THE COST OF LOGISTICS SURVEY FOR SOUTH AFRICA · But transport remains the biggest challenge...

THE COST OF LOGISTICS SURVEY FOR

SOUTH AFRICA:

Alignment workshop

20 January 2011

AGENDA

• Introduction

• History

• Recent results

• Definitions

• Project approach

• Alignment issues and ideas

2

AGENDA

• Introduction

• History

• Recent results

• Definitions



3

The world of logistics is getting more and more complex as globalization opens new markets and creates new opportunities

4

Greater efficiency in logistics and agile supply chains is often seen as the “final frontier” for improving competitiveness

5

Rising global logistics costs is confirmed by a 2005 study – total costs for the countries measured rose from 13.4% in 1997 to 13.8% in 2002

10

11

12

13

14

15

16

17

18

Perc

enta

geage

• Costs increased for lower income nations and is higher for lower income nations – due to operational pressures in the 1st world and density considerations

• Latter observations are key to SA where development of the 2nd economy has to be engineered and full potential cost savings on densified first economy corridors need to be exploited

Rodrigues, Bowersox & Calantone, 2005. Estimation of Global & National

Logistics Expenditures: 2002 Data Update, Journal of Business Logistics

1997 2000 2002

Low Lower middle Upper middle

High (non-OECD) High (OECD)

10

AGENDA

• Introduction

• History

• Recent results

• Definitions



11

A survey prototype was developed in 2006

LOGISTICAL COST IN SOUTH AFRICATransport

(R42,579m) 56.0%

Stock Losses

(R2,394m) 3.1%

Warehousing

(R9,578m) 12.6% Admin & Management

(R4,789m) 6.3%

Inventory CarryingCost

(R14,367m) 18.9%

Order Processing

(R2,394m) 3.1%

Total logistical cost = R76,101m (18% of GDP)

1996 view

12

LOGISTICAL COST IN SOUTH AFRICA

Transport

(R21,290m) 64.5%

One outcome were to quantify propensity to outsource

Stock Losses

(R838m) 2.5% Warehousing

(R3,352m) 10.2%

Inventory CarryingCost

(R5,028m) 15.2%

Order Processing

(R838m) 2.5%

Admin & Management

(R1,676m) 5.1%

Total propensity to outsource = R33 billion

1996 view

13

Agriculture

Mining

Iron, Steel, Metals, Scrap

Non-metals

Fuel & Petroleum Products

Food, Beverages, Tobacco

Transport & Other Costs

LOGISTICAL COST IN SOUTH AFRICA

And cost per industry

Food, Beverages, Tobacco

Chemicals (Including Haz & Non-Haz)

Machinery, Motor Vehicles & Parts

Pulp, Wood, Paper

Textiles, Clothing, Footwear

Rubber, Plastics, Glass, Pottery

High Value Goods

0 2 4 6 8 10 12 14

Spoornet Public Transport Own Transport Other Logistical Cost

R/Billion

1996 view

14

Johannesburg

PretoriaZeerust

Golela

Maputo

Beit Bridge

4.03

1.79

2.022.14

The first flow measurement were attempted in 96

Port Elizabeth

East London

Mossel BayCape Town

Noord-oewerUpington

BloemfonteinKimberley

Durban

Golela

2.5113.90

1.011.65

2.17

0.75

2.20

0.99

5.11

2.022.14

• Figures in million tons

• Total Tonnage Observed on National Roads = 48 mt15

And repeated repeated once in 98

ZeerustMaputo

Beit Bridge

Johannesburg

Pretoria

Golela

2.80

2.302.30

2.002.10

Cape Town

Bloemfontein

Kimberley

Durban

Upington

East London

Port Elizabeth

Golela

Noord-oewer

Mossel Bay

3.86

15.01

1.751.51

3.10

0.17

13.40

1.12

2.002.10

2.10

• Figures in million tons

• Total Tonnage Observed on National Roads = 54 mt16

Per industry flows could be estimated: Eg. Coal

JohannesburgWitbank

Nelspruit

Klerksdorp

Rustenburg

Ermelo

Thabazimbi

Phalaborwa

* Tonnage in thousands (1998)

0/3800

Saldanha

Cape Town

Bloemfontein

Upington

Sishen

Durban

Mossel BayPort Elizabeth

East London

Springbok

Calvinia

De Aar Richards Bay

Intra Regional Traffic

Ermelo - 0/27300

Witbank - 350/18300

Bloemfontein - 2/17000

Thabazimbi - 0/6000

17

And Processed foods

JohannesburgWitbank

Nelspruit

Klerksdorp

Rustenburg

Ermelo

Thabazimbi

Phalaborwa

6/10005/630

14/700

* Tonnage in thousands (1998)

