Keywords: Modal, Ocean Transportation, Air transportation, Cost Reduction, Import.
1. INTRODUCTION
The
transportation in the national or international level is regarded as one of the
most important Logistics sub-process. It involves the external displacement of
the supplier to the company, between plants and the company to the customer,
being in material forms, components, sub-assemblies, semi-finished products,
finished products or spare parts. In this way, the physical transfer (national
or international) that takes place in these sectoral transactions requires some
means of transportation.
Although
the transportation decisions are expressed in a variety of ways, the most
important are: the modal selection, the routing conveyor, to program vehicles
and consolidation shipment. So there are many ways to carry a product and
several available modes, so the companies rarely use only one way to carry
their products.
The
air transportation mode is fast and eliminates the need for large inventories
in transit, source and destination; but it is expensive. On the other side
shipping is slow, and so it is necessary higher stocks to cover both delays of
uncertainty and materials transit time.
The
purpose of this article is, through a case study, identify and select the
transportation mode that presents the lowest total cost, and also that is
compatible with the customer's needs in coolant import process for plasma
cutting machines.
The
case study was carried out in a medium-sized company that sells metal cutting
machines (machines with plasma, laser and water jet technology) and their spare
parts and accessories. All its products are manufactured in the United States
and the company distributes them to countries on five continents, via local
offices and central warehouses installed in some countries or directly from the
United States.
The
analyzed product is a liquid used for cooling the torches (piece by which the
plasma comes out to make the cut in metals) of mechanized plasma cutting
machines.
This
study originates from the definition of the following problem: what is the most
advantageous mode of transportation to import coolants? Besides, it will
consider two types of modes, air and sea. Both are used by the company studied
the import coolant from the US to Brazil.
Currently
the company uses air mode of transportation to import the coolant from the US.
This decision was made since the beginning of the company's operations in Brazil
(in 2003) when the company did not have a distribution center (DC) in this
country. However, in 2012, a CD was installed in the city of Cajamar, state of
São Paulo.
This
article is divided into five sections, including this introduction. The second
section presents the literature review of the issues addressed in this paper.
In the third section the method used in the research. The fourth section
presents the results and discussions. Finally, in the fifth section, the
research final considerations are reported.
2. LITERATURE REVISION
2.1.
Transportation decisions and
the modal selection
To
Alvarenga and Novaes (2004) although the logistics encompasses several items,
such as inventory management, marketing, processing and marketing information,
the subsystem transportation is one of the most important logistical items, it
includes variables related to level of service and It has a great impact on
operating costs.
According
to Caixeta-Son and Gameiro (2001), transportation is usually the main logistics
component and most often is seen as the last frontier for reducing costs in
companies. However, optimization of this link may reduce the power of regional
monopolies and allow the service to customers who do not consume products,
price conditions or availability at point of sale.
The
main transportation objective is to move products from one source location to a
destination while minimizing the financial, temporal and environmental costs.
The costs of damages should also be minimized. At the same time, the drive must
meet customer expectations regarding the performance of deliveries and
availability of information on cargo transported (BOWERSOX ; CLOSS , 2001).
For
Rodrigues (2007) a transportation system is constituted by mode (
transportation path), the form (the relationship between the various modes),
the medium (carrier element) and the additional installations (load terminals).
However, Silva and Porto (2003) rank as the transportation mode as land (road,
rail and pipeline), water transportation (maritime and waterway) and air.
According
to Faria and Costa (2010) the choice of transportation mode is influenced by
cost factors, the origin transit time destination, risk (involving cargo
integrity) and frequency (regular shipping). Normally, the cost factor is the
most important in economic and financial terms, but other factors may also
compromise the definition of the transportation mode and is related to the
achievement of the required service level.
For
Chopra and Meindl (2003) to choose the means of transportation the shipper must
balance transportation costs and inventory. The most cost-effective means of
transportation must not necessarily reduce total costs. The cheap
transportation typically have longer lead times and higher minimum amount of
delivery, both leading to higher stock levels. The means of delivery in small
quantities decrease inventory levels, but tend to be more expensive. He reports
that Dell ships most of its components from Asia by air freight and the choice
can be justified because the use of faster means of transportation for sending
high-value components allows Dell to maintain low inventory levels.
Chow
(2008) shows an example that shows the resulting conflict between the timing of
transportation and permanence of inventories. Imports from East Asia used to
reach North America through ports on the west coast and were heading east by
rail and road transportation. The increase in fuel prices raised the cost of
land transportation and caused many imports began to enter into the East Coast,
sea transit via Panama and Suez Canal. This maneuver has extended the stay and
the cost of inventories, but made it possible to reduce the shipping cost.
