National Academies Press: OpenBook

Guide for Conducting Benefit-Cost Analyses of Multimodal, Multijurisdictional Freight Corridor Investments (2017)

Chapter: Appendix I - Logistics Costs and Supply Chain Effects

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Suggested Citation:"Appendix I - Logistics Costs and Supply Chain Effects." National Academies of Sciences, Engineering, and Medicine. 2017. Guide for Conducting Benefit-Cost Analyses of Multimodal, Multijurisdictional Freight Corridor Investments. Washington, DC: The National Academies Press. doi: 10.17226/24680.
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Suggested Citation:"Appendix I - Logistics Costs and Supply Chain Effects." National Academies of Sciences, Engineering, and Medicine. 2017. Guide for Conducting Benefit-Cost Analyses of Multimodal, Multijurisdictional Freight Corridor Investments. Washington, DC: The National Academies Press. doi: 10.17226/24680.
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Page 149
Suggested Citation:"Appendix I - Logistics Costs and Supply Chain Effects." National Academies of Sciences, Engineering, and Medicine. 2017. Guide for Conducting Benefit-Cost Analyses of Multimodal, Multijurisdictional Freight Corridor Investments. Washington, DC: The National Academies Press. doi: 10.17226/24680.
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Page 149

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147 A p p e n d i x i This appendix summarizes the Weisbrod et al. (1) four-step process linking logistics costs to productivity changes and Cambridge Systematics, Inc., et al. (2) process for quantifying supply effects of direct cost changes. These are two separate efforts, but both attempt to quantify (in different ways) the logistical consequences. The procedure combines the first-order valuation of shipper cost for cargo (Step 5, Figure 4) with potential broader productivity implications as one composite analysis. Weisbrod et al. describe the following steps: 1. Establish the role of logistics cost as part of the total cost of delivered products (by industry, commodity, and impacted region): a. Determine freight flows using public- or private-domain data sources. Develop the com- modity mix. b. Use public domain data sources such as the Transportation Satellite Accounts inventory cost factors to identify the costs for individual commodity categories. The Transportation Satellite Accounts available from the Bureau of Transportation Statistics (http://www.rita. dot.gov/bts/sites/rita.dot.gov.bts/files/publications/transportation_satellite_accounts/) provide logistics costs associated with warehousing/storage and transport costs (in-house) for all modes used. The most recent year for which data are available is 2012. 2. Establish how each type of transportation improvement (by mode) affects each element of logistics cost. 3. For any specific transportation improvement in a specific area, calculate the change in travel characteristics and resulting effects on elements of total logistics cost: a. Establish the change in inventory costs in relation to TEE metrics. This is a straightforward process for inventory capital costs. This is not discussed in the NCHRP Report 786 report but is included in this report as Step 6 Figure 5. b. Adjustments for commodity type and logistic costs can also be made using interviews (Step 6). c. Include TEE operating cost changes as the logistics cost. d. NCHRP Report 786 also considers additional costs to the driver and shipment trip end labor costs at the loading dock and warehouses, if applicable, following procedures sug- gested by Weisbrod et al. (1) (Table I1). 4. Translate the logistics costs to productivity: a. Weisbrod et al. in NCHRP 786 recommend using Rasamit’s parameters (3) for linking changes in logistic costs to estimate the productivity implications (Table I2). In 2008, Cambridge Systematics, Inc., et al. collaborated with Boston Logistics Group (2) to recommend a method to capture supply chain effects. Figure I1 shows how direct first-order effects spill over to supply chain effects as developed by Boston Logistics Group and the effects of a 10% reduction in transport costs or capacity increase of 105. In order to quantify benefits Logistics Costs and Supply Chain Effects

