A model to calculate the cost of logistics at a macro

level: a case study of South Africa

F.J. Botes, C.G. Jacobs & W.J. Pienaar
A B S T R A C T
The article identifies the need to calculate the cost of logistics in South
Africa. Current data sources do not fulfil this purpose; for example,
figures on the cost of logistics published in South African national
accounts are becoming less useful over time as communications
becomes an increasingly larger component of the transport, storage
and communication sub-sector for which figures are available.
A Logistics Cost Model was developed for the purpose of calculating
the cost of logistics in South Africa. The model enables relatively easy
updating of the data to predict the costs of logistics in future years, as
well as time series comparisons by retrofitting historical data to the
model. It also enables updating of the results with improved data as the
study progresses, as well as enhancing the performance of sensitivity
analysis of key input parameters.
Based on the output of the model, it can be deduced, firstly, that the
cost of logistics represents a considerable percentage (14.7%) of the
gross geographic product, and secondly, that the propensity to
outsource logistics tasks is low (33%) and that about two thirds of all
logistics tasks are currently undertaken inhouse
INTRODUCTION
Need to calculate the cost of logistics
A number of studies, including those of the Reynders Commission (1972: 489),
Dehlen (1993: 10), Porter (Monitor Group 1995: Appendix), Naude (2001: 142) and
Pretorius (1997), have highlighted high logistics cost as one of the factors that inhibit
South Africa's competitive advantage. Yet South African transport policy and
transport plans focus almost entirely on passenger transport rather than on freight
transport (Radebe 2005). Although the importance of lower logistics cost has recently
Dr Botes, Mr Jacobs and Prof. Pienaar are in the Department of Logistics, University of Stellenbosch.
E mail: fjbotes@sun.ac.za
1 Southern African Business Review Volume 10 Number 3
been noted at the highest level (South Africa 2005), government still does not
appreciate the full extent of the problem and the need to implement an action plan to
address current deficiencies in the logistics system.
In order to understand and appreciate the full extent of the cost of logistics in the
South African economy, it is imperative that the logistics cost be available. This would
be of benefit to a number of stakeholders. Firstly, government departments and
parastatals should have an interest in the overall cost of logistics as (1) it is an
indicator of the overall state of the economy, (2) logistics has a direct impact on the
competitive advantage of a country and is thus an important input in the
development of trade policy, and (3) it should be an input in the development of
transport policy, as it provides information on the cost of transport per commodity per
mode.
Secondly, knowledge of logistics cost would benefit producers and marketers who
seek to compare the cost of logistics of their commodity or sector with that of other
commodities or sectors locally or abroad. Furthermore, it serves to indicate the
relative cost of specific components in the logistics chain, which enables such
companies to focus their efforts on the particular aspects where costs are highest.
Thirdly, companies that provide third-party logistics would be able to view the
size of different markets, for example, the value of the transportation or warehousing
cost for different commodities and the modal composition of the transportation of
different commodities. It would also provide a benchmark to such firms that would
enable them to monitor their relative competitiveness in a certain market segment.
Current sources of logistics data
There are currently two organisations in South Africa that publish official data on the
cost of logistics, namely the South African Reserve Bank (SARB) and Statistics South
Africa (StatsSA). The SARB lists logistics cost in the Quarterly Bulletin under the
`Transport, storage and communication' heading (SARB 2004: S-111). StatsSA lists
total volume (tonnage) of goods transported by road and rail, as well as the total gross
income of third-party road transport providers and Transnet (StatsSA 2003a: 16.10).
Although the accuracy of the data published by these sources is not disputed, the
following deficiencies have been identified when the data are to be used for the
logistics planning purposes listed:
. The aggregation of transport, storage and communication cost in the SARB
official published data is meaningless for logistics planning purposes.
. Both the SARB and StatsSA base transport and storage costs on total gross income
of primary service companies (namely, third-party providers). This means that
transport and storage that are provided inhouse, which in fact constitute a major
share of total logistics cost, are excluded from the official published figures.
2
A model to calculate the cost of logistics at a macro level: a case study of South Africa
. The SARB definition of `transport' includes both freight and passenger transport,
whereas the transportation of passengers does not form part of logistics.
. Income of companies that provide both passenger-related services and goods-
handling and storage facilities (for example, the Airports Company of South
Africa) is included in the definition of `storage'.
