Efficient logistics VS environmental impact

Hkan Aronsson Logistics Managment Dpt. Of Management & Economics Linkping Institute of Technology SE-581 83 Linkping SWEDEN +46 13 28 44 49 Hakar@eki.liu.se Maria Huge Brodin Logistics Management Dpt. Of Management & Economics Linkping Institute of Technology SE-581 83 Linkping SWEDEN +46 13 28 44 49 Marhu@eki.liu.se

Summary The performance of logistics systems is the result of different decisions made on strategic, tactic and operational levels. There is however a lack of knowledge on how different decisions on different levels influences each other and how those decisions influence the environment. There is also a lack of research linking environmental impact to structural logistics decisions. Through illustrations from four cases, this paper shows that cost and environmental stress are affected by those decisions in similar directions. Pro-active firms take today decisions on all three levels in order to reduce costs and environmental impact. Further, delivery service to the customer does not necessarily decrease as costs and environmental stress decrease.

Introduction Environmental problems have received an increasing attention during the last decade. One of the major sources of environmental problems is transportation, which are expected to increase even faster than the general growth of GNP in the industrialised world. EU emphasises that there is an absolute need for a decoupling between the increase in GNP and in the total transportation volumes, since the transportation volumes have increased more than GNP during the last 15 years. There is a general consensus that this development cannot continue and it is expected that EU will increase its involvement in trying to decrease the total emissions from the transportation sector. There are basically two ways to achieve that; introduce more energy efficient technology or to organize logistics in a different way. There is also an agreement that it is not enough to introduce new technology to stop the development, f ex more energy efficient engines. There is a need for larger structural changes in sourcing and distribution. McKinnon (1995) points out: ....that greening of firms logistical operations at a more fundamental level will require nothing short of a change in management culture and strategic priorities. There are significant possibilities for reduction of emissions in the lowest level of the logistics

hierarchy but the main potential for reducing transportation-volumes in production and distribution are linked to higher organisational levels. Wu & Dunn (1995) reasons in a similar fashion when they say those companies must re-evaluate where facilities are located, whom they cooperate with, what technology is used, and the whole logistics structure. They mean that environmental friendly logistics structures are characterised by fewer transports, less handling, shorter transportation distances, more direct shipping routes and better utilisation. They also point out that environmentally concerned companies will more often trade off short lead times against a lower transportation cost. Cooper (1991) states that the only way to structurally reduce the emissions caused by one company is to decentralise warehousing and use fewer and larger transports. Purchasing and distribution have a central role in influencing the environmental impact of the company, since the trading of goods in itself is one of the main reasons why there are transportation at all. To be able to make more environmental friendly decisions there is a need for knowledge on how strategic and tactical decisions influence the operational outcome. There is an agreement in literature that decisions on different organisational levels makes a difference, from strategic decisions of how to source material to operational decisions of what truck to use for a specific transport (see e.g. Abrahamsson & Aronsson 1999). There is also an agreement that the strategic decisions have a larger impact on emissions than operative decisions. There is however a disagreement in what types of decisions that have the largest impact, and what types of decisions leads to what type of environmental impact. Most of the literature is often discussing on a conceptual level and builds on analytical reasoning rather than empirical evidence. In general, which the authors cited above exemplify, it is argued that local sourcing, larger and fewer shipments of goods, and local warehousing, are strategic decisions that will decrease the environmental impact. Modern logistics solutions are often moving in the opposite direction. Warehousing and production are more centralised today, products are sourced over a greater distance, goods is ordered in smaller quantities but more often and so forth. This leads us to the main question that will be addressed in this paper. Is there a conflict of interests between efficient logistics and the environment? It is a large and complex question that requires more knowledge than is available. This paper is aimed at addressing two smaller questions: What is the opinion of the companies, do they believe that there is a positive relation between cost and environmental impact? How are strategic, tactic, and operation decisions related to each other? The paper is the first paper based on a large study and all thoughts are not yet finished, therefore the aim is to give an indication and to build a framework rather than presenting finished answers to these questions.

Measuring environmental impact

To measure environmental impact does not mean that it is really the impact on the environment that is measured.

Industry

pollution

impact on the environment

Figure 1: Industrial activities cause pollution, which in turn have an environmental impact As figure 1 shows industry causes pollution that in turn has an impact on the environment. The relation between pollution and the environment is difficult and many relations are not known. It concerns questions such as what causes global warming, ozone holes and so forth. We have taken the approach used by most researchers in the field of logistics, namely to ignore those type of questions. Measuring environmental impact means in this paper to measure the pollution caused by the industry.

