Methodologies to Estimate the Economic Impacts of Disruptions to the Goods Movement System (2012)

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1 The relationship between a healthy economy and transportation system performance is one of the most important relationships in transportation policy. As long as commodities and goods need to move as part of the supply chain, providing reliable and cost-effective transportation capability is embedded in the supportive nature of transportation to economic productivity. When such capability is disrupted, either by man-made or natural means, economic losses—to the companies and individuals dependent on the supply chain as well to the broader society—could be significant. Examples of such disruptions have occurred in the United States over the past several decades, including numerous hurricanes, major labor strikes such as the one affecting the West Coast ports in 2002, the closure of northern rail lines during the winter of 2006 for almost 2 weeks due to snow, the 2008 fuel price spike, freezing temperatures and flooding, the shutdown of the national aviation system during 9/11, and stoppages on critical trans- portation links such as the Baltimore rail tunnel fire. Internationally, disruptions in supply chains have also been caused by health concerns, such as the avian flu. This report presents the findings of research completed for NCHRP Project 20-59(34), “Methodologies to Estimate the Economic Impacts of Disruptions to the Goods Movement System.” The research had the following three objectives: 1. Synthesize the current state of knowledge of the economic impact of transportation disruptions on goods movement and relate this to a conceptual framework that describes key relationships, 2. Develop conceptual methodologies for estimating such economic impacts for different geographic and temporal scales, and 3. Illustrate the use of these methodologies at different scales and in different contexts. A number of important issues for economic impact modeling surfaced from the literature review conducted for this research, as follows: • The spatial or geographic scale of disruption will likely have a direct bearing on the magnitude and incidence of the economic impact. For example, the closing of a major port or key links in a land transportation network could have negative impacts throughout the supply chain, assuming little resiliency in moving goods on alternate paths. From a national perspective, however, the economic impacts might be very local (assuming that shippers and carriers can adjust the transportation component of the supply chain to serve the final consumers and still provide national benefits). Thus, the “perspective”— who is being impacted—will often produce different answers depending on context. • A disruption could affect the entire freight system of an area or affect a specific mode. In the situation where a single mode is disrupted, shipments are likely to transfer to S u m m a r y Methodologies to Estimate the Economic Impacts of Disruptions to the Goods Movement System

2 methodologies to Estimate the Economic Impacts of Disruptions to the Goods movement System alternative modes. The question then becomes whether the alternative modes have the capacity to handle the shipments and have the required approvals to transport such an unexpected demand in a timely and cost-effective manner. • The temporal nature of disruption will also have potentially important economic con- sequences. A short disruption, that is, one lasting a day or up to a week, might cause some temporary or short-term economic loss, but overall would have minimal economic impacts. However, one lasting a much longer time could have severe consequences, depending on how industries and supply chains adjust. It should be noted that temporally short disruptions could also have long-term effects. Thus, network resiliency in placing back into service the necessary facilities and services to move cargo once more becomes an important consider- ation in assessing overall economic impact. • The longer, more geographically extensive, and numerous breaks in the supply chain, the more extensive are likely to be the economic impacts. Shorter and less widespread disruptions, covering fewer supply chain/transport links are likely to entail limited economic impacts, primarily increased transport and inventory costs. Much more extensive and longer lasting disruptions will likely begin to effect productive economic activities, such as product assembly and manufacturing, or product distribution. When this occurs, regional and even national economic productivity and output can be reduced, affecting measur- able economic performance such as gross domestic product (GDP). Firms may be able to “catch up” on production and demand may respond, but some net losses are likely even over time. • The economic impact of severe bottlenecks and disruptions could affect a wide range of supply chain participants, not just the ocean carriers, truckers, railroads, and ship- pers that are using the network to transport the goods. These participants include public agencies, local labor unions, local retailers, warehousing and distribution providers, and— potentially—a significant number of consumers and economic organizations throughout the nation. • Different types of disruption could have a range of direct and indirect economic impacts. For example, the removal of one critical link in a network could create a bottleneck that might or might not have important consequences to goods flow. On the other hand, widespread network disruption (for example, due to floods and hurricanes) could have a multitude of overlapping and connected economic impacts. • Whether goods can be shipped economically via other modes depends, in addition to the availability of service, on the value and nature of the cargo itself. High-value commodities or commodities that are otherwise time sensitive, such as air cargo, may not economically be shifted to slower modes. • Network resiliency (through either redundancy or business flexibility) is a very important characteristic of economic impact. If, for example, goods flowing through a particular bottleneck can be rerouted without significant economic costs, the overall economic impact of a bottleneck could be minimal, ignoring for a moment the economic consequences to the local economy. • Assessing economic effects has to take into account the nature of the methodologies being used and the questions being asked. For example, a disruption that shifts shipments from rail to truck may require that far more truck drivers be used. Some economic models would see this as a positive impact offsetting losses to other modes and sectors—more workers are being employed. However, from a user perspective, the system has become potentially less efficient and not enough drivers and/or highway capacity may exist to handle the increased shipments. Accordingly, the analysis of disruptions may require more of a “toolkit,” rather than a “one-size fits all” model, organized within a consistent methodological framework. • The global goods movement supply chain is a multi-tiered system with various entities, stakeholders, networks, and modes involved, that spans a huge physical space, and by its

