Modelling Vehicle Utilisation, Operating Costs, and Efficiency of the Logistics Services Sector



Modelling Vehicle Utilisation, Operating Costs, and Efficiency of the Logistics Services Sector

Authors

P McCormack, A Smyth, National Institute for Transport & Logistics, IE

Description

Abstract

The current fragmentation of the logistics services sector in countries such as Ireland continues to undermine the nation?s competitiveness. While Ireland?s open economy has experienced remarkable economic performance based primarily on an export led growth strategy, to date little account has been taken of the role of logistics service providers in the realisation of such success. With only limited rail freight available, and given the geography of the country, Ireland?s commercial and industrial sectors now find themselves heavily dependent on the effective and efficient movement of goods by road. As a result, the overwhelming majority (89%) of products transported across Ireland are carried by the road haulage industry. More generally, companies in Ireland are facing an increasingly competitive marketplace. No longer do ?local? companies necessarily enjoy an advantage in their domestic market. If you add to the competitive situation, the natural disadvantage of operating from a geographical location peripheral to significant markets and sources of raw material which result in higher transport costs, then companies in Ireland face a significant business challenge in their efforts to be competitive.

The strategic challenges for Irish-based logistics firms include a rapid response to market changes, developments in information technology and accommodating new legislative regulations. There is an increased desire to ensure reliability of supply chain flows into industrial companies from the previous supply chain node and likewise to the flows outward to the next stage in the chain. Supply chain management is about providing top-level customer service at optimum cost. Reliability in moving inputs and outputs within a company?s supply chain, therefore, must be ensured and that creates the necessity to manage transport costs and inventory processes more effectively. The overall framework for refining and creating a more sophisticated supply chain is the fundamental of maintaining profit. Competitiveness is a condition that must exist all the way along the chain, including transport, if the value that is created in the final market place is to be maximised.

The understanding of transportation as a crucial component is often understated or ignored in the practice of building an excellent, national logistics infrastructure. The strategic focus still operates between the shifting relations between customer requirements and manufacturing responses, the ultimate goal being to minimise transport and distribution costs rather than to improve the overall supply chain.

It is the challenge of location and the need for excellence in logistics and Supply Chain Management (SCM) that the Irish economy faces. If Ireland fails to cope with the more demanding market and logistics environment which is rapidly emerging, exporters will lose competitiveness and market share and the longer term industrial development objectives will stand little chance of being achieved. Simply put, there are significant challenges facing the sector. These include: increased customer requirements; greater competition; increased costs; structural problems; enforcement issues; increased road traffic congestion; environmental considerations and so on. An important consideration in all of this has to be why would companies rely on Irish carriers if foreign, more efficient, less costly service providers are available?

An essential element in underpinning Irish industrial and economic performance is, therefore, the accurate measurement of vehicle utilisation, operating costs and efficiency of the logistics services sector. Much of this study involved the development of a comparative analytical framework facilitating cross-national and cross-sectoral assessments on efficiency. Data collection and collation on all such issues, alongside vehicle utilisation costs enabled an international best practice ?benchmarking? process of the Irish road haulage industry as a whole. Prior to this study, no such data existed on the overall size, make-up and efficiency of Ireland?s logistics services sector.

The road haulage industry in Ireland was liberalised in the late 1980s. Ireland was somewhat behind other developed western economies in introducing liberalised competition in the haulage market. As a result the industry which is largely made up of micro enterprises. Up to 70 per cent of the licensed sector of over 3,200 companies is comprised of one or two man operations. Additionally, in many instances, haulage entrepreneurs are coming into the business with little planning or thought for long-term viability. The inevitable outcome is fierce competition, irregular costs and downward pressure on rates.

Continuous logistics improvement involves taking a supply chain, identifying all unnecessary costs that exist in it and systematically proceeding to tackle and eliminate them. The haulage industry capacities must be broadened to cope with the implications of growing logistics excellence. In order for this to happen ?real? costs first need to be evaluated. The current structure of the industry militates against this.

The evolution of road haulage companies into fully-fledged supply chain management service providers continues to be one of the defining characteristics of the sector. Amongst the more ambitious operators, the emphasis is now on providing a wide range of ancillary services such as warehousing and stock control. With pure trucking activities generally earning low rates of return, the provision of these added-value services allows operators to improve operating margins. The increasing sophistication of the European industry also reflects the growing popularity amongst customers of outsourcing distribution operations.

In considering such these issues account must be taken of all existing and pending transport legislation and its potential impacts on, not just the logistics sector itself, but concomitant knock-on effects on Irish industry ? an obvious example being the retail sector with the recent legislation on city entry time restrictions from Dublin City Council. This paper also explores the impact of legislation on costs elsewhere, e.g. UK and the rest of Europe, including impending policy directives for 2006 on distance-based costing in the UK.

The recent Indecon / PWC Report, supported by Ireland?s Government Department of Public Enterprise illustrated that 48% of hauliers identified themselves as needing training in the area of cost calculation and analysis. The research in this paper provides a conceptual utilisation and costing model framework to analyse current practices/models effectively.

This paper addresses the central question of the extent to which the transport services available to Irish industry facilitate logistics strategies demanded by the contemporary market by (1) addressing the logistics requirements of industry in Ireland and (2) elucidating the capacity of the indigenous logistics industry to accommodate the alterations in the industry necessary for improving competitive advantage. The relationship between customers and logistics service providers, including selection criteria and contractual terms are also explored.

The research on which this paper draws involved a national study of small, medium to large size freight vehicle operators & third party logistics service providers (3PLs) in order to provide current estimates of freight vehicle utilisation in Ireland. Driving patterns such as those reflected in centralised distribution, were also identified, as were sector specific haulage demand and utilisation, specifications and needs. Research findings are obviously of relevance to the Irish commercial sector and the work involved has received strong support from industry.

The research offers detailed estimates of average vehicle operating costs yielded by survey together with details of operating cost components, such as vehicle costs, insurance costs, fuel, lubricant & tyre costs, depreciation, foreign exchange costs; drivers wages; licensing; tax costs; maintenance costs etc,. Respondents, from both logistics service providers and cross sectoral industry ?users? e.g. retail, were requested to provide details for representative vehicles or groups of vehicles in their fleets. Marginal and average operating costs are calculated for a variety of vehicle classes and operating conditions. Information describing other characteristics of vehicles surveyed including averages for age of vehicle, annual distance travelled, average days worked per annum, mileage, load carried, average tyre life, fuel consumption and use are also provided.

Data is then be organised into time-related and mileage-related total costs. Survey results have applications in the quantification of the impacts on freight vehicle operators of pending user cost recovery measures and other future possible variations to government charges affecting their operations. On-going analysis incorporates a full outline of cross-sectoral haulage vehicle utilisation, routing, operational costs and supply chain decision making processes. Also developed is the development of a classification system, which reveals the most appropriate operational model for firms to use based on their individual characteristics. We are also seeking to develop a continuum of utilisation and costing models.

This review into the structure of the Irish road haulage industry is thought to be the most extensive undertaken. The final outcome provides an informed basis on which to plan for the future of a sector which, in itself, is a major contributor to the Irish economy and is vital to the interests of Irish industry as a whole. The same obviously applies all over Europe as it is imagined this work is of relevance to policy makers etc., especially those pertaining to accession countries or those of peripheral economies.

Publisher

Association for European Transport