Linking different levels of decision making

The outcome or performance of a logistics system in general is dependent on a series of decisions made by. In figure 2 environmental consequences of company logistics operations are related to decisions of different types.
Concerns all products Concerns whole supply chain Concerns one market or one large client Choices concerning product design Choices concerning logistics structures / organisational form Choices concerning planning / management Choices concerning the operative work Creates opportunities and sets limitations for

Concerns a single shipment

Environmental consequenses

Figure 2: Linking decision to environmental consequences.

There is a decision hierarchy in figure 2. We have chosen to use four levels of hierarchy that corresponds to the earlier discussion of strategic, tactic and operative choices. One level has been added compared with the earlier discussion and that is product design. The logic is that from the beginning, when no decisions have been made there are a vast amount of possibilities. Step by step as decisions are made the possibilities are reduced. Once the product is designed f ex the weight and volume of the product is known. These data are then creating possibilities and limitations to how the overall logistics system is designed (questions concerning structure and organization). An example of such a decision are concerning if there should be both central and regional storage of a product. Typical for these types of strategic decisions are that they concern the whole supply chain. One step down in the decision hierarchy are decisions primarily concerning planning and management. Typically it concerns one market or one large customer. There is not always a clear cut between strategic and tactic decisions, f ex one market might be distant enough so that it is not possible to service the market with only a central warehouse, an exception is made and the warehouse is established in that market. The decision has both strategic and tactic similarities, the scope of the change (one market) indicates that it is a tactical decision and the type of decision (structural) indicates that it is a strategic decision. At this stage all that is left is to make day-to-day decisions of how to handle the delivery of incoming orders and single shipments, which is called the operative level. Once the operative decisions are effectuated there will be an impact on the environment.

Preliminary results of the case studies

The four companies are presented in table 1. Several of the companies are large international firms, the study has primarily focused on Europe, not asking any questions concerning other parts or the world with the exception of Company 2 where the study is focused on the Swedish market and Company 2 that focuses both the European and USA including transports and distribution between the two markets. All the studied companies have a large market share in the studied market for the products that have been studied. The companies were chosen based on recommendations from other companies that considered that they were in the forefront in respective market when it came to work with reducing the environmental impact in general. Table 1: Case companies Company 1 Products Market/Case
Telecommunication equipment Distribution of spare parts and equipment in Europe, USA

Company 2 Company 3
Grocery Distribution Supply and distribution in Sweden Submersible pumps and mixers Supply and distribution in Western Europe

Company 4
Furniture Supply and distribution in Europe

Company 5
Paper products Distribution to Western Europe

All companies considered it important to reduce environmental impact, partly because customer demands but also because a more deeply rooted conviction that it was important to be pro-active and act before they were forced by legislation. It was also pointed out that it was important to be able to give their customers a choice not only when it came to lead times, customer service and price but also when it came to the environmental impact of services and products that the customers bought. During the interviews we were primarily interested in what projects that had been conducted during the last years (both finished and ongoing) that have had a positive environmental impact. Specific questions were asked about what the drivers were for the projects and what effects apart from the environment, which had been achieved. The main answers to these two questions are shown in table 2. Company 1 is not present in the table due to special circumstances.

Table 2: Logistical changes; drivers and effects

Driver Company 2 Cost reduction, Environment, Increase number of products Reduction of emissions, Scale and scope effects, Better planning, Increased visibility Company 3 Cost reduction, Secure margin, Simplify Cost reduction Company 4 Cost reduction, Avoid congestion, Environment, Growth Reduction of emissions, Scale and scope effects, Reduced cost Company 5 Cost reductions, Decrease dependency, Higher flexibility Scale effects, Higher delivery frequency, Higher reliability, Reduction of emissions

Effects/ Results

The results of the changes were primarily a reduction of emissions and increased scale and scope effects in both transport and warehousing. In many cases this was achieved by an increased visibility and trace-ability of goods better tools for planning in advance which led to better fill rates. Although environmental improvement was considered as important, the most important driver for changes in structure and management was cost reductions. These were present in most projects. Other drivers that were less common but important for specific projects were to avoid congestion, increase flexibility, decrease dependency, and growth.

How are cost and the environment related ?

