The Effects of Transport Investment
on Logistical Efficiency
Professor Alan McKinnon,
Logistics Research Centre,
Heriot-Watt University,
EDINBURGH, UK.
[email protected]
ESRC Seminar Series: TSU Oxford University
Transport Investment and the Economy
20th March, 2003
Definitions of Logistics
‘The process of strategically managing the movement and
storage of materials, parts and finished inventory from suppliers,
through the firm and on to customers.’
Professor Martin Christopher
‘Logistics is that part of the supply chain process that plans,
implements and controls the efficient, effective flow and storage
of goods, services and related information from the point of
origin to the point of consumption in order to meet customers’
requirements.’
US Council of Logistics Management
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Logistics - Manufacturing Interface
‘The complexity of the business is not in the manufacturing: it is in the
logistics. This is more of a logistics machine than a manufacturing
plant.’
General Manager IBM Plant Greenock
‘Putting cars together is a relatively straightforward exercise. Getting all
the parts together at the right place and time with minimum inventory is
the real challenge.’
Director of Production Control, Nissan UK
Increased customisation of products in distribution centres
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Expenditure on Logistics
Figure
2: Breakdown
of Manufacturers'
Logistics Costs
Break-down
of Logistics
Costs
Administration /
Order Processing
16%
Variations in Logistics Costs by Industrial Sector
Transport
Pharmaceuticals
Inventory
Transport
31%
Machine Tools/Metal Products
Warehousing
Administration
Automotive
Electronics
Chemicals/Petroleum
Inventory
30%
Food and Drink
Electrical Appliances
Warehousing
23%
Paper
0
2
4
6
8
10
12
14
16
Percentage of Sales Revenue
Source: A.T. Kearney survey for European Logistics Association (1999)
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Measuring the Performance of a Logistical Operation
Utilisation
Ratio
Transport KPI
Productivity
Actual
Actualinputs
inputs used
sed : : Actual inputs :
available inputs
(capacity)
Vehicle fill
Empty running
Time utilisation
Actual outputs
Fuel efficiency
COST
Effectiveness
Actual quality of
output : predetermined norm
Deviations from
schedule
COST
REVENUE
Source: Caplice and Sheffi, 1995
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Porter Grid Adapted to Logistics
Source: Christopher, 1998
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Effects of Transport Improvement
• Increases capacity to handle larger / heavier vehicles
• Reduces in average transit time
• Improves transit time reliability
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Increase in Maximum Lorry Weight
• From 40-41 tonnes to 44 tonnes in February 2001
• Strengthening of bridges for heavier vehicles (£400 million)
• Annual reduction in vehicle-kms: 94 million
– 220 return journeys / day London-Edinburgh
• £61 million per annum savings in vehicle operating costs
• Environmental savings valued at £35 million
Source: CFIT, 2000
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Expanding Railway Loading Gauge
• Constraining development of intermodal services
• Piggyback Consortium (1994):
– gauge enhancement on spinal route
– Channel Tunnel to Scotland (750 kms)
– growth in intermodal services
– 60 million fewer truck-kms per annum
– net saving in transport and logistics costs ?