Summary 3 very nature is susceptible to natural and human-caused disruptions. International supply chains are also intricately interconnected. • In case of a major event, such as a terrorist attack or an earthquake, standard risk miti- gation measures, such as increasing safety stock, diversifying supply base, and building redundancy into logistical systems, may or may not afford much protection from damage. At the same time, the probability of occurrence of such events is small. • Disruption resistance (security) and tolerance (resilience or recovery) are both important measures in disruption management. These measures have to be balanced with concerns regarding productivity while promising to provide sufficient benefits to justify costs. These measures could include increased electronic surveillance, such as in the case of global container movement, or having back-up suppliers, as in the case of a business that procures raw material, so that if a disruption event affects one supplier, there is a fallback. The assumptions regarding resistance and resilience are important in understanding estimates of disruption impacts. • Various types of economic models can help estimate the potential for losses due to a dis- ruption in the supply chain. These range from simple logical frameworks to complicated dynamic economic simulations. However, it is important to understand the underlying assumptions of these models, particularly with regard to resiliency of, and interdependencies among, businesses and infrastructures. The order of magnitude of loss estimation can be largely affected by these assumptions. A sequential five-step process was developed as a comprehensive and practicable frame- work for evaluating a wide range of freight network disruption events and their many possible economic impacts. The initial step identifies the direct and immediate physical effects of a network disruption, including the identification of the specific transportation facilities affected and the associated modes of transport within, into, and out of the region impacted. The second step identifies current and future affected network flows by facility and link. A variety of more or less severe impacts on day-to-day operations are possible, from a rerouting of local or through traffic or a reassignment of vessels to other berths or terminals, to shifts in operating times to avoid increased on-network congestion. Longer term disruptions involving major damage to port or other terminal facilities may lead to truck, train, vessel, or aircraft rerouting to other locations and to a resulting drop in local freight traffic volumes. The third step identifies supply chain characteristics and parameters. Freight supply chains, which involve moving a commodity from production site to final customers, differ a good deal by commodity transported, including whether the cargo involves shipping raw materials, intermediate, or finished goods. Both physical and financial/institutional adjustments will often be required, typically leading to higher total transaction costs. The fourth step models the response of the supply chain to disruptions, the most challenging of the five steps in the process. Possible models might focus in the short term on rail, barge, truck, and air freight traffic rerouting, including the possible rerouting of trans- continental landed trade or ocean vessel movements; mode shifts; source-market restructuring of origin-destination flows and more permanent restructuring of origin-destination flows; and industry responses, including inventory draw-downs, reduced or suspended production levels, and shifts in the location(s) of production. The final step models the economic impacts of network disruptions. The extent and depth of economic impact modeling will depend heavily on what is assumed about supply chain responses to disruptions, or what is estimated based on more in-depth modeling. Modeling should examine the following types of costs.