When it came to transportation the opinion of all interviewed were that cost and the environment impact often pointed in the same direction, a solution for lower cost for transportation almost always reduces the pollution as well. Company 5 for example base their work on the following hypothesis: Long term cost effective transports must be resource efficient, and thus they will in the long run become positive for the environment as well. Their experiences from working with resource efficient transports show that environmental effects in transport systems are difficult to

measure, but that it is always right to reduce i.e. to strive for increasing the resource efficiency thus in the long run reducing the environmental stress. When it comes to warehousing Company 2 said that it is always less energy consuming to build one large warehouse instead of two smaller ones because there are scale advantages. Company twos products are stored in different temperature zones, which means that energy leakage between different zones is a problem. Most of the time changes that are made for decreasing the energy leakage are cost saving but there are exceptions. The results are interesting, as they indicate that companies with low environmental impact also can reach a lower cost for their supply and distribution.

Some examples of strategic, tactic and operative changes.

All companies had implemented or were in the process of implementing a number of different projects that were expected to have positive environmental impact, the span of the project were from large structural changes to small operative projects. Several of the companies had implemented structural changes in their distribution network. It was also common that there were a number of operative projects, f ex teaching drivers to drive more fuel-efficient. In table 3 the different changes are divided into strategic, tactic and operative decisions. Table 3: Presentation of decisions taken on different levels regarding different areas. Types of changes Strategic decisions increase the size of warehouses, centralise distribution, reduce the number of warehouses, change location of warehouses, other infra structural changes, introduce track and trace systems, virtual warehouses. Tactic decisions standardized cargo carriers, double deck lorries, vehicle routing, change storage strategies on a regular basis, minimise the number of deliveries, plan suppliers production, work with goods under transport as a moving storage. final repacking, warehouses. driver education, local changes in

Operative decisions

Most of the changes fall into one of two groups depending on their purpose, increase fillrates or increase manageability. Typically for both types of changes is that all levels of decision making is included, from strategic to operative, and are present in the projects being implemented at the case study companies. In the text below a number of examples will be shown of how these companies work to increase the fillrate, and to increase manageability.

Increase fillrate One of the key factors pointed out by many was the importance of increasing the fill rate in transportation. Strategic changes aimed at increased fill rate were to increase the size of warehouses, centralise distribution, reduce the number of warehouses, change location of warehouses and other infrastructural changes. On a tactical level there were examples of introducing standardized cargo carriers, double deck lorries to double the fill rate. Another method to increase fill rate was to work more actively with vehicle routing, to change storage strategies on a regular basis, and to minimise the number of deliveries, which in some instances meant to increase leadtimes. These types of changes are tactical in their nature because they target parts of one market they also require more sophisticated management and rely on the availability of information. On the operation level the changes on both the strategic and tactic level makes it possible to achieve a higher fill rate in the transports. There were also other types of changes such as final repacking of goods done by company 2 to reduce the size of the goods that can be done independently of other decisions. The effects of the changes were an increased fill rate and a decreased transport work. Other tactics to increase the fill rate included coordinating transports with other suppliers, supplying the same or similar customers in areas with few customers. In the case of company 4 increased and centralised volumes made it possible to shift mode of transportation. A new company has been started. The first connection that is to be established is between two of their main facilities in Europe. There were several reasons for moving to rail, apart from cost and the environment are the increased goods volumes caused by new stores being established. Another reason is that congestion on the roads in central Europe will be expected to grow. A prerequisite for rail to be an alternative is that it is possible to buy a fixed timetable so that the train can run non-stop between the destinations. This has been difficult to do before, especially when the destinations are in different countries. The distance between the two nodes of transportation is 1000 km and is expected to take 14 hours, an average speed of 65 km per hour to be compared with a normal average for freight trains of 17 km per hour. The speed is essential because the fixed costs of buying a train set are high. With a higher speed the train can be better utilized. Today, 24% of the goods is transported by rail, the goal is 40%. At the same time the company is planning an expansion in Europe, establishing new stores, which according to plans will double the goods volumes. All goods transported on train are loaded in containers to make handling and loading and unloading to trucks easier.

The importance of information for managing the supply chain Several of the changes made by the companies are aimed at an increased collection and use of information. The goal is to increase manageability and to increase the ability to plan ahead. If successful it means that the distribution structure can be used more efficiently and with f ex increased fill rates as a result, which was discussed earlier. Two examples of how the information can be used are presented below.

