The Structure of Freight and Distribution

1. The Structure of Freight and Distribution Several issues and trends of importance when considering the patterns of freight movement: • The relative importance of road freight transport. • The perceived and actual relative limitations of rail freight and its restricted role in domestic distribution. • The change in the nature of traffic; and total ton mileage sent by road and rail over the past two decades. • The change in the nature of the services offered by public hauliers towards a total distribution service.

2. Trends in transport and Logistics in Europe • Steady economic growth has increased demand for transport • Uniform increase in passenger & freight transport (tonnes/km) over the last 2 decades • Increase in international trade relations due to liberalisation of world trade & geographical specialisation of production • Forecasts predict that if the rate of European integration continues as planned then: • freight traffic will double by year 2010 i.e. from 120,000 vehicles/day (in two directions added together) • Approx 75% of this will be between London-Milan corridor • Lost travel time in Germany (main road freight transport country in Europe) is estimated around 275 million Euros/year. • Some governments keen to levy a specific road freight tax

3. Logistics Trends in Europe • Decisions concerning logistics can be divided into: • the structure of the supply chain (i.e. the location and size of production or processing plants, storage sites - trends towards increased centralisation of inventory at larger geographical scale - Single European Market - means increase in transport distance) • the alignment of supply chains (i.e. the breakdown of the chain into different processing segments, the number & location of supplies and the ultimate destination of the product - firms focus on core competencies hence increased sourcing leading to increased freight transport - see strategic positioning matrix) • the scheduling of the product flow (i.e. the frequency of delivery, the mode of ordering and delivery) • the management of logistics resources (i.e. the size of vehicles used, types of handling and storage system and their effectiveness of use)

4. Strategic positioningof leading European logistics operators(Peter 1999) High Schenker P&O Trans European Exel Logistics Kuhne & Nagel Danzas TNT Logistics Tibbett & Britten Royal Nedloyd TDG Ryder PLC Hays Distribution Geographical Coverage Christian Salvessen GEODIS Logistics BTL AB TecnoLogistica ASG AB McGregor Cory BOC Distribution Frans Maas Stok Inter Penske Logistique Logistics Europe Wincanton Logistics DFDS Low High Contract logistics focus Low

5. Scheduling of the product flow • Emergence of new management principles such as: • JIT, quick response, lead-time management, lean logistics, agile logistics, efficient consumer response etc. • Numerous developments in process & pipeline mapping techniques to analyse & eliminate slack time and non-value adding activities • Pressure to “time compress” logistical systems

6. Consumer service requirements

7. Types of Services • The market for road freight is divided between “own-account”(where a manufacturer, retailer etc., operates its own freight vehicles) and “hire-and-reward”(professional - public haulage carriers) operators. • The background to this structure is the development of the licensing system for road freight. From a legal point of view there is little difference between own account and hauliers.

8. The Haulage Market • Dominated by small operators. • Smaller hauliers tend to offer less specialised service(though not necessarily poor quality service). • Hauliers tend to operate their business in an “ad-hoc” fashion which might mitigate against a “total distribution service”. • Hauliers may sub-contract.

9. Outsourcing • ..is the act of moving firm’s internal activities & decision responsibility to outside provider • Several reasons for outsourcing (see attached list from Chase, Aquilano & Jacobs, Ops management, 9th ed 2001) • Firms able focus on core competencies to secure competitive advantage whilst reducing costs • Dramatic growth in outsourcing Logistics function i.e. Third-party logistics

10. What is Outsourcing? Outsourcing is defined as the act of moving a firm’s internal activities and decision responsibility to outside providers Defined

11. Reasons to Outsource • Organizationally-driven • Improvement-driven • Financially-driven • Revenue-driven • Cost-driven • Employee-driven

12. Benefits of Third-Party Logistics • Holistic service provision(i.e. managing the complete cycle from packaging, collection, loading, unloading and delivery etc.) • Improved delivery speed & reduced risk unreliable of transportation of goods • Usage of latest freight tracking technology(EDI, satellite to keep customers informed about drivers & deliveries) • This is important when delivery window may be 30 minutes as in JIT • These days tracking technologies linked through the internet thus customers able to follow delivery arrival times • Disadvantages: • Reduction in workforce

13. Transport Modal Choice • Freight transport is not a single homogeneous product. • Different transport services (e.g. different carriers in the same mode) offer different qualities of service. • This is also true for different transport modes(e.g. road or rail, air or sea). • Modal choice is likely to be dependent upon: • Delivery Speed • Delivery Dependability & Reliability • Cost • Quality • Route Flexibility • Customer communication etc.

14. Volume/value determinants of transport mode High Air Road Rail Value Water Pipeline Low Low High Volume

15. The relative performance of each mode of transport Key: 1 = Best performance, 5 = Worst performance

16. Rail versus Road • Rail considered more efficient for high volume, low value materials and/or for longer distance consignments (say >200 miles). • Road haulage still popular choice for most distributors including those to Europe. This is despite a number of technical and/or marketing initiatives undertaken by Rail companies.

17. International Air Freight Transport Typical characteristics are its: a) Speed of delivery - reduced inventory investment. b)Reliability of delivery- reduced inventory investment due to lower safety and buffer stock. c)Environmental Impact-less requirement for packaging due to lower probability of damage and reduced likelihood of pilferage (?)

18. Advantages of Air Freight Distribution (compared to surface freight) • Lower Inventory costs- less need to hold large inventories due to speed and improved certainties of deliveries. • Lower Packaging costs- but from airport to the final destination will require packaging. • Local Distribution costs- often airports closer to the points of origination & destination than the depot of surface modals. • Lower Material handling costs- due to smaller packages, which are easier to handle. • Lower Insurance costs- low incidence of loss, damage & pilferage. • Lower Administrative costs- due to greater efficiency. • Reduced Vulnerabilities of non-performance - due to less strikes.

19. Disadvantages of Air Freight (compared to surface freight) • High freight cost of air distribution. • Rates are much higher than for surface modes

20. Air Freight Distribution and Management • Air cargo rates are higher than other modes but often total distribution costs can be lower (reduced costs of inventory, insurance, warehousing, packaging & lead-times etc.- leading to competitive advantages). • Often managers unable to overcome the psychological barriers of air freight. • Managers need to conduct a“trade-off” analysis. • Distribution of “Traditional” perishable goods and emergency shipments by air are being supplemented by more conventional consumer and industrial goods.

21. The Psychological Problem • Increasing costs of distribution make reductions increasingly worthwhile. As management sophistication increases, this becomes more widely accepted. • Air. However, awareness of the total distribution systems concept will enable management to identify situations when air freight will minimise total distribution costs and give marketing advantages. The problem is psychological. These cost advantages are not as obvious as the more direct advantages of high air cargo rates. • Air Freight can reduce total distribution costs.Freight rates will be higher than other modes. Other costs, notably inventory, insurance and packaging will be lower. • Upon which mode of transport or minimum total costs - “trade-off” analysis.

22. Characteristics of Air Freight • Modern air freight was established in the early 1950s as a “widening” of cargo types. • “Traditional” perishable goods and emergency shipments are being supplemented by more conventional consumer and industrial goods - routinely distribution by air. The trend towards “unit load devices” in air freight is increasing the types of cargo being handled; (Equipment such as the container, which comes in types and sizes from the igloo to the 40’ x 8’ unit carried on the B747F).