4 methodologies to Estimate the Economic Impacts of Disruptions to the Goods movement System Social and Public Sector Costs • Changes (increases or decreases) in network maintenance costs, based on net regional, mode-specific vehicle miles of travel (VMT) changes – Changes from traffic rerouting will have little impact on overall routine highway maintenance costs, since regional VMT will not change much, but there can be a transfer of impacts from one location—or possibly from one state—to another—in cases of widespread diversion incidence. – Changes are more significant where modal diversions occur and truck volumes fall significantly across the entire network. • Increased network congestion on undamaged facilities – Crude estimates can be based on additional VMT under congested conditions and based on diversion assumptions or actual diversion analysis. – Within a travel demand model itself, additional levels of link congestion can be estimated and measured using metrics such as VMT or vehicle hours of travel (VHT) under con- gested conditions (levels of service [LOS] D,E,F). • Changes in externalities, such as emissions, based on net regional changes in mode-specific vehicle miles of travel – These impacts may also need to be weighted to reflect increased overall levels of conges- tion from truck reroutings, i.e., if volumes are diverted from LOS C facilities to other facilities, which then operate under LOS F, emissions and congestion costs would both experience net increases. Direct Supply Chain Costs • Increased direct truck transport costs from diversion, based on VMT and VHT changes. – Given truck VMT and VHT changes, trucking cost factors can be readily obtained from numerous benefit-cost analysis studies and sources. • Increased inventory carrying costs, calculated based on changes in ton hours by commodity type, value of the commodity, and assumed time value of money (inventory costs) – Increased direct truck transport costs from diversion can lead to increased inventory costs, calculated based on changes in ton hours by commodity type, value of the com- modity, and assumed time value of money (inventory costs). Assumptions may also need to be made about the share of shipper costs borne by/passed on to the carrier, or to beneficial cargo owners (BCOs). Assessments should also reflect net regional impacts, such as potential increases in local trucking activity in some areas at the expense of other areas, i.e., potentially no net change in costs or benefits, but a change in the spatial distribution of impacts. Measures include producer and consumer surplus. Based on the relevant literature, case studies, and the research team’s experience in freight, logistics, and economic impact analysis, it was determined that a general methodology could be developed that grouped impacts according to common characteristics and that simplified the analysis in such a way that a high proportion of the economic effects could be readily captured. This so-called high-level methodology uses “rules of thumb” for estimating the economic costs associated with different components of a system disruption. The economic impact of any particular disruption would depend primarily on the commodity characteristics, the characteristics of the disruption, and the costs associated with different elements of the cost structure (e.g., transport/logistics costs, inventory costs, and productivity and output losses) (see Figure S-1). It is apparent that a high-level methodology, while involving simplification, is not necessarily “simplistic.” Rather, the methodology must reflect important distinctions across

Summary 5 a number of key variables, which would determine economic outcomes, and also dictate analytic methods. The high-level methodology is intended to capture the most likely general set of supply chain and economic impact outcomes. The more detailed methodology depends on a much higher level of detail and more sophisticated analysis of the supply chain dynamic (especially under stress). To fully implement the more detailed methodology, further research would have to be conducted on several elements of the analysis approach, especially the supply chain response to external forces. Figure S-1. Basic concepts in a high-level economic impact methodology. Commodity Characteristics • Low/high value • Low/high time sensitivity • Low/high volumes Disruption Characteristics • Short/long duration • Small/large geographic scale • Small/large number of transport alternatives available • Significant supply chain disruptions within a given industry sector = Economic Impact Default Values for •Transport costs •Inventory costs •Lost industry productivity •Output