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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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A European perspective on Indian trucking

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

As a European logistics specialist travelling on the Indian road network for the first time, I was struck by the virtual absence of articulated trucks, comprising a tractor unit and trailer. Most of the road freight seems to be moving in small, open-topped rigid vehicles with two or three axles and brightly coloured liveries. In fact, at last count, they represented around 85% of all trucks on Indian roads. From a European perspective, the Indian road freight system may seem inefficient. After all, there are economies of scale in road haulage: the bigger and heavier the load, the lower are the unit transport costs per tonne‐km or cubic‐metre‐km.

Indian rigid truck

Indian rigid truck

The standard Indian rigid trucks have a cubic capacity of around 30 m3 and gross weights ranging between 9 tonnes (on 2 axles) and 25 tonnes (on 3 axles).

By comparison, the main ‘workhorse’ of the European road freight sector is an articulated 5‐axle vehicle with a 13.6 metre trailer, offering 82 m of space and having a maximum gross weight of 40 tonnes.

European articulated truck

European articulated truck

Surely then, it would be in India’s interests to move to a truck fleet more closely resembling that of European countries.

Not necessarily.

One must be cautious about recommending the transfer of logistics technologies from one country to another. There are often very good reasons, for example, for international differences in the composition of national truck fleets.

In several respects the Indian truck fleet is probably well adapted to the country’s physical and economic circumstances. Much of the country’s road infrastructure would be unable to accommodate articulated vehicles with large turning circles, while relatively few of the country’s factories, warehouses and shops have the reception facilities and manoeuvring space required by these vehicles.

Most Indian carriers would also lack the capital to acquire European‐style articulated vehicles. They are generally very small, predominantly owner‐driver businesses operating in an intensely competitive market, surviving on tiny margins and very low rates of return. Even if they were able to afford a large articulated vehicle, the nature of the Indian logistical system would not allow them to exploit the additional flexibility offered by ‘articulation’. In Europe there are typically around 1.7 trailers for every tractor unit allowing companies to decouple loading and transport operations. Most Indian truckers would lack the resources to acquire additional trailers and control their use. Perhaps the main explanation of the dearth of articulated trucks in India is that, at this stage in the country’s development, they are not actually needed. Bulky, primary products still make up a large proportion of the commodities moved by road. These are generally dense products that do not require the additional space that an articulated trailer offers.

Also, relatively little of the freight moved by road in India is conveyed on pallets or in roll cages, unitised handling equipment that takes up additional space. The very low labour costs in India make it more economical to ‘handball’ loose product, thereby maximising vehicle loading and eliminating the need for unitised and mechanised handling. Low labour rates also weaken the economy of scale argument for bigger trucks. In Europe the labour costs typically represent around a third of total road transport costs; in India it is around 10%. Procurement practices also influence the demand for road services and hence truck capacity. In many sectors, goods tend to be ordered in smaller quantities than in Europe reducing the need for large vehicles.

Although the current dominance of small rigid trucks can be explained and probably justified, it is likely that as the Indian economy develops, as its transport infrastructure is upgraded and as the logistics service sector evolves, greater numbers of articulated vehicles will appear on the roads. The Transport Corporation of India, the country’s largest logistics company, estimates that between 5 and 8 billion rupees (70 and 115 million Euros) could be saved annually if the national fleet of articulated trucks was increased by 10%. These savings would accrue mainly from reductions in fuel consumption and road wear and tear. The World Bank has also advocated a switch to articulated vehicles. Given the relatively long truck replacement cycle in India, however, it will probably several decades before India becomes as dependent on the articulated truck as European countries.

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Life without trucks

Reproduced from World Economic Forum blog, December 2011.
World Economic Forum logohttps://www.weforum.org/agenda/2011/12/life-without-trucks/

Can you imagine a world without trucks? It’s not a scenario that keeps many people awake at night, but perhaps it should. If, for whatever reason, road haulage operations were suspended, the resulting dislocation of supply chains would result in economic collapse within a few days. This is the conclusion of a study I have carried out of the likely impact on the UK of a total shut-down of its road freight system.

This eventuality is not as far-fetched as it may seem. In September 2000, steep increases in fuel prices provoked some UK hauliers and farmers into blockading oil refineries and blocking roads, causing a national crisis within three or four days. Since then strikes have seriously disrupted trucking operations in France, Spain and Portugal (June 2008), Australia (July 2008), India (January 2009), Greece (September 2010) and Shanghai (April 2011).

The trucking sector is particularly prone to this type of action. In most countries, its profit margins are very tight. This leaves carriers’ finances vulnerable to cost increases, particularly of fuel, whose price is highly susceptible to global events, and which typically accounts for around a third of total haulage costs. Although the trucking industry is highly fragmented, protests over prices, wages, taxes, tolls and regulations can precipitate mass action. Carriers and drivers know that such action can have a swift and debilitating effect on an economy giving them industrial ‘muscle’.

The conclusions of the UK study were far-reaching and profound. After only five days, the country would see retail stocks of most grocery products exhausted, almost all manufacturing closed down, all elective surgery in hospitals suspended, half the national car fleet without fuel, mail and parcel deliveries terminated and retail banking seriously disrupted by the collapse of the ‘cash logistics’ system. As the analysis made no allowance for panic buying, the reality would in all probability be far worse.

Individually, businesses can do little to protect themselves against such a sudden and systemic withdrawal of a vital transport service.  Traditional business continuity techniques would provide only marginal relief.  High-level contingency planning, involving close government and industry collaboration, would be required to deal with an emergency of this magnitude.

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Logistics – our life support system

Reproduced from World Economic Forum blog, September 2011. World Economic Forum logo
https://www.weforum.org/agenda/2011/09/logistics-our-life-support-system/

When logistics works, as it does almost all the time, nobody notices. It becomes an invisible service that we all take for granted. For example, when we shop in the typical department store, we seldom give a thought to all the complex processes that have brought tens of thousands of products together in that one location from all over the world in sufficient quantities to meet our demands. Thousands of separate supply chains converge on that one point to give us the level of product availability we have grown to expect. Indeed every service we use and every product we buy depend on elaborate supply networks that we know very little about – until they fail.

It is only when these networks are seriously disrupted, by bad weather, industrial disputes, earthquakes or whatever, that logistics tends to get news coverage. Then journalists all too frequently refer to ‘logistical nightmares’, instilling a negative impression of logistics in the public mind. Many people also resent having to share the road network with trucks and complain about the adverse effects of freight transport and warehousing on the environment. They sometimes fail to see the connection between these sources of irritation and pollution and the goods they buy in the shop. Little wonder that logistics managers often feel they do not get the understanding and appreciation they deserve.

Efforts are now being made, however, to raise the public profile of logistics and make people realise just how vital it is to modern life. In the UK, the Freight Transport Association has launched a campaign called Love Logistics, while the parcel carrier UPS is conveying a similar sentiment in its global press and television advertising. In April this year Germany held a national logistics day, when trade fairs and company visits were organised to promote the sector and the Chancellor, Angela Merkel, gave a speech on the subject.

The World Economic Forum’s decision in 2010 to establish a Logistics and Supply Chain Industry Agenda Council also recognised the critical importance of this activity to global economic and social well-being. The publication of the Council’s first report (see below) should raise awareness of the major challenges facing the logistics sector. Keeping logistical systems, upon which we all rely, running efficiently, sustainably and reliably in the years ahead will not be easy.

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© Professor Alan McKinnon 2022

Kuehne Logistics University
Hamburg
Germany

contactme@alanmckinnon.co.uk

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© Professor Alan McKinnon 2022

 

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