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Effects of Transport Improvement
• Capacity to handle larger / heavier vehicles
• Reduction in average transit time
• Improved transit time reliability
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Direct Benefits of Shorter Transit Times
• Increased driver productivity
• Greater fuel efficiency (in free flowing traffic)
• Better utilisation of vehicle assets
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Utilisation of Vehicle Assets
Tonne-K m s per Lorry per Annum
240
220
200
180
160
140
YEAR
• Increase in average speed
'00
98
96
94
92
90
88
86
84
82
80
78
76
74
72
100
70
120
Source: DfT, 2002
• Increase in maximum vehicle weight
• Migration of loads to heavier vehicles
• Running of vehicles over longer periods
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A Day in the Life of a Trailer / Rigid Vehicle
idle
(empty & stationary)
28%
running on
the road 28%
on the road
daily rest 2%
maintenance/
repair 7%
loading/unloading 16%
awaiting
pre-loaded, awaiting
unloading/loading 4%
departure 15%
Sample of 3128 vehicles monitored over 48 hour period: UK food supply chain
Source: McKinnon, Ge and Leuchars, 2003
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Direct Benefits of Shorter Transit Times
• Increased driver productivity
• Greater fuel efficiency (in free flowing traffic)
• Better utilisation of vehicle assets
• Less in-transit inventory
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Inventory In-transit on the UK Road Network (1997)
A v e r a g e V a lu e
D e n sity
£ 1 3 0 0 / to n n e
A v era g e
le n g t h o f h a u l
90 km s
A v era g e
sp eed
60 km s
T o ta l R o a d
Tonne - K m s
1 5 0 b i lli o n
T o t a l v a lu e o f i n - t r a n s i t
in v e n to ry
£ 3 5 0 m i lli o n
A n n u a l in te re st ra te
10%
In -tr a n sit in v e n to r y c o st
£ 3 5 m i lli o n
A d d i t i o n a l c o s t o f 1 0 m i n d e la y
£ 4 m i lli o n / a n n u m
Source: McKinnon, 1999
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Direct Benefits of Shorter Transit Times
• Increased driver productivity
• Greater fuel efficiency (in free flowing traffic)
• Better utilisation of vehicle assets
• Less in-transit inventory
• More responsive order fulfilment: increased revenue
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Indirect Benefits of Shorter Transit Times
• Centralisation of inventory
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Effect of Transport Improvement on Delivery Cost
Transport
Cost
Before improvement
A
After improvement
B
O
X
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Logistical Cost Trade-off
cost
total distribution costs
inventory costs
storage costs
transport costs
no. of warehouses
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Effect of a Reduction in Transport Costs
cost
total distribution costs
inventory costs
storage costs
transport costs
optimum
no.of warehouses
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Inventory Savings from Centralisation
Square Root Law of Inventory
(Starr and Miller, 1962)
Id / Ic = √n
Source: McKinnon, 1989
68% saving
Id = inventory in decentralised system
Ic= inventory in the centralised system
n = no. of depots in decentralised system
Issues:
Applicability to cycle stock
Several limiting assumptions
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Square Root Law of Inventory
Ronen (1990): No simple way of computing inventory savings from centralisation
Sussams (1986): Review of 24 cases of inventory centralisation:
‘…the square root law may be used with confidence to estimate differences in buffer
stock requirements for different configurations of depots.’
Actual vs. predicted inventory savings from centralisation:
Office Equipment
Supplier
Scottish Brewers
Merck
Reduction in depot nos.
Predicted
Actual
12 → 1
70%
40%
8→4
8→1
33%
62%
13%
30%
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Other Centralisation Benefits
• Economies of scale in warehousing
‘It is hard to work out how economies of scale
may be achieved in warehousing. Factors such
as product characteristics, order patterns and
handling flexibility influence the actual design
and use of a warehouse …’ (Verduijn, 1997)
Source: Williams, 1975
storage
cross-docking
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Centralisation of Warehousing
70
60
50
40
30
20
10
0
1993
1998
Tr
ad
e
A
ve
ra
g
e
y
hi
ne
r
FM
C
G
2003
M
ac
Au
to
m
ot
iv
C
e
om
m
od
iti
es
% of Distribution Facilities
Percentage of Distribution Facilities
Serv ing More than One Country
Source: A.T.Kearney Ltd. 1999
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Delimitation of Warehouse Hinterlands
•Marginal readjustment of delivery zones
•Traditional inflexibility
•Use of computerised vehicle routing and
scheduling packages
•‘Flexing’ of depot boundaries
•Pooling of fleets within ‘network systems’
shop
DC
DC
factory
Source: McKinnon, 1989
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Modelling the Indirect Benefits
Quarmby (1989) Assessed ‘business potential’ of road improvement:
‘...in a typical operation of retail distribution of food, the benefits of
restructuring the distribution and depot network could exceed the
benefits of straight time savings by 30-50%’
Mackie and Tweddle (1993): Modelling retail logistics network with and
without UK motorway network.
Demonstrated that there were significant development benefits not
captured by COBA.