. StatsSA figures exclude cargo transported by air and sea (coastal shipping).
Because there is no generally accepted benchmark or standard source that
publishes logistics costs in South Africa on an annual basis, the results of ad hoc
studies are quoted from time to time. Raath, for example, estimates logistics and
transport costs in South Africa at 17% of the gross domestic product (GDP) (Raath
2004: 21). Given that South Africa's GDP was R1 209 497 million in 2003 (SARB
2004), the total logistics cost in South Africa, according to that estimate, amounts to
R205 615 million. Apart from the fact that no scientific methodology is described to
indicate how this figure was arrived at, it is also not broken down into `transport' and
`storage' components.
In the light of the foregoing discussion, there is thus a need (1) to provide an
unambiguous definition of `logistics costs' and (2) to calculate logistics costs for South
Africa in terms of a generally accepted methodology.
Literature review on current methodology
Delaney (2003) popularised the quantification of logistics costs, which is presented
annually for the United States in the State of Logistics Report. The methodology used
in this ongoing study to quantify the inventory-carrying cost component of logistics
cost is based on the Alford-Bangs formula (Alford & Bangs 1955: 396397), whereas
transportation cost is calculated by means of Smith's methodology (Smith 1986: 4).
The 2003 State of Logistics Report quotes the logistics costs in the US at $910 billion,
which is about 8.7% of GDP (Delaney 2003).
Although the State of Logistics Report is currently the generally accepted
benchmark of logistics cost in the United States, it is sometimes at odds with other
similar reports and benchmarks. For example, it indicates that warehousing costs
remained unchanged during the past three years, whereas other reports, such as that
by Davis Logistics Cost and Service Database published by Davis (2004), show an
increase driven by increased distribution complexity. The latter is an ongoing annual
survey in which manufacturers, distributors and retailers participate to receive a
customised benchmarking report of logistics cost and service.
Although these popular benchmarks sometimes offer conflicting data, they suffer
from the same inherent constraint, namely that they rely on surveyed information
supplied by companies. Firstly, the accuracy of the output is entirely dependent on the
reliability of the information supplied by sources, which can often not be verified. In
3
F.J. Botes, C.G. Jacobs & W.J. Pienaar
this regard, it is well known that many companies are not aware of the total cost of
inhouse services, of which logistics is no exception. This is not because companies are
ignorant about such costs, but financial control systems are often designed to ensure
financial control rather than for wider costing and planning purposes. In addition,
the definition of cost items may also differ between companies, which makes it
extremely difficult to obtain a uniform dataset.
Secondly, the sample size may not be sufficiently representative to allow
estimation of the national total. This is due to the reluctance of many companies to
participate in such surveys on a regular basis. It was, for example, noted in a major
transportation policy study that ``it was often easier to find data on SA industries in
the USA than in SA. The data that do exist are often inaccurate or out of date''
(Monitor Group 1995: 4).
Thirdly, if the study is to be repeated annually, the survey should ideally obtain
data from exactly the same companies each year. This is difficult to achieve, as some
companies disappear or may withdraw from the programme, which means that the
study cannot be repeated exactly from year to year, casting further doubt on the
accuracy of the data.
Fourthly, it is extremely time consuming, both for the surveyor and for those
surveyed, to compile and analyse the data.
Based on the literature review, it can be concluded that practices described in the
literature to calculate logistics cost have proved to be unsuitable for general
application. For this reason, there is a need to develop a generally accepted
methodology to calculate the cost of logistics in South Africa.
Terms and definitions
There is a need to define the following key terms for the purpose of this study:
. `Commodity' is the physical output of production, mining or cultivation, as well as
waste and defective goods returned to the supplier and scrap.
. `Throughput' represents the total volume of commodities that are transported and
stored in the study area. This includes commodities that have both origin and
destination in the study area, as well as transport, handling and storage of
imported and exported commodities from the point where they pass through a
border control point. The activities in a seaport or airport up to the point where
the commodities are loaded on to a vessel or aeroplane are thus included.
Although the throughput of specific commodities is measured in a variety of units
(such as weight, units or volume), this multitude of units is converted to a
common physical unit, namely `ton equivalent', for the purposes of this study (for
example, one litre of fuel is equal to 0.8 kg).