Lorandi,
Bertan and Ferreira (2011) in a case study on a consumer electronics company
found that logistics costs involved in acquiring an imported product, via air
freight is higher than the sea, but that the possibility of providing the goods
in shortest time is a viable trade-off.
According
to Faria and Costa (2010) the national or international transportation can be
accomplished by the following modes: road, rail, air transportation, pipeline
and water transportation (maritime, fluvial and lacustrine). In this study we
will only cover the modes of air and water transportation (marine) due to the
distance and accessibility between the United States and Brazil.
International
shipping is dominated by ocean carriers that handle more than 50 % of trading
volume in dollars and 99% by weight. Air carriers moving 21% of the trade
volume in dollars and the remainder is transported by road, rail and pipeline
between neighboring countries. (Ballou , 2006).
As
reported by the Center for Research on Regional Economics (Ceper) in 2014 the
main means of transportation used both for input and for output of products
from Brazil’s maritime representing 75.1% of imports. The second major modal
used for imports is the air that is used to transportation lower product volume
and increased value, perishable foods and pharmaceuticals with shorter period
of validity, representing 17.8% of imports.
According
to Chopra and Meindl (2003) by the quantities shipped and the distance
traveled, the water transportation is the cheapest for international trade.
Delays in ports, customs and management of containers are the main concerns in
international shipments by this means. For Bowersox and Closs (2001) the main
advantage of water transportation is the ability to move very heavy loads. This
type of transportation uses two types of boats: the high seas that are designed
for use in oceans and large lakes and barges that usually operate in rivers and
canals. The ability of maritime and inland waterways have to carry large
volumes/tonnages to a variable low cost makes this mode of transportation is
required when you want to get low freight rates and when speed is secondary
issue.
According
to Faria and Costa (2010) the waterway mode does not present flexibility of
routes and terminals and depends on solution as intermodal and relevant
legislation to processing in bonded warehouses. For Ballou (2006) claims
involving the transportation of high value are much greater in shipping and
required additional packaging to protect the goods mainly against rough
handling during loading and unloading operations.
Air
transportation is one of the sectors that are often identified as strategic by
both governments and industry analysts. This qualification is due to the great
enhancement factor for entering the country in the international context and to
strengthen its geopolitical positions and trade ties (SALGADO et al, 2010).
According to Aguiar (2011) the speed that aviation brings to transportation
attracts more and more sectors of the economy.
According
to Ballou (2006) that speed is not directly comparable with other modes of
transportation for the time of collection and delivery of ground handling are
not included and all these time elements must be combined to represent the port
of delivery time the door.
Besides
carrying cargo with much higher speed to the other modes, air transportation
has lower levels of damage and loss, resulting in greater safety and
reliability. For this reason, not only of high added value products such as
electronics and precision instruments, are transported by plane, as well as a
number of products sensitive to weathering, such as perishable foods, flowers,
orders, etc. (Novaes, 2007). For Bowersox and Closs (2001) the speed of air
travel allows other logistical benefits such as the reduction or elimination of
operating warehouses and inventories.
For
Faria and Costa (2010) the modal air transportation should be chosen for medium
and long distances, in the case of products with high added value and high
level of demand as service levels to customers. The author also reports that
for this mode of transportation insurance costs and packaging are lower due to
lower transit time.
According
to Chopra and Meindl (2003) air carriers offer a considerably expensive means
of transportation. He reports that due to the growth of high technology, the
freight weight carried by air has been reduced over the last two decades of the
twentieth century while the amount of freight increased. According to Ballou
(2006) the air transportation rates are twice those of road transportation and
16 times more expensive than rail transportation.
An
overview of the quality of services offered by transportation modes used in
this article can be seen in Table 1.
Table
1: Relative ranking of modes of air transportation and water transport by cost
and operations performance characteristic
|
Transportation mode |
Cost 1=major |
Average delivery time 1=
faster |
Variability of delivery time |
Losses and Damage 1= minor |
|
|
Absolute 1= menor |
Percentage 1= minor |
||||
|
Water transport |
5 |
5 |
5 |
4 |
2 |
|
Air transport |
1 |
1 |
1 |
5 |
3 |
Source: Adapted from Ballou (2006 )
There
are trade-offs among the costs of all logistics activities, but those existing
between the inventory maintenance activities and transport worth mentioning the
following: transportation costs and inventory maintenance are the major
components of logistics costs; the cost of maintaining inventories is one of
logistics costs that has grown the most over the years (kator, 2007). Overall,
the trade- offs between maintaining inventories and transportation costs stem
from the fact that transport influences the time that inventories remain in
transit and on site. (BHATNAGA ; TEO , 2009)
The
total logistics costs composition is given through sum of inventory costs,
storage, purchase and transportation. Carraro (2009) proposed a graphical
representation of the total cost logistic curves by adding these elements, the
minimum cost is given by the inflexion point of the total cost. This
representation can be seen in Figure 1.