Ernst and Young (1996): 20% of firms were able to cut inventory levels
and access new markets as a result of transport improvements.
SACTRA (1999): recognition of indirect benefits
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Growth of Hub-Satellite Networks
Echelon structures
Hub-satellite network
Production
Primary
Primary Consolidation Centre
Regional Distribution Centre
(supermarket chain)
Regional Distribution Centre
(large wholesaler)
Secondary
Multiple retail outlet
Local wholesale / cash and carry
warehouse
Tertiary
Independent retail
outlet
catering outlet
Parcel and pallet-load distribution
JIT and J4U delivery
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Indirect Benefits of Shorter Transit Times
• Centralisation of inventory
• Wider sourcing and distribution
• Concentration of production capacity
• ‘Vertical disintegration’ of production
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Average Length of Haul by Road 1985=100
160
94 km
140
120
100
80
60
32 km
40
20
1950
1960
1970
1980
1990
2000
Source: DfT, ‘Transport Statistics Great Britain 2002’
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Effects of Transport Improvement
• Capacity to handle larger / heavier vehicles
• Reduction in average transit time
• Improved transit time reliability
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Direct Costs of Congestion
• £15 billion (CBI 1989) (notionally inflated to £20 billion)
• ‘convenient and consensual fiction…. precise answer to a phantom
equation’ (Goodwin, 1997)
• ‘substantial over-estimate’ (Worsley, 1997)
Implies that eliminating congestion would reduce all journey times by 50%
• NERA (1997):
£6.9 billion
freight-related £1.2 bn (17%)
• No allowance for the effects of unreliability on logistical efficiency
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Assessing the Cost of Unreliability
• Bozuwa and Hoen (1995): Dutch ‘freight lanes’ study (230 hauliers / shippers)
– indirect costs of congestion = 8 -11% of direct costs
• Hague Consulting Group for IRU (1998):
– indirect costs = 2.2 x value of time for freight (VOTF)
– VOTF = vehicle operating costs + in-transit inventory costs
• Fowkes et al. (2001): Adaptive stated preference study
Average journey: 281 kms
Average cost: £286
Valuations: (pence per minute)
Delay time:
107p
Arrival time spread:
85p
Schedule delay:
66p
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On-site Investigation of Indirect Effects of Congestion
7 Distribution Centres for Fast Moving Consumer Goods: N-S motorway corridor
Objectives
• assess impact of congestion-related delays on internal DC processes
• examine company responses
• find a method of quantifying indirect costs of congestion
Problems
• Existing monitoring / accounting systems inappropriate
• Wide variations in sensitivity to congestion
• Isolating congestion from other sources of delay
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Causes of Delays: sample of 15,252 journey legs
29% of le gs
re cord e d a n
uns che dule d
d e la y
no delay 71%
traffic congestion
31%
equipment
breakdown 2%
delivery point
problem 25%
cause of delay not
known 16%
collection point
problem 9%
lack of driver 1%
own company
actions 16%
Source: McKinnon, Ge and Leuchars, 2003
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Degrees of Disruption
1. Accommodated within normal procedures
2. Temporary redeployment of resources at minimal cost:
- switch from store- to line-picking
3. Temporary deployment of more resource
- extend opening hours, staff on overtime
4. Delay to outbound departure
5. Incomplete load on outbound delivery
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Effects of Congestion on a Distribution Operation
C O N G E S T IO N D E L A Y
R e g u la r
N orm al
O p e r a tio n
M a jo r In c id e n t
M in o r
A d ju stm e n t
D e la y to o u tb o u n d
d e liv e r y
N o n -d e liv e r y o f
product
• sto c k o u t r isk
• lo st sa le s
• r e d u c e d lo a d in g
D e liv e r y
w ith in r e so u r c e s
S tor a g e
C r o ss-d o c k
N o o u tb o u n d
d e la y
W ith in
resou rce
E x tr a
resou rce
A d d itio n a l
d e liv e r y r e so u r c e
R e sc h e d u lin g o f o p e r a tio n s
a t d e liv e r y p o in t