. `Logistics' is considered to be that part of the supply chain process that deals with
the transportation, warehousing, and inventory administration and management
4
A model to calculate the cost of logistics at a macro level: a case study of South Africa
of commodities between the origin (that is, where they are produced, mined or
cultivated) and the destination (that is, the point of delivery to the consumer either
as input to further production processes or for consumption). By definition, this
excludes the cost of passenger transport, costs such as transport, storage, packaging
and handling of mail and luggage, as well as the storage and transport tasks that
occur during the production, mining or cultivation process.
The extent of logistics within the supply chain process can be explained by
means of the following example. Once iron ore enters the smelter, it exits the
logistics chain and enters the production process. After the hot rolled steel is
produced, it again enters the logistics chain as an altogether different commodity,
but exits again when it enters the body-pressing plant of a motor manufacturer.
The entire process ends when a consumer finally takes delivery of the commodity,
which may consist of many individual commodities that are dealt with separately
until they are finally assembled into one product and delivered to the client.
. `Cost' means the direct financial cost of performing logistics tasks that will be
reflected in national accounts, up to the point where the final consumer purchases
the commodity. It therefore excludes external costs, for example, air pollution,
noise, vibration, or other disutilities that are not for the account of any party.
DESCRIPTION OF THE LOGISTICS COST MODEL
Model overview
A Logistics Cost Model (LCM) has been developed in order to calculate the logistics
cost for South Africa. The LCM is unique in a number of ways and is an
improvement on existing approaches for the following reasons:
. The LCM employs a `bottom-up' approach to compute logistics cost by
aggregating detailed commodity-specific data, including throughput, transport
and storage characteristics, as well as transport and warehousing unit costs. The
aggregation of logistics costs is based on primary input elements (the amount
produced of a specific commodity) and the cost of performing specific tasks (such
as transport, storage and handling) of that commodity in the logistics chain.
Validity of output data can thus be verified at the primary source before any
aggregation takes place. This departs from existing methods that extrapolate
logistics cost data that were collected by means of sample surveys.
. Although individual data elements are sourced from readily available primary
sources mostly census data and industry/sector analyses they do not exclude
the undertaking of specific surveys to further enhance the quality and accuracy of
input data. However, there is no need to conduct the same surveys every year in
order to produce accurate output. Once set up, the LCM subsequently focuses
5
F.J. Botes, C.G. Jacobs & W.J. Pienaar
research on the refinement of individual input elements. It would even be possible
to add more detailed layers to the LCM in order to undertake a detailed analysis of
a particular industry.
. The fact that the LCM is able to run off an MS Excel spreadsheet platform means
not only that different sensitivity analyses can easily be performed, but also that
easy updating of data is possible if more reliable figures are obtained. This would
even allow the construction of a past record of logistics costs by retrofitting
historical data to the model.
. Data are presented per mode (collection/distribution by road, long haul transport
by road, rail, air, coastal shipping and pipeline), per cost component
(transportation, warehousing, inventory management, holding cost, as well as
administration and management) and per industry/sector (as defined in terms of
the standard classification of primary (agriculture and mining) and secondary
(manufacturing) sectors.
The LCM consist of four sub-models, namely the transport cost sub-model,
warehousing cost sub-model, inventory cost sub-model, and management and
administration cost sub-model. The following section provides a detailed description
of each of the sub-models.
Total logistics cost
TLC is the national total logistics cost from (1.1)
TOTC is the total overall transport cost from (2.9)
TSHC is the total shipping and handling cost from (3.11)
TIC is the total inventory cost from (4.9)
TMAC is the total management and administration cost from (5.3)
TLC = TOTC + TSHC+ TIC + TMAC (1.1)
Transport cost sub-model
Transport cost is calculated as a function of throughput, modal usage, transport
distance and the unit cost of transport per ton throughput.
Tonnages of commodity transported are calculated by estimating the percentage
of the total throughput transported per specific mode and multiplying the estimated
percentage by the actual tonnages per commodity:
ET
ik
is the estimated tonnage of commodity i transported by mode k (2.1)
EP
ik
is the estimated percentage of commodity i transported by mode k (2.2)
AT
i
is the actual total tonnage of commodity i (2.3)
ET
ik
= EP
ik
.
