Saturday, June 29, 2013

Transportation Modelling

Transportation Modelling
Transportation is the most important part of Logistics & Supply Chain Management. All costs associated with movement of products from one location to another constitute of transportation cost. The average transport costs ranges from 5 to 6 percent of the recommended retail price of the product.

Why Transportation Models are required ?
Companies produce products at locations called Origins and ships these products to customer locations called Destinations.
Each Origin has a limited amount that it can ship, and each Destination must receive a required quantity of the product. 
The Transportation Models prove useful when considering alternative facility locations within the framework of existing distribution system.
Each potential plant, warehouse, or distribution centre will require a different allocation of shipments, depending upon its own production or shipping costs and its strategic position in the network.

Transportation Modelling finds the least cost means of shipping supplies from several Origins to several Destinations.

Origin points (Sources) can be facilities, warehouse or any other points from which the goods are shipped.
Destinations are any points that receive the goods.

To use a Transportation Model, we need to know the following.
  1. The origin points and the capacity or supply per period at each.
  2. The destination points and the demand per period at each.
  3. The cost of shipping one unit from each origin to each destination.
To illustrate one transportation problem, let's look at a company called Bengal Plumbing, which makes among other products, a full line of bathtubs. The company has many factories and warehouses spread along the length and breadth of the country.
In our example the firm must decide which of its factories should supply which of its warehouses.

Relevant data of Bengal Plumbing are presented in the table below :

Transportation Matrix for Bengal Plumbing
From \ To
Warehouse E
Warehouse F
Warehouse G
Factory Capacity
Plant A



Plant B



Plant C



Warehouse Requirement

The Table shown above can be explained as following.

Plant (A) Capacity Constraint - 100 Units
Cost of shipping 1 Unit from Plant (A) to Warehouse (E) - Rs. 50
Cost of shipping 1 Unit from Plant (A) to Warehouse (F) - Rs. 40
Cost of shipping 1 Unit from Plant (A) to Warehouse (G) - Rs. 30
Total Demand of Warehouse (E) - 300 Units

Now we know that the 300 Units required by Bengal Plumbing's Warehouse (E) can be shipped in various combinations from its Plants (A), (B) & (C).
The first step in Modelling Process is to set up a Transportation Matrix as shown above. Its purpose is to summarize all relevant data and to keep track of algorithm computations.

Once the data is arranged in tabular form, we must establish a feasible solution to the problem. A number of methods have been developed for this step.
  1. The Northwest Corner Rule
  2. The Intuitive Lowest Cost Method
  3. The Stepping Stone Method
  4. The MODI (Modified Distribution) Method
  5. Vogel's Approximation Method