Saldanha

Cape Town

Bloemfontein

Upington

Sishen

Durban

Mossel BayPort Elizabeth

East London

Springbok

Calvinia

De Aar Richards Bay

Intra Regional Traffic

Johannesburg - 80/5000

Cape Town - 230/2100

Durban - 890/4000

0/700

17/630

1/1400

35/1200

18

Resulting in tested and

published methodology

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AGENDA

• Introduction

• History

• Recent results

• Definitions



20

Logistics costs as a percentage of GDP declined to its lowest level since measurement

270

290

310

330

350

15%

16%

Rand billion

190

210

230

250

270

14%

15%

2003 2004 2005 2006 2007 2008

Rand billion

Logistics cost Percentage of GDP

21

60

80

100

120

140

160

180

Rand (billion)

Transport continues to be the biggest contributor to logistics costs

0

20

40

2003 2004 2005 2006 2007 2008

Transport Storage and Ports Management, Admin & Profit Inventory carrying cost

Transport costs improved, relatively, due to different effectiveness trade-offs. But the “administered” nature of cost components is still a concern.

22

2008 distribution

160

180

200

220

240

260

Indexed = 2003

Transport50%

Storage and Ports

Management, Admin & Profit17%

Inventory carrying cost19%

Inventory carrying costs increased the most

80

100

120

140

160

2003 2004 2005 2006 2007 2008

Indexed = 2003

Transport Storage and Ports Management, Admin & Profit Inventory carrying cost

and Ports14%

23

Relative inventory carrying costs in the secondary sector is higher

53%150

200

250

Billion

Logistics cost stack elements

Transport

Storage & Ports

12%

23%18%

16%22%

9%

48%

0

50

100

Primary Secondary

Billion

Storage & Ports

Management, Admin & Profit

Inventory Carrying Cost

24

But transport remains the biggest challengeAfrica’s

0.8%

1.0%

1.5%

2.0%

2.5%

RSA as a % of world figure

Low Calculation

High Calculation

Source: In 2004 the world produced about 49 000 Mt CO2 - equivalent of which South Africa emitted 440 Mt CO2 – equivalent roughly 1% -Scenario Building Team

(SBT) 2007 , Jones, T.Rodrigue, J.P., Gielen, D. – low calculation based on 2002 data / Comparison of Datamonitor 2009 (2008 data) and world GDP (2008) – high

calculation

1.2%1%

0.8%

0.4%

0.0%

0.5%

Surface freight tonne-km

CO2 emissions Surface land mass GDP

RSA as a % of world figure

Transport is in fact a strategic resource – more so than for all South Africa’s trading partners

25

Apart for higher than normal demand, freight growth, usually, outstrips GDP growth – this is the result of specialisation

Freight and economic growth from 1993 to 2008

3

4

5

6

7

8

9

Total GDP / Tonkm

100

150

200

250

Indexed = 1993

Source: National Freight Flow Model

-

1

2

1993 1997 2003 2004 2005 2006 2007 2008

0

50

1993 1997 2003 2004 2005 2006 2007 2008

Primary Sector GDP

Secondary Sector GDP

Total GDP

Freight flow (tonne-km) calculated from the NFFM

Indexed = 1993

26

105

110

115

120

125

130 Freight growth faster than GDP

SA

Europe

But the growth differential is more pronounced (or less) given the maturity of an economy – structural shift

90

95

100

1993 1997 2003 2004

• Indexed freight flows divided by GDP

But increased specialisation, leading to more freight transport will require higher levels of transport efficiency