AT
i
(2.4)
6
A model to calculate the cost of logistics at a macro level: a case study of South Africa
The total overall transport cost is the sum for all commodities of the total
transport cost per commodity. The total cost of transport per commodity is the sum of
the cost of transport per mode for the commodity, which in turn is the estimated
tonnage transported per mode, multiplied by the mode unit cost in Rand per ton-
kilometre, multiplied by the mode average distance transported of each commodity in
kilometres.
The subscript indices that will be used are i for commodity family/commodity
and k for the transport mode:
TTCP
i
is the total transport cost per commodity i (2.5)
MCTK
k
is the modal unit cost per ton-kilometre per transport mode k (2.6)
PATD
ik
is the commodity-specific average distance transported per
commodity i by mode k (2.7)
TTCP
i
=
P
n
k 1
ET
ik
.
MCTK
k
.
PATD
ik
(2.8)
TOTC is the total overall transport cost
TOTC =
P
m
i 1
TTCP
i
(2.9)
Warehousing cost sub-model
Warehousing cost is a function of the duration and volume of storage, the unit cost of
storage and the handling cost of goods. For each commodity, the average intra-
seasonal storage time is estimated as the time-weighted difference between time of
production and time of consumption. (It is assumed that the quantities produced and
consumed are equal in the long run.)
The subscript indices that will be used are i for commodity family/commodity
and j for the month of the year:
p
ij
is the fraction of commodity i produced in month j (3.1)
c
ij
is the fraction of commodity i consumed in month j (3.2)
IST
i
is the intra-seasonal storage time in months of commodity i
IST
i
=
P
12
j 1
j
.
p
ij

P
12
j 1
j
.
c
ij
(3.3)
The total average storage time for a commodity is the sum of intra-seasonal
storage time as well as the average time spent at storage facilities for consolidation
purposes:
TAST
i
the total average storage time in months for commodity i (3.4)
CC
i
is the collection consolidation time in months for commodity i (3.5)
DC
i
is the distribution consolidation time in months for commodity i (3.6)
TAST
i
= IST
i
+ CC
i
+ DC
i
(3.7)
7
F.J. Botes, C.G. Jacobs & W.J. Pienaar
The storage cost per ton is the commodity of the storage cost per ton-month and
the total average time spent in storage.
SCTM
i
is the storage cost per ton-month (3.8)
SCPT
i
= SCTM
i
.
TAST
i
(3.9)
The cost of storage and handling per ton of commodity is the sum of the storage
cost, handling cost, and warehousing administration and overhead cost per ton of
commodity:
SHCPT
i
is the storage and handling cost per ton for commodity i
HCPT
i
is the handling (loading and off-loading) cost per ton for commodity i
WAOHPT
i
is the warehousing administration and overhead cost per ton for
commodity i
SHCPT
i
= SCPT
i
= WAOHPT
i
+ HCPT
i
(3.10)
The total storage and handling cost for all commodities that were stored and
handled is the sum of the cost for storage and handling per ton of commodity (3.10)
multiplied by the actual tonnage of commodity (2.3):
TSHC =
P
n
i 1
SHCPT
i
.
AT
i
(3.11)
Inventory cost sub-model
Inventory cost is a function of the value of commodities, the volume of goods
transported and stored, the time in transit and the time value of money.
The inventory cost per commodity i is the prevailing annual interest rate,
multiplied by the average value per ton of commodity, multiplied by the sum of the
ton-years spent in transit and in storage:
AMTS
k
is the average modal travel speed in km/h (4.1)
TTPT
ik
= PATD
ik
/ AMTS
k
/ 24/ 365 is the transit time per ton of
commodity i per mode k (4.2)
STPTY
i
= TAST
i
/12 is the storage time per ton of commodity i in years (4.3)
TTT =
P
n
k 1
TTPT
ik
.
ET
ik
is the total ton-years in transit of commodity i (4.4)
TST
i
= AT
i
.
STPTY
i
is the total ton-years in storage for commodity i (4.5)
AVPT
i
is the average value per ton of commodity i (4.6)
IR is the prevailing interest rate per year (4.7)
IC
i
= IR
.
AVPT
i
.
