Reducing national freight logistics costs risk in a high-oil-price environment. A South African case study

• Published date: 06 May 2014
• Date: 06 May 2014
• Pages: 35-53
• DOI: https://doi.org/10.1108/IJLM-11-2012-0133
• Author: Jan Havenga,Zane Simpson
• Subject Matter: Management science & operations,Logistics

Reducing national freight

logistics costs risk in

a high-oil-price environment

A South African case study

Jan Havenga and Zane Simpson

Department of Logistics, Stellenbosch University, Stellenbosch, South Africa

Abstract

Purpose – South Africa’s logistics cost measurement was expanded to include externality costs, and

scenarios based on the key exogenous risks were developed to inform mitigation strategies. Thisp aper

aims to discuss these issues.

Design/methodology/approach – The research approach is quantitative, based on a gravity-

orientated freight flow model, a road transport cost model, actual transport costs for other modes, a

warehousing cost survey, an inventorydelay calculation (to infor m warehousing cost calculations and

inventory financing costs) and an externality cost calculation.

Findings – Transport cost pressures are expected to deteriorate due to the increasingly negative

outlook for the oil price and the internalisation of externality costs. The nature of these forces compels

transport cost challenges to be addressed strategically through collaborative, industry-wide and even

nationwide initiatives.

Research limitations/implications – Key limitations are inconsistent commodity classification

schemes across information sources, and incomplete container content data. The researchers are

collaborating with information providers to addressthese issues and refine model accuracy and forecasting.

Practical implications – The exogenous risks strengthen the argument for new approaches to

South Africa’s logistics cost challenges driven by the high densities of corridor freight flows.

Social implications – The inclusion of externality costs highlighted the negative environmental

impact of the current modal configuration and provides impetus for change.

Originality/value – Major advancements to logistics cost modelling were made by incorporating

externalitycosts and developing scenariosfor risk mitigation. Freightflow data granularity (in excessof

one million records)allows both aggregation to national-levelintelligence to inform policies, large-scale

infrastructureinvestments and industrialpositioning, anddisaggregation to enablepractical application.

Keywords South Africa, Cost tradeoffs, Total logistics cost, Transportation economics,

National freight logistics costs, Oil price risk, Modal shift

Paper type Research p aper

Introduction

The transport demand of a country can be expressed as the relationship between

ton-kilometre and GDP (i.e. how much is contributed to the GDP by moving a ton of

freight one kilometre). In a global comparison of this indicator, South Africa emerges as

a “transport-hungry” countr y (Figure 1).

South Africa’s spatial challenge is a result of long transport corridors between

especially the port of Durban and Gauteng (the industrial heartland which is 600 km

inland), and Cape Town and Gauteng (whic h is 1,400 km inland). The industrial

heartland was formed due to the discovery of gold and diamonds 150 years ago and

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0957-4093.htm

Received 5 November 2012

Revised 2 April 2013

2 August 2013

Accepted 29 August 2013

The International Journal of Logistics

Management

Vol.25 No. 1, 2014

pp. 35-53

rEmeraldGroup Publishing Limited

0957-4093

DOI 10.1108/IJLM-11-2012-0133

This paper is based on a paper presented at the 17th International Symposium on Logistics

(www.isl21.net) held in July 2012 in Cape Town, South Africa.

35

Logistics

costs risk

gives the country the curious characte r of a relatively small GDP, but long dense

transport distances to the interior. In this sense the country differs both from mining

peers such as Brazil and Australia where most activity is coastal, and Europe and

North America where transport dista nces are also long, but relative industrial outpu t

much higher. This transport-hungry nature of South Afri ca, combined with the

volatility in the oil price, the key driver of transport cost, indicate that logistics cost is a

strategic resource requiring national attention.

A reduction in freight logistics costs to increase competitiveness is high on the

agenda of developed and developing countries alike (see, e.g. the cases of the US in

Wilson, 2010; Brazil in World Bank, 2010; Latin American and Caribbean countries in

Schwartz et al., 2009 and South Africa in Havenga, 2010). During the 1980s, logistics

costs as a percentage of GDP in the USA showed a sharp decline (Wilson, 2010), driven

particularly by better inventory management and therefore lower inventory-carrying

cost. This percentage, however, has moved within a ver y narrow band over the past

two decades, and has shown signs of an increase over the past five years (with the

exception of the 2008/2009 recession). Many reasons for the slower improvement in the

logistics costs-GDP relationship can be postulated. The objectives of this pap er is, first,

to highlight the challenge from the long-term perspective evidenced in the USA data

(that is often not referred to or considered), cor roborated by the shifting global focus

to exogenous transport cost drivers (the oil price and emissio ns charges). Second,

the structure of South Africa’s freight logistics costs is presented, emphasising the

country’s vulnerability to these exogenous drivers through scenario development.

Finally, actions are proposed to mitigate this risk.

The shifting global focus to exogenous transport cost drivers

One of the key reasons put forward for the slower improvement in the logistics

costs-GDP relationship is the cost management trade-off between inventory and

transportation (see Figure 2).

In the USA and other mature economies, logisticians have made great efforts to

decrease logistics costs, efforts that have been facilitated by deregulation and

technology (Murphy and Wood, 2011), amongst other thin gs. Deregulation of transport

provided logisticians with more modal choices and the ability to lower total cost of

0

2

4

6

8

10

12

14

16

18

20

Source: Wilson (2010)

25

30

35

40

45

50

55

60

65

70

Logistics costs % of GDP

% of Logistics Costs

Inventory

Transportation

Logistics costs as % of GDP

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Figure 1.

Trends in US logistics

costs as percentage of

GDP – inventory and

transportation cost

contribution

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