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Table of Contents
Introduction
Methodology
Little focus on logistics costs in the 1970s
Broadening scope of logistics costs in the 1990s
The contribution of transport
Considerable growth in transport
The transport industry has contributed to the development of supply chain management
Increasing relative importance of transport and logistics
Logistics as a key competitive tool for European business
Flexible and adaptable transport is vital
Appendix 1; Definitions of logistics costs
Introduction
Since the early 1980s, 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
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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 1990s compared to that of the 1970s.
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 todays supply chain management.
Methodology
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
Little focus on logistics costs in the 1970s
businesses focused on production costs and sales/marketing in order to maximise profit. In most cases, supply chain management as a cross-functional discipline had not
yet emerged.
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 1970s. Rather reference was normally made to transport costs.
In order to conduct the study, KPMG has defined logistics costs in the 1970s 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.
Broadening scope of logistics costs in the 1990s
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 1990s used in this study includes:
Freight/transport costs;
both inbound and outbound transport;
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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 1970s;
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 1980s 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 1970s 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
1970
1997
(tonne-kilometres)
Road
30.8 % 43.8 %
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Rail
21.2 %
8.6 %
Inland waterways
7.7 %
4.3 %
Pipeline
5.0 %
3.1 %
Intra-EU shipping
35.5 % 40.6 %
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10,600
80 %
Rail
900
7%
Inland waterways
400
3%
Pipeline
500
4%
Intra-EU shippin
750
6
Source: European Commision, EU Transport in figures, 1998.4
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.
Increasing relative importance of transport and logistics
The relative importance of logistics and transport has increased significantly compared to 1970s according to the companies interviewed.
Furthermore the companies interviewed stated that transport is the most important element in logistics costs today:
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 1970s:
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
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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.
Trade lane
Inter-continental container transport 20 & 40 unit transport costs are 152 - 177 % higher in Europe
Domestic US road transport
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.
European businesses face a major cost disadvantage
Flexible and adaptable transport is vital
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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:
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On-time delivery;
Lead-time reduction n Increased flexibility in the logistics network;
Reduction in transport costs.
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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.
Road transport must be permitted to continue to play an essential role Road transport must be permitted to continue to play an essential role
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Transport costs
Warehousing costs
Inventory costs
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.
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Figures cover import of flowers into The Netherlands and export of flowers from The Netherlands.Sources: Dutch Floricultural Wholesale Board and KPMG.
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