(TTT
i
+ TST
i
) is the inventory cost per commodity i (4.8)
8
A model to calculate the cost of logistics at a macro level: a case study of South Africa
The total inventory cost is the sum over all commodities of the inventory cost per
commodity TIC =
P
n
i 1
IC
i
(4.9)
Management and administration cost sub-model
Total management and administration cost per ton of commodity is the warehousing
administrative and overhead cost per ton of commodity, plus the sum for all modes of
the modal transport cost per ton of commodity, multiplied by the commodity-specific
average transported distance for the mode, multiplied by a mode-specific
administrative percentage:
MAPC
k
is the mode-specific administrative percentage of cost for mode k (5.1)
MACT
i
= WAOHPT
i
+
P
n
k 1
MCTK
k
.
PATD
ik
.
MAPC
k
(5.2)
Total management cost for all commodities is the sum for commodities of the
total management and administration cost per ton of commodity (4.2) multiplied by
the actual tonnage of commodity (1.3).
TMAC =
P
n
i 1
MACT
i
.
AT
i
(5.3)
CALCULATION OF THE LOGISTICS COST IN SOUTH AFRICA FOR
2003
Introduction
The following application of the LCM calculates the logistics cost for South Africa in
2003. Apart from demonstrating the practical worth of the results to interested parties
in South Africa, it could also serve as a guideline for constructing similar models in
other study areas. The description of the methodology of the application of the
model, the sources of the input parameters for each of the sub-models, as well as the
output and results of the model are outlined in the following sections.
Determine the throughput
Throughput is the primary input parameter on which all other cost calculations are
based. For the purpose of calculating throughput, commodities are listed in three
main categories (see Table 1). The two primary sector categories are mining and
agriculture, whereas the secondary sector includes all industry (namely, the
manufacturing sector). Further commodity breakdowns are in accordance with those
of officially published data. In the case of `minerals', the Department of Minerals and
Energy classification (Jonck, Van Averbeke, Harding, Duval, Mwape & Perold 2003)
was used; for `agriculture', the classification of the Department of Agriculture
(Brouwer 2004) was used, and for `manufacturing', the Standard Industrial
Classification (SIC) as applied by StatsSA
1
was used.
9
F.J. Botes, C.G. Jacobs & W.J. Pienaar
Table 1: List of commodities
PRIMARY SECTOR SECONDARY (MANUFACTURED/
PROCESSED)
MINING
PRECIOUS METALS AND
MINERALS
ENERGY MINERALS
Coal
Hydrocarbon fuels
Uranium
NON FERROUS METALS
AND MINERALS
Aluminium (metal)
Aluminium (concentrate)
Aluminium (refined)
Antimony
Antimony (processed)
Cobalt
Copper
Lead
Lead (refined)
Nickel
Titanium
Zinc
Zirconium
Tungsten
Magnesium
Tin
FERROUS MINERALS
Chromium
Iron Ore
Manganese
Silicon
Vanadium
INDUSTRIAL MINERALS
Aggregate and sand
Alumino-silicates
Dimension stone
Fluorspar
Limestone and dolomite
Magnetite
Phosphate rock
Processed phosphates
Special clays
Sulphur
Vermiculite
Other
AGRICULTURE
HORTICULTURE
Apples
Apricots
Grapes (domestic market)
Grapes (export)
Grapes (process)
Grapes (dried)
Graped (pressed)
Pears
Peaches
Plums
Prunes, cherries, quinces
Figs
Strawberries, berries
Watermelon, melon, other summer fruit
Avocados, bananas
Granadillas, litchis
Guavas, loquats
Mangoes, pawpaw
Naartjies
Pineapples
Oranges
Lemons
Grapefruit
Fruit (dried)
Vegetables
FIELD CROPS
Maize
Wheat
Grain sorghum
Groundnuts
Sunflower seed
Soya beans
Oats
Barley
Rye
Dry beans
Cowpeas, drypeas, lentils
Chicory
Sugar cane
Chicory
Cotton (lint)
Cotton (seed)
Cotton (seed-cotton)
Wattle bark
Lucerne, hay
Tobacco
LIVESTOCK
Red meat
White meat
Butter
Cheese
Condensed milk, powdered milk
Fresh milk
IRON AND STEEL BASED PRODUCTS
Basic iron and steel products
Basic non-ferrous metal products
Fabricated metal products
Machinery and equipment
Electrical machinery and apparatus
Motor vehicles, parts and accessories
Miscellaneous products
CHEMICALS AND PETROLEUM BASED
PRODUCTS
Industrial chemicals
Other chemical products
Petroleum products
Rubber products
Plastic products
Non-metallic mineral products
PROCESSED FOODS AND BEVERAGES
Canned and prepared meats
Dairy products
Canned fruit and vegetables
Fish products and similar foods
Vegetable and animal oils and fats
Grain mill products
Bakery products
Sugar
Chocolates, sugar confectionery and cocoa
Roasted peanuts and other nuts
Coffee roasting, tea blending and packaging
Food products, not elsewhere classified
Animal feeds
Distilleries and wineries
Soft drinks and carbonated water industries
TEXTILE, LEATHER AND WOOD BASED
PRODUCTS
Woolscouring and combing
Spinning, weaving and finishing of textiles
Soft furnishings
Tents, tarpaulins and other canvas goods
Knitted garments, hosiery and knitted cloth
Carpets and rugs
Other textiles
Men's and boys' clothing
Women's and girls' clothing
Tanneries and leather finishing
Footwear
Sawmilling from round log
Board laminated, plywood, particle, etc.
