The importance of road transport for the competitiveness of European business

• Little focus on logistics costs in the 1970’s
• Broadening scope of logistics costs in the 1990’s

• Considerable growth in transport
• The transport industry has contributed to the development of supply chain management
• Increasing relative importance of transport and logistics

• Flexible and adaptable transport is vital

Since the early 1980’s, supply chain management has developed rapidly as companies have been seeking to improve their competitiveness in respect of cost and service levels, and to attain sustainable growth.

Supply chain management has gained increasing recognition in European business, both as a function in its own right and as a cross-functional discipline.

At the same time, supply chain management has moved from operational level to board level within the corporate organisation. Never before has supply chain management played such an important role in the corporate strategy of many companies as it does today. This development has led to a much broader scope in supply chain management in the 1990’s compared to that of the 1970’s.

Given the growing importance of supply chain management and logistics, IRU has asked KPMG Transportation & Distribution to:

• Determine how the calculation of transport and logistics costs has changed over the last decades as a consequence of improved supply chain management and the increasing significance of supply chain management
• Assess to what extent this has led to a shift in the relative significance of transport and logistics costs compared to production/manufacturing
• Evaluate whether and how transport and logistics costs can be reduced in Europe
• Determine what the consequences of inaction could be for European business
• Assess how this would influence the competitiveness of European business.

This study has focused on the transport and logistics part of today’s supply chain management.

The general approach has been a desk research study of transport and logistics costs in Europe for manufactured goods, supplemented by cross-sectoral interviews in order to verify the information obtained through the desk research.

Industries interviewed include:

• Automotive
• Chemical
• Consumer
• goods
• Electronics
• Food
• Retail
• Steel
• Flower

Instead transport activities were typically placed under the responsibility of other functions such as sales, production or even finance/administration.

Hence logistics costs were often not properly defined within companies in the 1970’s. Rather reference was normally made to transport costs.

In order to conduct the study, KPMG has defined logistics costs in the 1970’s to consist of;

• Freight/transport costs; both inbound and outbound transport
• Warehousing costs; consisting of out-of-pocket expenses such as warehouse rent, equipment and labour costs. Indirect costs such as inventory carrying costs were not included.

This definition has been confirmed by the companies interviewed.

Today a number of definitions of logistics costs exist. KPMG has looked to several internationally recognised definitions in order to have the broadest possible platform for comparison.

Our definition of logistics costs takes into account the definitions of:

• The SCOR model (Supply Chain Operations Reference model)
• European Logistics Association (ELA)
• The German Bundesvereinigung Logistik (BVL)
• Herbert W. Davis and Company

These definitions are detailed in Appendix 1.

The definition of logistics costs in the 1990’s used in this study includes:

• Freight/transport costs;
• both inbound and outbound transport;
• Inventory carrying costs; Warehousing;
• Packaging;
• Order management;
• Administration;
• Supply chain related Management Information Systems;
• Supply chain related finance and planning.

This definition was also confirmed by the companies interviewed.

The focus on supply chain management has led to a direct increase in the need for transport services since the 1970’s. As a result, transport (measured in tonne-kilometres)in the EU increased 207% in the period from 1970 to 1997:

Source: European Commission, EU Transport in figures, 1998

A number of issues contributed to the increase in the demand for transport services:

• Part of the growth in transport was caused by the general economic growth in the period;
• Companies have increasingly been specialising in specific parts of the value chain;
• Specialisation and more out-sourcing have meant that on-site transport has been converted into external transport among different supply chain participants;
• Acquisitions and mergers have been used as an opportunity to further optimise the supply chains;
• Downsizing and Business Process Reengineering have led to more outsourcing;
• New supply chain management strategies such as Just-In-Time and Efficient Consumer Response redefined the demand for transport services as a consequence of shortening replenishment cycles and lower inventory levels;
• In the 1990’s, European business started to focus more on fulfilment of customer demand by introducing mass customisation or creating diversification in the product range;
• At the same time emphasis on customer service in respect of shorter lead-times, Quick Response systems and higher order fulfilment rates led to smaller order quantities and increased order frequency. The consequence has been a significant increase in the number of deliveries to end-users;
• European business’drivetowards reducing inventory levels led to centralised inventories and reduced number of stock-keeping points in the supply chain, thus creating additional demand for transport;
• The shift from Make-to-Stock to Make-to-Order;
• The outsourcing of value-addedlogistics to third party logistics service providers;
• The geographical scope of logistics has changed. Many companies reinvented their logistics concepts and changed their logistics scope from a country based concept into a regional, Pan-European or global scope;
• Changing distribution concepts; efficiency improvements and more reliable transport services provided the back-bone for direct distribution and cross-docking concepts in which higher transport spending has been off-set by lower inventory carrying, lower warehousing costs and better transport planning;
• Globalisation and increased competition have led to an increase in the demand for transport services as companies source from the most optimal place, not depending on geographical location;

The increase in transport has resulted in new distribution concepts from which both businesses and consumers have benefited, as opposed to unnecessary additional transport.