Figure 1: Logistics Total Cost
Source: Carraro 2009 .
It
can be seen from Figure 1 that with the frequency increase of transportation
and purchases elements there is a reduction in the costs of warehousing and
inventory elements. The opposite occurs when it reduces the frequency with
purchases and transportation, with an increase in the storage and inventory
cost.
For
Ballou (2006) when a shuttle is not used in order to provide competitive
advantage, the best option is the one obtained by offsetting the cost of using
a shuttle service to the indirect cost of inventory attached to the selected
modal performance.
The
next section covers the transportation mode selection through basic
compensation cost. In other words, the cost compensation of using the shuttle
service to the indirect cost of inventory related to the performance of the
modal.
2.2.
Transportation modal selection
For
transportation mode selection were used the following calculations:
Annual
cost of transportation (Cta):
Cta=
Da x Vf (1)
Where
Da is the annual product demand and Vf is the freight tariff rate for the used
modal
Inventory
cost at the source (Ceo):
(2)
Where
Vmanut is the storage maintenance per year and Vunit is the product average
unit value.
The
average inventory on both ends of the distribution channel can be approximated
as ,
where VLentr is the board lot size.
Inventory
cost on destination (Ced):
(3)
Where
Vunit-dest is the avarege unit value of the product on the destination. In
other words, it is the average unit value of the product plus the transportation
fare.
In
transit inventory cost (Cet):
(4)
Where
T is the average transit time in days.
In
order to calculate the modal total cost were added to the annual transportation
cost and stock costs on the source plus the inventory costs on the destiny and
plus the average in transit inventory costs.
(5)
3. METHODS
This
article is characterized by having an exploratory nature with theoretical and
used as field work a case study. According to Yin (2010) case study is an
empirical inquiry that investigates a contemporary phenomenon in depth and in
its real life context, especially when the boundaries between phenomenon and
context are not clearly evident.
The
case study was carried out in a company that produces machines and parts for
industrial cuts solutions and distributes them worldwide. As the object of
investigation, it was considered the prism according to which it will develop
the research (BEUREN , 2003) ,it was selected the coolant used to chill
torches, because of its importance to customers of this company.
Visits
were carried out to study the company to understand its transportation
operations. The data used in this work were taken directly from its information
system and reports on transportation and the stock maintenance of the product.
Data collection was carried out during the month of April 2015.
To
determine the best mode of transportation it was used the basic compensation
costs model.
4. CASE STUDY
This
case study was conducted in a medium-sized multinational company that sells
metal cutting machines (machines with plasma, laser and water jet technologies)
and their spare parts and accessories. All its products are manufactured in the
United States and the company distributes them to countries on 5 continents,
via local offices and central warehouses installed in some countries or
directly from the United States.
The
company has been operating in Brazil for over 12 years and has an office in the
city of Guarulhos in São Paulo. When the company started its activities in the
Brazilian market it did not have stocks in the country and served its customers
by dispatching the goods directly from the factory located in the United
States. In this operating model, the client was responsible for the whole
importation process and the goods acquisition process used to take long.
In
2012 a DC was installed in the city of Cajamar in São Paulo, in order to serve
customers directly and more efficiently. Since then SKUs (stock keeping unit -
Inventory Maintenance Unit ) commonly imported, stored and sold in Brazil
totaling 1040 items.
The
coolant is among the materials sold in Brazil. It is used to cool the torch
(piece where the arc plasma used in metal cutting leaves the machine). This fluid
prevents the machine overheating, and that a PC board or any component burn or
burst due to high temperature. This product is extremely important, because its
lack can lead to a production line stop, plus additional costs for replacements
of damaged parts due to overheating.
This
product consists of 70% fully treated water and 30% of chemical components that
aid in various parts of the process and also causes slowness in the
evaporation. This evaporation is much slower than it would be with water.
Due
to impurities that ends up going to the coolant reservoir, this should always
be exhausted. Never just complete the level required for the machine good
operation. This item has been selected for this study because it has a stable
demand since all customers are instructed to exchange it after 500 hours of
cutting, which equals about 6 months (depending on the factory working hours).
With
the DC installation in the city of Cajamar the company now has space to store
lots of coolant. However, the migration of air transportation modal to sea only
became feasible with the professionalization of the logistics department.