Carpentry and joinery
Furniture
Packaging
Stationery
Printing, publishing and allied industries
10
A model to calculate the cost of logistics at a macro level: a case study of South Africa
The throughput for each commodity has been sourced from the publications
mentioned. Some adjustments were necessary in order not to double-count
commodities, as more than one source sometimes listed the same commodity line.
For example, the Department of Agriculture includes butter and cheese in its
classification of dairy production, whereas these commodities are listed by StatsSA as
manufactured items.
Total throughput (local production plus imports) amounts to 753 million ton-
equivalent. The secondary sector accounts for 44% of the total throughput. The
remaining 56% is from the primary sector (mining and agriculture).
Input to the transport cost sub-model
The inputs required to calculate transport cost are split according to mode in terms of
tonnage carried, average distance over which a particular commodity group is
transported and the unit cost of transporting a particular commodity type by each
available mode. For the purposes of the case study, six modal applications were
identified, namely (1) collection and distribution by road, (2) line-haul transport by
road, (3) rail transport, (4) air transport, (5) coastal shipping (from the point where
goods enter or leave the country) and (6) pipeline transport.
The modal split and average distance that each commodity is transported by each
mode was determined from information obtained from operators and practitioners. In
the case of the primary sector (mining and agriculture), fairly detailed information
was available. A recent study published by the CSIR (Van Dyk 2004) on logistics
practices in the fruit industry formed the basis for input in that sector. However, no
such information was available for the manufacturing industry, and a detailed freight
distribution model is required to simulate movements of manufactured and processed
goods accurately. The modelling of transport desire lines for the secondary sector is
essential to enhance the accuracy of the model in future, particularly because this
sector has a major impact on total transport cost. It should also be borne in mind that
the hauling distances reflect averages for the different sectors and may vary
considerably from commodity to commodity within a particular sector.
Unit cost of transport per mode was entered in terms of Rand per ton-kilometre.
The aim was to determine a typical cost per ton-kilometre for each mode and
commodity category, as the unit cost per unit commodity could differ substantially
between commodities, even if they are transported by the same mode. The accuracy
of these input data varied greatly between modes and commodities for several
reasons:
. Some industries were more forthcoming in providing costs than others. The
divisions owned by Transnet were reluctant to divulge the cost of air, rail and
pipeline transport. In contrast, the organised road freight industry publishes details
of the operating cost of different vehicle classes in the Vehicle Cost Schedule (Road
11
F.J. Botes, C.G. Jacobs & W.J. Pienaar
Freight Association 2003). Operating cost of road freight transport was verified
from data collected and costs calculated independently by the Bureau for
Economic Research (2003: 288290).
. The cost of coastal shipping fluctuates substantially, depending on the demand for
transport at a particular time.
A summary of the total transport cost by mode and sector is presented in Table 2,
and the amounts transported by mode are summarised in Table 3.