EXAMPLE:

Trading of flowers at the international flower auction in The Netherlands.

The flowers are sourced from all parts of the world, are traded at the flower auction and are then redistributed to buyers all over the world. This takes place on the same day as the flowers arrive in The Netherlands.

RESULTS:

• The international flower auction, the sellers and the buyers are highly dependent on the efficiency of the logistics system;
• Transport has permitted new market opportunities for the flower growers and the flower buyers at both ends of the supply chain;
• The amount of transport related to flower trading has increased significantly as seen above due to a shift from local sourcing to global sourcing; 76% of imported flowers originate today from overseas destinations compared to less than 4% in the 1970’s;
• The transport cost element of the turnover of flower trading has increased compared to the domestic flower trading of the past; from less than 10% of turnover to 18-28% of turnover, despite a growth of 676% in transport as shown above:

The transport industry has contributed to the development of supply chain management

The transport industry contributed to the changes driven by supply chain management by developing more reliable transport services and value-added logistics services. This provided the back-bone of direct distribution and cross-docking concepts and enabled European business to reduce inventory levels.

In addition the transport industry started to invest heavily in the 1980’s in improved communication and planning systems, harmonisation of transport units, fleet management, automating of back-office functions and IT systems which led to a continuous increase in productivity and operational efficiency.

Also the ongoing consolidation within the transport industry during the last 10 years has in-creased the efficiency of transport through the formation of larger transport companies, alliances or co-operative networks.

Furthermore there has been a considerable change in the role of transport companies. In the 1970’s the transport industry was dominated by a large number of small or mid-sized forwarding companies that fulfilled the classic role of "middlemen". This has changed dramatically. Today the small and mid-size forwarding companies have been reduced both in numbers and importance. Instead new types of transport companies have emerged of which some are directly focused on supporting the execution of businesses’ supply chains.

Without this active contribution of the transport industry, it would not have been possible for European businesses to benefit from their increased focus on supply chain management.

The changes in demand have also meant that the growth in transport has been unevenly distributed.From 1970 to 1997 the importance of road transport grew considerably compared to the other modes of transport:

% of total transport work (tonne-kilometres)	1970	1997
Road	30.8 %	43.8 %
Rail	21.2 %	8.6 %
Inland waterways	7.7 %	4.3 %
Pipeline	5.0 %	3.1 %
Intra-EU shipping	35.5 %	40.6 %

Source: European Commision, EU Transport in figures, 1998.

When measured in tonnes, the position of road transport as the primary mode of transport in Europe becomes even more evident:

Source: European Commision, EU Transport in figures, 1998.

This was underlined by the interviews conducted, as 78% of the companies confirmed road transport as their most important mode of transport.

Rail is also used by some of the companies interviewed, but only on specific transport corridors and not as a general option when com-pared to road transport.

The relative importance of logistics and transport has increased significantly compared to 1970’s according to the companies interviewed.

Furthermore the companies interviewed stated that transport is the most important element in logistics costs today:

Most important elements in logistics costs (% of companies interviewed)

The importance of transport is not all about costs. The companies interviewed also stated that the perceived relative importance of transport compared to production/ manufacturing has increased:

Perceived relative importance of transport and logistics compared to production / manufacturing (% of companies interviewed)

The companies interviewed pointed to a number of reasons for the increasing relative importance of transport and logistics today compared to the 1970’s:

• Customer service is becoming increasingly more important, hence the capability to service and deliver as provided by logistics becomes more important
• Supply chain management and logistics are mandatory in order to achieve cost reductions and maintain a competitive edge
• Supply chain management has created awareness of transport and logistics
• A broader scope of logistics has increased the importance of transport and logistics
• The change to Make-to-Order has increased the importance of transport and logistics
• Globalisation leading to increasing competition in one single global market for goods and services.

Furthermore some companies stated that transport will become an even more important and integrated part of logistics in the future.

Logistics management has become a key element for many European businesses in order to gain competitive advantages and thereby improve their competitive position. It is not only the case within Europe, but also in competition with overseas companies.

As shown in previous chapters, transport is viewed as the most important cost element in logistics cost. A comparison between Intra-European road transport, domestic US road transport, Intra-Asian container transport and Inter-continental container transport of the transport cost for 20’ and 40’ units shows that European companies have a cost disadvantage
When compared to Intra-Asian trade, they face transport costs that are almost 3 times higher.

It is clear from the above that there is a link between the future developments in transport and logistics costs, and the future competitive position of European business.

As the below table shows, it is in some cases less expensive (transport wise) to source from overseas locations when compared to local European sourcing. Combined with other factors such as lower labour costs, this might push European businesses towards relocating their production facilities in their quest for competitiveness.

44% of the companies interviewed stated that the competitiveness of European business would be negatively influenced, if the transport and logistics costs are not reduced in Europe.

