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Alan McKinnon – Professor of Logistics

THE 
LOGISTICS BLOG

Current issues in logistics and transport

Scottish Independence: implications for logistics and pricing

Written for Kuehne Logistics University publication
Click here to download PDF of this blog

Scotland’s economic interdependence with other parts of the UK has been thoroughly researched in financial and fiscal terms, but little reference has so far been made to its physical manifestation in the millions of tonnes of freight that are moved around the country. Perhaps this merits some attention in the independence debate?

An analysis of companies’ logistical systems reveals a very high degree of supply chain integration between Scotland and England. Over the past few decades, many large manufacturers and retailers have centralised their UK distribution operations in the English Midlands, supplying the whole country from a few large logistics hubs. 40% of the new distribution centre capacity built since 1995 has been concentrated in the East and West Midlands, with only around 3% of it located in Scotland. The major supermarket chains and a handful of large non-food retailers, like Marks and Spencer and Argos, regionalise their distribution and have warehouses in Scotland, but that leaves a substantial northward flow of retail and industrial products from supply points south of the border.

There are strong economic arguments for organising logistics at a national scale within the UK. This allows companies to make large savings in inventory and warehousing costs. The more you centralise your inventory the less you need to hold and the bigger your warehouses the lower unit costs of storing and handling the goods. The higher efficiency of centralised distribution translates into lower prices in the shops.

If Scotland became independent the distribution of supplies from warehouses in England to shops and businesses in Scotland, many of which are currently internal inventory transfers, would become international trade. As Scotland would not belong to the EU in the short to medium term, this would be international trade between two countries that did not belong to the same trading bloc, with the extra administrative costs and possibly tariffs that would bring. This might encourage companies to hold inventory in Scotland and move back to a more decentralised distribution model, but this would be a very costly option and result in higher prices in the shops.

At present most companies equalize prices across the UK, despite the fact that it is more expensive to supply the Scotland than the UK market as a whole. This higher cost is not simply due to Scotland’s relative peripherality. It is also a consequence of the freight traffic imbalance that exists between Scotland and England. Significantly more road freight flows into Scotland than goes in the opposite direction, making it difficult for companies to find return loads. It is estimated that in 2010 (the last year for which we have data) around 190,000 lorries travelled south to England empty. Getting a revenue-earning load in only one direction makes distribution much more expensive. The lower population densities in Scotland also inflate the unit costs of supplying Scottish consumers.

The system of uniform pricing which most companies currently apply across the UK effectively cross-subsidises Scottish consumers and businesses. There is no guarantee that they would continue to do this if Scotland were an independent country. Indeed this would be unlikely if independence brought higher trade barrier and logistics restructuring costs. The additional administrative costs associated with supplying retail outlets in a foreign country would increase the logistical cost penalty in serving the Scottish market. This penalty would increase if Scotland were to cease using Sterling and English-based companies became exposed to currency exchange costs and risks. It would increase even more if differences in immigration policies between Scotland and the rest of the UK resulted in the imposition of border controls*. Under these circumstances many companies would be likely to abandon the principle of uniform transport pricing to the detriment of Scottish consumers and businesses.

There would also be implications for the rapidly expanding online retail market. At present, goods bought online by Scottish consumers are delivered free to the home or at a standard UK delivery charge. A large proportion of online orders are channelled through the parcel networks of companies that operate so-called hub-spoke systems. This involves centralised sorting of parcels at major hubs, again mostly clustered in the West Midlands. If the cost of distributing online orders from English-based warehouses and sortation centres to the Scottish market were to rise significantly post-indepdendence, as seems likely, it is doubtful the uniform delivered pricing arrangements would continue. In terms of e-commerce, therefore, the benefits that Scotland currently enjoys from being integrated into UK-wide logistics and pricing systems could be eroded.

The organisation of logistics on a UK national scale also works to Scotland’s advantage in terms of international freight flows. The vast majority of Scotland’s imports are channelled through ports and airports in the south of England. Scotland has no deep-sea container port and must rely on Felixstowe, Southampton, Tilbury etc for most of its imports from other parts of the world. Most of Scotland’s airfreight trade goes through the major English air cargo hubs at Heathrow, Stansted and East Midlands airports. Almost all the roll-on roll-off lorry traffic carrying goods to and from Scotland enters the country through English ports such as Dover, Harwich and Hull. Some of these import consignments travel directly to Scotland, but a large proportion of Scotland-bound imports are stored and handled in distribution centres in and around the Midlands – again mostly supplied from there on a uniform delivered price basis.

Scotland’s heavy dependence on freight terminals south of the border can be easily explained. As a peripheral country with a relatively small population and industrial base, it has difficulty attracting direct international freight services. The traffic imbalance problem is even more acute in the case of these international flows. Scotland also lacks the freight traffic volumes to achieve the economies of scale enjoyed by the UK’s major sea and air freight hubs, all of which are located in England. Scottish exporters and importers have long taken advantage of the lower freight rates and higher service frequencies that they can obtain at these ports and airports.

To use the logistics jargon, Scotland is likely to remain a ‘spoke’ rather than a ‘hub’ in global logistics networks whether it remains part of the UK or becomes independent. It is likely too that it will continue to have most of its supply chains routed through English ports, airports and distribution centres. There is no doubt that these supply chains will keep Scottish businesses and consumers adequately supplied – the question is at what cost. An independent Scotland would inevitably incur higher trade barrier and transaction costs. These, coupled with an erosion of uniform pricing, would significantly inflate Scottish logistics costs, raising the cost of living and impairing business competitiveness.

*As a new EU member state Scotand would have to join the Schengen Agreement. If the rest of the UK remained outside the Schengen zone, controls would have to be erected along the Scotland/ England border.

 

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© Professor Alan McKinnon 2021

Kuehne Logistics University
Hamburg
Germany

contactme@alanmckinnon.co.uk

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© Professor Alan McKinnon 2021

 

Kuehne Logistics University
Hamburg
Germany

 

contactme@alanmckinnon.co.uk

 

Contact me

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