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Source: McKinnon, 1999
20th March, 2003
Factors Affecting Sensitivity to Congestion
• relative importance of cross-docking
• internal process times
• dependence on vehicle pre-loading
• stringency of booking-in times
• geographical location
• scheduling of deliveries over 24 hour cycle
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Variations in Delivery Activity over 48 hours
2500
P A mbient
Deliveries to Dis tributi on Ce ntres
(Primary Distribution)
2000
P Chilled
P Frozen
1500
1000
number of pallets
500
0
8000
S A mbien t
Deli veries to Shops
(S econdary Distribution)
7000
S Chilled
6000
S Frozen
5000
4000
3000
2000
1000
22 :30
21:00
19 :30
18:00
16 :30
15:00
13:30
12:00
9:00
10:30
7:30
6 :00
4:30
3 :00
1:30
0 :00
22:30
21 :00
19:30
18 :00
16:30
15 :00
13:30
12:00
10:30
9:0 0
7:30
6:00
4 :30
3:00
1 :30
Source: McKinnon, Ge,
Leuchars, 2003
0:00
0
Hours
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Rescheduling of Deliveries
% of Lorry-kms Run between 8pm and 6am
20
18
16
14
12
10
8
6
4
2
0
Constraints:
• production / distribution cycles
• working time directive
• driver shortage
• night delivery curfews
1985
1996
2001
40% of grocery chain stores in areas subject to a night delivery curfew
If half of the curfews were relaxed:
10% fewer vehicles
63 million less vehicle-kms per annum
Source: The Times, 8th July 2002
36 million litres of fuel saved
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Factors Affecting Sensitivity to Congestion
• relative importance of cross-docking
• internal process times
• dependence on vehicle pre-loading
• stringency of booking-in times
• geographical location
• scheduling of deliveries over 24 hour cycle
• degree of Just-in-Time replenishment
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Benefits of JIT Replenishment
Inventory savings
date
location
company/sample
1987
Japan
sample of four
manufacturers
1987
UK
Honeywell
25% (WIP)
1987
UK
Lucas Electrical
60%
Improved product quality (up 26%)
1988
US
mixed sample of
manufacturers
41%
‘More than just a stock control system..’
Bostrom
30%
1989
US
inventory
savings
16-45%
Reduction in warehouse space (30%)
Productivity improvements (30-50%)
N is s a n W a s h in g to n P la n t In v e n to ry
L e v e l
8
Rank Xerox
65%
Source: McKinnon and Marchant, 1999
2
1
0
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1996
Netherlands
1995
1994
3
1994
31%
1993
205 manufacturers
4
1992
US
5
1991
1990
6
1990
50%
7
1989
Hewlett Packard
30%
1988
US
Rank Xerox
1987
1990
UK
No. of Days of Inventory
1989
20th March, 2003
Transit Time in Context
Process mapping
Value-adding time =
5.9% of total manufacturing time
(Warwick Manufacturing Group, 1995)
Source: Taylor and Hines, 2000
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Time Loss in the Coca Cola Supply Chain
Source: Womack and Jones, 1998
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Vehicle Load Factors 1990-2000
70%
average load factor
60%
50%
40%
30%
20%
10%
Source: DfT, 2002
Rigids
Artics
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
0%
All Vehicles
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Trend in Average Payload Weight
9.4
9.2
Tonnes
9
8.8
8.6
8.4
8.2
8
1988 1989 1 990 1991 1992 19 93 1994 1995 1 996 1997 1998
Source: DfT ‘Transport of Goods by Road in Great Britain’
ESRC Seminar Series: TSU Oxford University
Transport Investment and the Economy
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Conclusions
• Transport investment can yield significant improvements in the efficiency
and quality of logistical services
• During the main era of motorway construction main efficiency gains
probably accrued from inventory / warehouse centralisation rather than
transport cost savings
• These indirect / development benefits are difficult to quantify
• Today JIT pressures make transit time variability the main issue
• Time compression of other logistical activities magnifying transport delays
• Infrastractural improvement is only one of many ways of raising logistical
efficiency
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References
A.T. Kearney Ltd. ‘Insight to Impact: Returns of the Fourth Quinquennial
European Logistics Study’ European Logistics Association, 1999.