The companies interviewed also mentioned which initiatives should be taken in order to reduce transport and logistics costs in Europe:

• Reduce transport-related taxes n Increase economies of scale in transport companies through more concentration of transport companies;
• Increase efficiency based on implementation of IT, particularly EDI, tracking & tracing and satellite navigation systems;
• Higher utilisation of equipment;
• Create more transparency by means of IT;
• Continue to optimise the supply chain;
• Eliminate inefficiencies and create more synergy in the transport chain;
• Improve on-time delivery;
  
• Outsource more logistics activities to third party companies;
• Make railways and inland waterways more competitive;
• Continue liberalisation of transport markets;
  
• Restructure the main transport corridors;
  
• Infrastructure improvements;
  
• Removal of barriers.

With the increasing importance of transport and logistics in supply chain management, European business is and will continue to be highly dependent on efficient transport/logistics services. Without this, companies will lose their competitiveness.

This is supported by a recent KPMG market survey in which the four most important objectives for shippers in logistics partnerships were:

• On-time delivery;
• Lead-time reduction n Increased flexibility in the logistics network;
• Reduction in transport costs.

In addition, the e-business revolution will create new logistics challenges for European business, both in terms of reducing costs and creating new services.

With the expectation of European business to improve quality and enhance service while reducing costs at the same time, they will have to rely on the most efficient, most adaptable and most flexible modes of transport.

For distances of 500 kilometres or less, road transport is considered by many to be the least expensive, most flexible and quickest mode of transport. 97% of all volumes measured in tonnes (Source: European Commission, EU Transport in figures, 1998) are moved within these distances in Europe, which explains the current dominant position of road transport in Europe.

Road transport has been the mode of transport that has best met the needs of the modern business environment. Anything that might prevent road transport companies from fulfilling these needs, will also affect businesses' capability to compete.

The importance of road transport in supply chain management is further underlined by the fact that the rise of supply chain management has taken place simultaneously with the relative growth of road transport.

Given the logistics objectives, the need for efficient and flexible transport solutions and the current structure of European transport, it is difficult to envisage that European companies’ competitive position can be maintained without permitting road transport to continue to play its current essential role. Hence it is vital that the road transport industry maintains its flexibility and capability to adapt to the needs of European business.

The SCOR (Supply Chain Operations Reference model) definition of logistics costs includes:

• Supply chain related MIS;
• Finance and Planning;
• Inventory Carrying costs;the sum of opportunity cost, shrinkage, insurance and taxes, total obsolescence of raw material, WIP, finished goods inventory, channel obsolescence and field sample obsolescence;
• Material Acquisition costs include costs incurred for production materials; sum of materials management and planning, supplier quality engineering, inbound freight and duties, receiving and materials storage, incoming inspection, material process engineering and tooling costs;
• Order Management costs the aggregation of the following cost elements.

• Create customer order costs (including costs for creating and pricing configurations to order and preparing for order documents)
• Order entry and maintenance costs (including costs for maintaining the customer data base, credit check, accepting new orders and adding them to the order system as well as later order modifications)
• Contract/program and channel management costs
• Installation planning costs
• Order fulfillment costs (including costs for processing the order, allocating inventory, ordering from the internal or external supplier, scheduling the shipment, reporting order status and initiating the shipment)
• Distribution costs (including costs for warehouse space and management, finished goods receiving and stocking, processing shipments, picking and consolidating, selecting carrier, and staging products/ systems)
• Transport costs (including all company paid freight and duties from point of manufacture to endcustomer or channel)
• Installation costs (including costs for verifying site preparation, installing, certifying, and authorizing billing)
• Customer invoicing/accounting costs (including costs for invoicing, processing customer payment, and verifying customer satisfaction)

• Transport costs
• Warehousing costs
• Inventory costs
• Administration

The BVL definition of logistics costs is rather comprehensive and includes several scopes of logistics costs:

• Core logistics costs;

• Warehousing
• Shipping
• Delivery and other external transport costs
• Management costs

• Expanded logistics costs;

• Inventory holding costs
• Packing costs
• Capital expenditure
• Internal transport
• Interest and depreciation
• Order processing
• Reverse logistics costs

• Marginal logistics costs

• Waste removal costs
• Production planning & control costs
• Claims & guarantee costs

• Transport n Warehousing
• Inventory carrying n Customer service & order processing
• Administration

	Cross-docking is used when goods flows from different sources are merged at a distribtution centre before final delivery, but without holding any inventory at the distribution centre.
	Figures cover import of flowers into The Netherlands and export of flowers from The Netherlands. Sources: Dutch Floricultural Wholesale Board and KPMG.
	Source: European Commision, EU Transport in figures, 1998.
	Source: European Commision, EU Transport in figures, 1998.
	Companies interviewed were allowed to state multiple elements
	Not all companies were able to provide an answer to this question
	Comparison of transport costs

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