The
logistics department is responsible for conducting the inventory planning
taking into account the analysis of demand occurred in the last 13 weeks and
received demand forecast by the sales team. This department defines the minimum
and maximum inventory levels and enters this data in the ERP (Enterprise
Resource Planning - Enterprise Resource Planning ), which in turn sends
purchase orders automatically to the United States as the stock level of each
item reaches its resupply point.
The
freight’s amount, as well as the annual stock maintenance cost for this
product, the product unit value, the annual product demand, the in-transit time
average and delivery batch sizes can be seen in Table 2:
Table 2: Relatives Costs to Company’s Transportation and
Coolant Stock Maintenance
|
Elements |
General |
Air |
Sea |
|
Freight/shipping per box (US$) |
- |
119,83 |
28.00 |
|
Annual cost of stock maintenance |
14% |
- |
- |
|
Unit value of the product (US$) |
82,04 |
- |
- |
|
Annual product demand
(unit) |
11.545 |
- |
- |
|
Traffic time (days) |
- |
15 |
38 |
|
Size of shipment lot (unit) |
- |
100 |
1728 |
5. RESULTS AND DISCUSSIONS
Some
simplifying assumptions were adopted for this study:
·
Both
the supplier and the company are located in places where the distance and the
transportation cost to/from the airport are the same as the distance and the
cost of transportation to/from the port.
·
The
systems, facilities and staff necessary to handlings and purchases, and
transport packaging will be similar in both modes.
It
was used basic compensation costs to calculate the modal total cost. Thus by
applying the equations 1, 2, 3, 4 and 5 for air transportation, those are the
results:
Annual
cost of transportation (air):
Cta=
11545 x 119,83= 1383437,35 (6)
Inventory
cost at the source (air):
=574,28 (7)
Inventory
cost on destination (air):
=1413,09 (8)
In
transit inventory cost (air):
=5449,37 (9)
Modal
total cost (air):
(10)
Applying
the equations 1, 2, 3, 4 and 5 for shipping it gets the following results:
Annual
cost of transportation (sea):
Cta=
11545 x 28,00= 323260,00 (11)
Inventory
cost at the source (sea):
= (12)
Inventory
cost on destination (sea):
=13310,44 (13)
In
transit inventory cost (sea):
=13805,06 (14)
Modal
total cost (sea):
(15)
The
transportation costs synthesis, for both transportation modes can be seen in
Table 3.
Table 3: Company’s Transportation Costs in the Importation
of coolant
|
Costs |
Air (US$) |
Maritime (US$) |
|
Annual cost of transport (Cta) |
1.383.437,35 |
323.260,00 |
|
Inventory cost at source (Ceo) |
574,28 |
9.923,56 |
|
Inventory cost in destination (Ced) |
1.413,09 |
13.310,44 |
|
Stock cost in transit (Cet) |
5.449,37 |
13.805,06 |
|
Total cost of the modal (Ctmodal) |
1.390.874,09 |
360.299,06 |
It is possible to check that the
most advantageous mode of transportation for importing coolant from the US is
the maritime.
It is also possible to identify that for this
product the cost reduction of approximately 74% in transportation costs by
switching the transportation mode from air to maritime.
The results corroborate with
Lorandi, Bertan and Ferreira’s (2011) research and with the literature claiming
that air transport is more suitable for high-value and low volume products,
however the coolant has a low value (US $ 82.04) and a large annual importation
volume (11545 units).
The study contributed to the
theme of using the basic compensation cost, which in this study was effective
for the transportation mode selection.
6. FINAL CONSIDERATIONS
This paper aims to select the
mode of transport able to minimize total costs in the import by using the basic
compensation cost. The cost compensation of use the shuttle service to the
indirect cost of inventory related to performance modal. The results showed
that it is advantageous to replace the air mode by maritime shipping in the
coolant importation.
It may be important to mention
that the use of shipping requires a better accompaniment from logistics
department, which should better monitor sales and forecast demand, making sure
to have this item in stock. Despite the results presented, the transportation
decisions need to be accompanied often, after all no process is static and the
involved variables can be modified by it in a way that the transportation mode
selected today becomes a no better option tomorrow.
The paper contributed from a
theoretical and practice manner that held a practice application of modal
selection, helping on the company’s decision on transportation mode
substitution.
As it comes to limitations, it
is possible to point, basically, the difficulty of generalize from a case
study. This paper was limited only to study air and maritime transportation
modes due to the geographical position of both supplier and customer/buyer and
the accessibility of other modes for both of them.
New studies will be done for
other products sold by this company in order to accomplish the analysis of all
items that it imports and commercializes in Brazil for the purpose of selecting
the most adequate transportation mode.
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