Bozuwa,J. and Hoen, A.L. ‘The Economic Importance of Separate Lanes for
Freight Vehicles on Motorways.’ Paper presented to the PTRC European
Transport Forum, Warwick, 1995.
Caplice, C. and Sheffi, Y. ‘A Review and Evaluation of Logistics Metrics,
International Journal of Logistics Management 5, no. 2, 1994.
Confederation of British Industry (CBI) ‘Trade Routes to the Future’ London,
1989.
Commission for Integrated Transport (CFIT) ‘Permitting 44 tonne Lorries for
General Use in the United Kingdom’ Department of Transport, Local
Government and the Regions, London, 2000
Christopher, M.C. ‘Logistics and Supply Chain Management’ Financial Times
Management / Prentice Hall, London 1998.
Department for Transport (DfT) ‘Transport of Goods by Road in Great Britain’
London (annual)
Department for Transport (DfT) ‘Transport Statistics Great Britain’ London
(annual)
Ernst and Young ‘Transport Infrastructure, Business Costs and Business
Location’ Department of Trade and Industry, London, 1996
Fowkes, A. et al, ‘ Freight Road User Valuations of Three Different Aspects of
Delay’ Paper presented to the European Transport Forum, 2001.
Goodwin, P. ‘Solving Congestion’ Inaugural Lecture, University College
London, 23rd October 1997.
Hague Consulting Group ‘Economic Cost of Barriers to Road Transport’
International Road Transport Union, Geneva, 1998.
Mackie,P. and Tweddle, G. ‘Measuring the Benefits Gained by Industry from
Road Network Improvements’ Institute of Transport Studies working paper
391, University of Leeds, 1993.
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References
McKinnon, A.C. ‘Physical Distribution Systems’ Routledge, London 1989.
McKinnon, A.C. ‘The Effect of Traffic Congestion on the Efficiency of Logistical
Operations’ International Journal of Logistics: Research and Applications, 2,
2, 1999.
McKinnon, A.C. and Marchant, C. ‘The Effects of Just-in-Time on Freight
Traffic Levels’ Report for TRL / Highways Agency, 1999
McKinnon, A.C., Ge, Y. and Leuchars, D. ‘Benchmarking Transport Efficiency
in the Grocery Supply Chain’ ECR Journal, 3, 1, 2003.
NERA ‘The Costs of Road Congestion in Great Britain.’ Report for Quentin Bel
Associates, London, 1997.
Piggyback Consortium ‘Final Report Part II: Reports from Consultants’
London, 1994
Quarmby,D. ‘The Retail Market and Freight Distribution’ Journal of Transport
Economics and Policy, 23, 71-87, 1989.
Ronen, D. ‘Inventory Centralization / Decentralization – the Square-Root Law
Revisited Again’ Journal of Business Logistics, 11, 2, 1990.
SACTRA ‘Transport and the Economy’ The Stationery Office, London, 1999
Starr , M.K. and Miller,D.W ‘Inventory Control: Theory and Practice’ Prentice–
Hall, Englewood Cliffs, 1962.
Sussams, J. ‘Buffer Stocks and the Square Root Law’ Focus on Physical
Distribution and Logistics Management, 5, 5, 1986.
Taylor, D. and Hines, P. ‘Going Lean: A Guide to Implementation’ Lean
Enterprise Research Centre, Cardiff University, 2000.
Verduijn, T. ‘Ship Shape’ Logistics Europe, March 1997
Warwick Manufacturing Group ‘Time Compression Self-Help Guide’ University
of Warwick, 1995.
Williams,J. ‘Food Distribution Costs: Results of an Inter-firm Study of
Wholesale Transportation and Warehousing Costs.’ National Materials
Handling Centre, Cranfield, 1975.
Womack,J.P and Jones,D.T. ‘Lean Thinking’ Simon & Schuster, London,
1996.
Worsley, T. ‘Congestion and Growth: at the National Level.’ Presentation to a
Seminar on Behaviour and Congestion, Institute of Civil Engineers, 5th
February, 1997.
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