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Logistics Infrastructure: How Much, at What Cost?
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Logistics Infrastructure: How Much, at What Cost?


For just about my whole supply chain life, and certainly since the late 1990s, I have been hearing calls for additional investment in logistics US infrastructure: roads, rails, ports, etc. The message: we need both to fix much of what we have, and also to add a lot more of it.


Those infrastructure worries and calls for action reached a crescendo in 2007, as the wave of imports put a lot of pressure on our logistics capacity, and the collapse of a major bridge in St. Paul sent the message that much of the existing infrastructure was literally crumbling.


But how much, if any, is too much investment in infrastructure? (I will explain that below.) And what really should be the priorities, given that there is no way we can do it all?  (Only China seems to be able to manage that – paid for by the tidal wave of trade surpluses.)


On top of those questions, of course, is the fact that we have seen dramatic decreases in the movement of containers and freight here in the recession, which has been more like a depression when it comes to logistics. So, in the short term, the infrastructure situation isn’t exactly a burning issue any more – though many say trouble is again headed our way.

Gilmore Says:


At some point, for any individual company, or a country as a whole, the benefits from better logistics infrastructure start to outweigh the additional costs to pay for it.

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I got on this question back in the Spring, at the NASSTRAC conference in Orlando, where one of the group’s leaders noted that the logistics industry (carriers and shippers) were likely to be on the hook for much of the financing of any major infrastructure improvements. His message – be careful what you wish for.


Before we look at that though, it is not hard to find people articulating the problem.


My new friend George Stalk of Boston Consulting Group recently wrote in the Harvard Business Review that “As our worldwide transportation network becomes less and less able to support the demands of a global economy, we’re heading straight into a crisis,” arguing that we shouldn’t let the current freight slowdown blind us from mid-term needs.


He notes, among many data points, that since 1990, US vehicle mile traffic has increased some 41%, while highway “lane miles” have increased just 5%. That obviously means increasing congestion for cars and trucks. There are similar data for ports and rail.


Many say that the issue is beyond just a matter of increasing logistics costs for shippers  – that the quality of logistics infrastructure will increasingly be a determinant of a nation’s overall economic competitiveness. In that light, it’s not surprising that China has many of the world’s most sufficient ports, and is spending billions on roads and waterways.


However, it will take lots and lots of money to address these issues. Just how much, you ask?


In 2008, the National Surface Transportation and Revenue Study Commission, a Congressionally sponsored effort, recommended that funding for logistics infrastructure over current investment projections be increased to the tune of almost $200 billion dollars through 2020. That’s a lot of money.


That report, in part, recommended additional gasoline taxes to generate the funds. Less reported was the fact that the commission also vaguely called for more taxes from truckers/shippers that would result in a more proportional amount of revenue to be generated versus their use/benefit of the highway system.


And there, in fact, is the rub, and what I have been thinking about for the last several months: there is no free lunch. Some experts, for example, call for the trucking industry to incur a “Vehicle Mile Tax,” or VMT – a charge per mile driven, in addition to any taxes on diesel fuel.


We can agree that improved logistics infrastructure is a good thing; but the question becomes, at what point does the incremental cost in terms of new taxes to pay for it begin to outweigh the incremental benefit in terms of lower logistics costs?


As you will see below, I took a traditional supply chain trade-off curve, such as inventory versus logistics costs, and reconfigured it for logistics costs versus increased taxes.



Larger/Downloadable Version


The summary idea behind the graph is this: at some point, for any individual company, or a country as a whole, the benefits from better logistics infrastructure start to outweigh the additional costs to pay for it. For any company or the country, there is an optimal point that minimizes total cost: logistics costs (which we can assume should decline as a result of improved infrastructure, or why do it?) plus additional taxes.


Where that point is on a national scale, I have no idea. And because it is likely that we will only get a fraction of the money many say we need to devote to infrastructure, we may not get anywhere close to passing the point of diminishing returns.


But that then begs the question: how should money that becomes available best be spent? I have had a hard time finding anyone with an answer to that question. More on that soon.


The main point again is just that when we hear the calls for billions for infrastructure, much of the money will likely, in the end, come from shippers (as it already has in new container fees at some ports – usually under protest from shippers, it should be noted.) I think the concept of some “optimal point” is one worth thinking about, as are companies considering their own cost curves versus additional taxes.


I also realize, as noted above, that there are national competitiveness questions here too that some may argue should trump a given company’s own cost picture.


So, as my friend Gene Tyndall likes to say, these are the questions. I think they are worth pondering.

Let us know your thoughts

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Again, catching up on a variety of topics this week.


