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 positioning of leading European
logistics operators (Peter 1999)
High
Schenker
PO Trans European
Exel Logistics
Kuhne Nagel Danzas
TNT Logistics
Tibbett Britten
Royal Nedloyd
TDG
Ryder PLC
Hays Distribution
Geographical Coverage
GEODIS Logistics
Christian Salvessen
BTL AB
TecnoLogistica
ASG AB
McGregor Cory
BOC Distribution
Frans Maas
Stok Inter Penske
Wincanton Logistics
Logistique Logistics Europe
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 firms 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?
Defined

• Outsourcing is defined as the act of moving a
  firms internal activities and decision
  responsibility to outside providers

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
High
Low
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 gt200 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).