27

The prime rate declined over the last decade

15.00%

20.00%

25.00%

30.00%

0.00%

5.00%

10.00%

1948/12/31

1950/12/31

1952/12/31

1954/12/31

1956/12/31

1958/12/31

1960/12/31

1962/12/31

1964/12/31

1966/12/31

1968/12/31

1970/12/31

1972/12/31

1974/12/31

1976/12/31

1978/12/31

1980/12/31

1982/12/31

1984/12/31

1986/12/31

1988/12/31

1990/12/31

1992/12/31

1994/12/31

1996/12/31

1998/12/31

2000/12/31

2002/12/31

2004/12/31

2006/12/31

2008/12/31

28

But inventory were delayed for longer periods of time

3.7

-1.8-4.3

3.6

46

48

50

52

Billions

Changes in Storage Costs

46

-4.3

47

36

38

40

42

44

Storage costs in 2007 Inflation Lower storage volumes

Lower cost to store per unit

Longer storage time Storage costs in 2008

Billions

29

• “Administered costs” includes:• The price of fuel

• The availability of alternative infrastructure to road

• The condition of roads

• Other external service disruptions

• Interest rate

• Productivity opportunity costs for example includes:• Elimination of empty haul (or at least the optimal trade-off between empty haul, inventory

levels and customer service)

Solutions should consider the underlying drivers of costs …

levels and customer service)

• Increase in tonkm per employee

And continue measurement – it provides perspectives for improvements

30

The flow of value and the flow of volume

31

AGENDA

• Introduction

• History

• Recent results

• Definitions



32

There is no agreement on a precise definition of logistics costs.

• World Bank found significant discrepancies regarding the activities that

should be included in the definition of logistics costs

• World Bank consider logistics costs to include: transaction costs (those

related to transport and trade -processing of

permits, customs, standards), financial costs

(inventory, storage, security), and non-financial costs (insurance).

33

Overarching channels describe the economy

• The primary, secondary and tertiary sectors of the economy are essentially linked and demonstrate flows

• Think of practical examples

• On a cluster level also think of value networks – compare the value chains of coal and gas and steel production

Extraction

(Mining & Agriculture)

(Primary)

Beneficiation

(Manufacturing)

(Secondary)

Consumption

(Private

households)

Services

(Energy, construction, trade, transport, professional, community)

(Tertiary)

34

Value is added along the way

• But in each step discrepancies in time and place arises

• These discrepancies requires solving

• The process of solving it is called logistics

• Irrespective of whether it is consciously or subconsciously done

• Doing it consciously is an advancement and leads to the origin of the discipline

• In this logistics becomes an input – a value add like any • In this logistics becomes an input – a value add like any commodity or service along the value chain

• It solves time and place problems efficiently

But the function’s ultimate output is customer service

35

Systems approach is important

• It highlights the necessity of integration

• Systems:

• Have interconnected parts

• These parts impact on each other

• Variation in one part has an effect on each/most of the other parts

• The sum of a series of activities is greater than its individual parts – if

the system is effective

• Are open

• Are subject to entropy

• The second law states that entropy always increases

• But this is in closed systems

• In open systems entropy can decline if the system draws effectively from

the environment – in physics this refers to increased order of individual

systems amongst entropy in the environment

The systems approach implies trade-offs

36

Creationof

wealth

Distributionof

wealth

Sustainabilityof

system

Sustainable development

Integration

Economy Community Environment Physical assets

Flow management

Scientifically planned

Logistics system

The origins of growing logistics is specialisation

Requir

es

Specialisation Logistics requirements

Requires

Requires

Systemicand

integrated

Systemicand

integratedAdministration

Productiveregional

specialisation

Effectiveexchange between

regions

Specialisation Exchange Transport Storage Management

37

140

160

180

200

Ind

ex

ed

= 1

99

3

Causing faster growth in time and distance disparity

80

100

120

140

1993 1997 2003 2004 2005 2006

Ind

ex

ed

= 1

99

3

Freight flow (tonne-km) calculated from the NFFM Primary Sector GDP

Secondary Sector GDP Total GDP

38

150

200

250

300

To

nn

es ('

00

0 0

00

)

Specialization in South Africa can be illustrated by comparing supply and demand on provincial levels…

-

50

100

To

nn

es ('

00

0 0

00

)

supply demand

39

… translating into flows and the need for logistics infrastructure

Total freight flow in SA

2007

40

Comparison of grain and FMCG flows in 2040

Grain flow in SA

2040

FMCG flow in SA

2040

41

The relationship between logistics and the marketing concept

Output of logistics = client service with one objective: customer satisfaction.

Achievement of this objective should always lead to one specific result, i.e. a competitive

advantage for the value cluster at play

42

Logistics

Logistics solves the time and place discrepancy in the supply chain which is

caused by specialisation.

It optimises transport and inventory carrying cost trade offs given certain

customer service expectations.

This requires the measurement of transport cost, the warehousing cost of

inventory, the opportunity cost of investment in this inventory and the

management and administration cost of these actions.

Where it is outsourced the profit margin of service providers is also included.