148 Guide for Conducting Benefit-Cost Analyses of Multimodal, Multijurisdictional Freight Corridor investments Table I1. Logistics cost factors associated with reliability. Factor Type of Freight CommercialTruck Freight Rail Inventory carrying cost (time cost of capital) per ton-hour of delay Bulk commodities $0.05 $0.02 Manufactured goods $0.36 $0.21 Composite average $0.09 $0.02 Average capacity (tons per vehicle) Bulk commodities 10.0 7,430 Manufactured goods 17.5 3,024 Excess labor cost (wage per worker-hour) Truck/train crew $19.88 $26.40 Warehouse (scheduled time) $14.77 Warehouse (overtime) $22.15 Source: Rasamit (3 ). Table I2. Logistics cost and total factor productivity. Logistics Variables Models ExaminedNo Time Lag 1-Year Time Lag 2-Year Time Lag Logistics cost −0.003 −0.011 −0.004 Inventory level −0.009 −0.009 −0.003 Inventory carrying rate −0.0003 −0.009 −0.006 Inventory carrying costs −0.006 −0.018 −0.005 Transportation costs −0.009 −0.004 −0.006 Source: Rasamit (3 ). Figure I1. Supply chain links between first-order effects and higher-order effects. Source: Boston Logistics Grp (4 ) and Cambridge Systematics, Inc. (5 ).

Logistics Costs and Supply Chain effects 149 Table I3. Effect of a 10 percent transport cost reduction or capacity increase. Source: Boston Logistics Grp (4 ) and Cambridge Systematics, Inc. (5 ). Infrastructure Benefit Supply Chain Impact Supply Chain Benefit Expressed as Percent of Operating Costs Supply Chain Benefit Expressed as Percent of Transport Costs 10% transport cost reduction Lower material cost by substituting farther, cheaper sources Consolidate plants due to extended reach Switch modes and reduce shipment size, decreasing inventory 0.1% 0.2% 0.1% 1.5% 4.1% 1.2% 10% capacity increase Less safety stock Rationalization of fleet and warehouse assets 0.1% 0.01% 1.1% 0.3% Secondary effects Increasing service levels Converting cost savings into price reductions On-demand supply chains Not quantified Not quantified Not quantified Not quantified Not quantified Not quantified Overall %2.8%1 as indicated in Table I3, the baseline transport costs are determined by shipper type matched to North American Industry Classification System sector (1). These benefits are only preliminary estimates that are based on average companies in a broad cross section of industries, including many that have little transportation cost and do not move physical product. More precise estimates that are targeted at specific supply chain types should be developed using the tools referenced throughout this text. References 1. Weisbrod, G., N. Stein, C. Williges, P. Mackie, J. Laird, D. Johnson, D. Simmonds, E. Ogard, D. Gillen, R. Vickerman. NCHRP Report 786: Assessing Productivity Impacts of Transportation Investments, Transporta- tion Research Board of the National Academies, Washington, DC, 2014. http://onlinepubs.trb.org/onlinepubs/ nchrp/nchrp_rpt_786.pdf. 2. Cambridge Systematics, Inc., Economic Development Research Group, Inc., Halcrow, Inc., DecisionTek LLC, and Boston Strategies International. NCFRP Report 12: Framework and Tools for Estimating Benefits of Spe- cific Freight Network Investments. Transportation Research Board of the National Academies, Washington, DC, 2011. http://www.camsys.com/pubs/ncfrp_rpt_012.pdf. Accessed August 2014. 3. Rasamit, T. “The Aggregate of Logistics Cost and Total Factor Productivity,” MSc thesis, MIT, Cambridge, MA. 2003. http://dspace.mit.edu/bitstream/handle/1721.1/28576/57468268.pdf?sequence=1. 4. Boston Logistics Grp. Infrastructure Investment: The Supply Chain Connection. 2008. http://www.supply chainquarterly.com/topics/Logistics/scq200804infrastructure/. Accessed 2014. 5. Cambridge Systematics, Inc. EDR Group, Boston Logistics Group, Inc. 2006. Guide to Quantifying the Eco- nomic Impacts of Federal Investments in Large Scale Freight Transportation Projects. Office of the Secretary of Transportation, U.S. DOT. 2006.

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TRB's National Cooperative Freight Research Program (NCFRP) Research Report 38: Guide for Conducting Benefit-Cost Analyses of Multimodal, Multijurisdictional Freight Corridor Investments explores how to conduct benefit-cost analyses (BCAs). A BCA is an analytical framework used to evaluate public investment decisions including transportation investments. BCA is defined as a collection of methods and rules for assessing the social costs and benefits of alternative public policies. It promotes efficiency by identifying the set of feasible projects that would yield the largest positive net benefits to society.

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