Virtual warehousing an example In 1998 the distribution structure was changed and the number of warehouses was reduced. It had a positive environmental impact. In the present structure the logistics centers can have four different functions, merge centers for incoming goods, central warehouse, regional warehouses, and distribution centers for outgoing goods. Central warehouses can be moved from one location to another depending on geographical demand patterns. About 80% of the products are stored in central warehouses, which is about 20% of the goods volume. Some products have a highly seasonal demand, f ex barbecue products. The products are kept at the central warehouse during off-season and moved to the regional warehouses during high season. The IT-system makes it possible to let one warehouse have one or several different functions. It also makes it possible to change how each product is managed, and to move a product from being stored in one location to another location. The idea is to try to reduce the distance each product is transported by using direct transports when it is possible. A typical example is a product that is produced in southern Sweden. Each year around 700 pallets are bought. The product is stored in the central warehouse 100 km outside Stockholm. The products were transported from southern Sweden, to the central warehouse in, distributed to the regional warehouses, and finally distributed to the stores. When more closely examined it turned out that 30% of the goods was distributed to the regional warehouse in Smland (located between the producer and the central warehouse). The products were rerouted so that all transports from the supplier first stop at the warehouse in Smland, where 30% of the products stay, the rest is sent to the central warehouse.

Increased control and standardization The aim of one of the projects is to have control over the goods after it has left the supplier. The goods is traced on article level and in what container it is loaded. The system will make it possible to manage and reroute the goods under transport, especially for goods from Asia. Today, 40% of the goods comes from Asia and is transported by ship. It means that about 0,5 million cubic meters is in storage on boats. The effects are difficult to calculate but it is expected to give positive effects on the environment, cost and delivery service. The aim of another project is to manage the production at larger suppliers so that company 4 can prioritize in which order products are being produced. As mentioned before the company is a major customer (90-95%) for many suppliers. Many supplier agreements are based on buying capacity that on a later stage becomes orders for products. To manage the suppliers capacity it is possible to gain control further back in the supply chain than was possible earlier. It is difficult to predict the effects but the change will increase predictability that will create possibilities to increase efficiency. Often the predictability is more important than delivery time

Conclusions

It is striking that all case study companies have approached this problem by making both strategic, tactic and operation changes. The changes are clearly interlinked and create new possibilities. This paper has identified a range of decisions aiming at improving a logistics systems performance in terms of costs and pollution. The decisions are classified as strategic, tactic and operative. Two questions that have been addressed by most companies to reduce pollution and cost have been identified: increasing fill rates and increasing the systems manageability. One of the aims of the whole research project is to try to establish the main drivers that explain the size of the environmental impact caused by logistics in a company. Fill rate and manageability might well be two drivers of environmental impact. In this study this is suggested but not proven. The cases also demonstrate solutions where costs and pollution levels have been reduced, while the customer delivery service has not decreased, in some cases even increased. This finding stresses the importance of seeking solutions from new perspective; here the environment, and thus being able to find new solutions. In short we find support in the cases for forming a hypothesis: Structural changes in logistics systems can simultaneously lead to reduced costs, reduced pollution and to improved customer delivery service. Fill rate is important but can be increased in many ways. In Lumsden (1998) a case involving a major shipper in Scandinavia changed its structure from direct transports to a hub and spoke structure. The fill rate increased dramatically and the total transport work measured in transport kilometres were reduced by 25%. It is interesting to notice that some shipments travelled a longer distance than before. This shows that a more centralized structure can be both cost effective and reduce emissions. It also points to the fact, which is supported by the case studies as well that the structural decisions are important.

Further research To focus on decision making and linking it to environmental outcome has in this study shown to be fruitful. It has made it possible to more clearly describe how different types of decisions are interlinked to each other and how strategic decisions create possibilities as well as limitations to decision making further down in the hierarchy. The next stage in our research will be to in more detail describe and structure the changes to see to what extent that they really are interconnected. The questions are many, one of the more interesting is to see if it is possible to identify different strategies that leads to both lower cost and reduced environmental impact and if that is the case to describe them. When that is done we have a framework that can be used for addressing a large number of different questions.

Acknowledgements

The authors are grateful to Ericsson, Sweden, for providing funding of the research underlying this paper. We also want to thank Christoper Kohn in supporting our data collection phase.

References

Abrahamsson, M. & Aronsson, H., 1999. Measuring Logistics Stucture, International Journal of Logistics: research and Application, Vol 2 No 3, pp. 263-284. Cooper, J (1991) Innovation in Logistics The impact on Transport and the Environment, Freight Transport and the Environment. Lumsden, K. (1998) Logistikens grunder, Studentlitteratur, Lund. McKinnon, A (1995) Opportunities for Rationalising Road Freight Transport, Herriot Watt University Business School, Edinburgh, UK. Wu, H & Dunn, S (1995) Environmentally responsible logistics systems, International Journal of Physical Distribution and Logistics Management, Vol 25, No 2.