Our Feedback of the Week is a delayed response coming from Materials Handling Editor Cliff Holste’s column on use of handicapped workers at Walgreens from Brian Eddy, who says more companies should look at the potential here.


We have a couple of responses to our video discussion on the use of Lean in distribution, and a couple more on the change at the top of GM's supply chain leadership that some say may improve the way suppliers are treated.


Finally, one reader thinks the move of a Chinese light bulb manufacturer to set up a factory in Cleveland is a really smart move.


Mostly short and sweet, but all good letters.

Feedback of the Week: On Hiring the Disabled in Distribution

I know Randy Lewis [Walgreens’ VP] and he should be given an award for all his efforts.


The disabled workforce in the US has a 73% unemployment rate despite the efforts of some companies like Walgreens, Canon, HP, and others.


Our non-profit operates a large on-site vocational training operation that employs 200 disabled folks. I wish people within the supply-chain field would look at the many benefits to outsource labor-intensive work to ensure these people achieve their goals.


Every October, it is National Disability Employment Awareness Month, and a good time to write an article that educates people on this important social topic.

Brian F. Eddy, MBA

Director, Sales & Marketing

SubCon Industries

On TCP’s Move to Cleveland:


TCP's move to manufacture light bulbs in the US is a brilliant strategic move. Regional, or local, sourcing makes sense in today's down-trodden economy. Reducing the number of miles a product ships will benefit the triple bottom-line (Profit, Planet, People) of TCP.


Profit: Transportation costs will be reduced, as the North American market can be sourced from Cleveland versus China. The transportation savings from regional sourcing become even greater when fuel prices inflate. Inventories needed to support their supply chain will be reduced as the transportation component of their lead time is shorter. Reducing inventories frees up capital. All these moves financially benefit TCP.


Planet: By reducing the miles their products are shipped, less fossil fuels are consumed in transportation activities. This, in turn, reduces their carbon footprint and is better for the environment.


People: Many people in the Cleveland area are out of work. Placing their light production in this economically-depressed area benefits all the people who will now become gainfully employed. I believe that branding their products "made in the USA" will be an order winner for many US consumers who, quite frankly, are becoming more environmentally and socially responsible. This last point, I believe, will drive more sales for TCP as it "feels" good to be able to purchase an item that is made in the USA.

Joanne Gorski, CFPIM, CSCP

Instructor, Manufacturing Technologies

Fox Valley Technical College

On Lean Techniques in Distribution:


I teach a course in Logistics Management at the university level, and lean processing is heavily emphasized all along the way, including 3PLs, international logistics, and manufacturing.  Lean more appropriately represents elimination of cost, waste, and reduction of lead time, not just lot-size-of-one kanban manufacturing. 

There are a lot of opportunities to implement lean/six sigma in a distribution environment, and technology is a necessary driver to accomplish it and remain competitive.

Sandy Friedman

Check out our book Value Driven Channel Strategy: A Lean Approach published by ASQ's Quality Press.  We address many of the issues that you have raised.  Distribution systems, by their very nature and economic necessity, incorporate a large number of pathologies that can and should be addressed by Lean.  In addition, my numerous value analyses for manufacturers that depend upon distribution networks often indicate that the key drivers of value are not product drivers, but dealer and network drivers.  In other words, distribution systems offer manufacturers a potential differential advantage along the lines achieved by CAT.  This is a tough pill to swallow for many manufacturers who are product focused and do not understand their markets.


R. Eric Reidenbach

On Change in GM Supply Chain Leadership:

I've been preaching for years that the entire US auto industry has been paying a price for the short-sighted tactics invented by Jose Ignacio Lopez.  The idea of the PICOS sessions (aggressive Kaizen events) was sound, but the unethical negotiation and constant threat and resourcing devastated the supplier industry.  The North American auto OEM's need to re-establish business ethics in sourcing and long-term planning with the continued need for low cost, on-time delivery, quality, and a healthy supply base.

Sam Henry

Bradford International Group

Chrysler (before becoming DCX), had a real chance at properly utilizing Japanese SRM principles with Thomas Stallkamp.  


Around the same time, or soon thereafter, Chrysler had the most productive assembly plants (least hours/vehicle) and growing profit margins per vehicle.


I do not know if it was the Lopez movement, or Daimler's takeover, that brought that tremendous progress to an end.


Either way, it was sad.

Chris Alder

Senior Scientist

Amway Supplier Quality Development


What important supply chain concept was developed all the way back in 1913?


Economic Order Quantity (EOQ), though many cite a 1934 article in the Harvard Business Review on the topic as really driving the concept into industry.