43

therefore

logistics is required to

Causes discrepancy

between when and

where a commodity is

produced and consumed

Specialization

1. Transport Cost

2. Admin and/or profit

1. Warehousing cost

2. Opportunity cost of

carrying inventory

3. Admin and/or profit

provide

time and place utility

Time Place

Elements of Logistics44

AGENDA

• Introduction

• History

• Recent results

• Definitions



45

Service Provider LSP

Consumer (including intermediate

consumption)

Producer time and place

Outsourced cost

Function within organization In-sourced cost

Transit:Incurred

according to ToTStore Store

46

Aims and objectives of project

Reliable data

Overarching cost Solutions

•Transport data

•Freight movement

on corridors

•Cost drivers

•Market share

•Policy

•Transport planning

•Capacity creation

47

Data elements

Benchmarking

•Market share

•Cost drivers

•Trends

•Forecasts

Scoping and planning

Alignment workshop

The project consists of the following phases:

Macro-economic analysis Industry level analysis

Cost of logistics report and launch

48

Alignment workshop - TODAY

What we want to achieve today:

• Alignment on:

• Assumptions for macro –economic freight logistics measurements

• Classification of resulting measurement

49

But first lets contextualize in terms of the project

Macro-economic analysis

National Freight Flow Model• Road & rail freight flows in SA

• Macro summary market share

modes

• 4 Network typologies

• Corridor

• Metropolitan

• Rural

Logistics cost model• Cost on all modes with breakdown

of identified logistics activities

(inventory carrying

cost, transportation cost, storage

cost & admin cost) per economic

subsector (agriculture, mining &

manufacturing)

• Rural

• Primary (long haul of base

commodity)

• Freight flow between key economic

sectors & key regions

• Estimated annual logistics cost for

SA

50

Demand side case study – Fruit industry

The purpose of the case study will be two-fold:

• To identify success stories for application in the private or public sector

• Identification of challenges to inform DoT actions and investments

Approach:

1. Analyse the logistics challenges of domestic and export fruit supply

chains, including

• Delays at loading & offloading facilities & truck stops

• Handling costs, productivity a.o. issues at ports

• Maintaining the cold chain

• Potential use of rail

• Supply chain visibility & information flows

• Integration of smallholder/developing farmers into the supply chain

2. Investigate industry initiatives, e.g.

• Tonnage off Tar

• 1-Citrus packhouse to port transport harmonisation tool

• ITC / NAMC developing farmer initiative

3. Recommendations

51

LSP Supply Side Survey

• 15 Interviews

• Areas:

• Future trends in supply chain service provision;

• Future technology trends;

• Opportunities for collaboration between government and LSPs;

• Positioning of SOEs and other government agencies in terms of

creating an enabling environment for logistics service provision;

Workshop

•Participants (emerging operators, industry suppliers, rest of freight logistic

industry, government agencies & SOE’s)

•High level implementation plan for integrated planning between Government & private

sector

• Freight logistics requirements (what the LSPs expect from

government); and

• Skills challenges and required interventions from government.

52

Report content:

• Key stakeholders and sources of information;

• Findings of the cost of logistics in South Africa

• High-level summary of tonnages transported in the SA economy by

both public road, private road and rail

• High-level summary of logistics cost as % of GDP within major

economic sectors (agriculture, mining and manufacturing)

• Trends within SA’s logistics and supply chain management and a benchmark of SA’s performance globally

• Results of LSP survey and demand-side case study to inform the status of the supply chain network for the various sectors of the freight transport industry

53

AGENDA

• Introduction

• History

• Recent results

• Definitions



54

Alignment issues and ideas

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People must therefore get away from the idea that serious work is restricted to beating to death a well-defined problem in a narrow discipline, while broadly integrative thinking is relegated to cocktail parties.

In academic life, in bureaucracies, and elsewhere, the task of integration is insufficiently respected. Yet anyone at the top of an organization, a president or prime minister or a CEO, has to make decisions as if all aspects of a situation, along with the interaction decisions as if all aspects of a situation, along with the interaction among those aspects, were being taken into account.

Is it reasonable for the leader, reaching down into the organization for help, to encounter only specialists and for integrative thinking to take place only when he or she makes the final intuitive judgements?

Murray Gell-Mann, Winner of the Nobel Prize for

Physics, in “The Quark and the Jaguar”

THE COST OF LOGISTICS SURVEY FOR SOUTH AFRICA · But transport remains the biggest challenge...

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