Table 2: Transport cost by mode (R million)
Road
(Distribution)
Road
(Line haul)
Rail Air
Pipe-
line
Water TOTAL
Mining 278 4 577 8 146 0 0 0 13 001
Agriculture 945 3 089 579 0 0 8 4 621
Primary 1 223 7 666 8 726 0 0 8 17 622
Secondary 27 247 74 627 2 569 10 702 71 235 115 451
TOTAL 28 469 82 293 11 295 10 702 71 243 133 073
Table 3: Amount transported by mode (million ton)
Road
(Distribution)
Road
(Line haul)
Rail
Other (air,
water,
pipeline)
TOTAL
Mining 4 110 143 0 257
Agriculture 32 37 7 1 77
Primary 37 147 149 1 334
Secondary 322 296 28 15 661
TOTAL 359 443 178 16 995
It should be borne in mind that the total tonnage transported by all modes
combined exceeds the total throughput, as the same commodity could make use of
more than one mode. For example, commodities transported by rail for the line-haul
leg of a journey could be delivered to their final destination by road. In other
instances where specialised vehicles are used (for example, transportation of motor
vehicles), trucks (both road and rail) may return empty, which effectively doubles the
travel distance for that product.
12
A model to calculate the cost of logistics at a macro level: a case study of South Africa
Input to the warehousing cost sub-model
Duration of storage
Two reasons for storage in the logistics chain were identified in this study, namely,
storage for freight consolidation purposes and intra-seasonal storage.
Freight consolidation takes place where commodities are accumulated at a certain
location for onward transport in order to optimise the utilisation of the transport
modes delivering to and collecting from the accumulation point. A distinction is also
made between consolidation for collection as opposed to consolidation for
distribution. An example of consolidation for onward carriage is farmers delivering
bananas, typically with a three- to five-ton truck, to cooperatives where the onward
consignments are consolidated and hauled to major centres with 28-ton combination
trucks. An example of consolidation for distribution is several 28-ton combination
trucks, each with a different commodity on board, delivering to a cross-dock centre,
where their loads are broken up and commodities re-sorted and combined for
delivery to retail outlets with smaller eight-ton trucks.
Certain commodities are harvested during a specific season, but are consumed at
a constant rate throughout the year (for example, maize). Other commodities are
harvested during a specific season but have only a limited storage life, for example,
fresh deciduous fruit. The seasonality of production of certain commodities and the
delayed consumption thereof necessitate intra-seasonal storage.
The intra-seasonal storage duration of commodities that are evenly produced and
evenly consumed throughout the year has been assumed to be zero. The duration of
storage of all commodities that have a non-zero intra-seasonal storage duration is
calculated by determining the difference between the weighted mean time of
production and the weighted mean time of consumption.
Unit cost of storage
Unit costs of storage in terms of Rand per ton per day were collected for each
individual commodity line. The following six main types of storage have been
identified for the purpose of this study:
. Hard standing outside (dry commodities)
. Bulk warehouse (dry commodities)
. Silo (dry commodities)
. Shelved warehouse (dry commodities)
. Cold storage (dry commodities)
. Bulk tankard (liquid commodities)
. Specialised tanks (liquid commodities)
. General storage inside (dry commodities)
13
F.J. Botes, C.G. Jacobs & W.J. Pienaar
. Cold storage (dry commodities)
. Storage tanks (liquid commodities)
. Cold storage tanks (liquid commodities).
Storage cost is allocated for each commodity type according to the type of storage
associated with the commodity.
Unit costs of storage include storage and handling costs expressed in Rand per
ton. Storage costs are the costs of establishing and maintaining the storage facility and
are spread over the expected throughput of the facility. Handling cost reflects the
marginal cost of handling each unit of throughput.
Storage cost, in Rand per ton, is derived by multiplying the duration of storage of
a specific commodity with the storage type-specific storage cost per ton-month.
Handling cost accrues to the commodity as it is handled. The sum of this storage cost
and handling cost form the storage unit cost.
Inventory cost
For the purpose of calculating inventory cost for goods in South Africa, primary
goods are valued at R290 per ton throughput and secondary goods at R671 per ton
throughput. These values were obtained by dividing total throughput by the total
value of goods produced as reflected in the national accounts (SARB 2004). Transit
time consists of the duration of storage and the transport time. Transport time is
based on the amount transported and the transit time for each mode and commodity
type. The time value of money is the average annual prime bank lending rate for 2003
(12.5%).
Management and administration
The cost of management and administration was taken as a percentage of the unit
cost of transport and warehousing. These percentages, which vary according to
storage type and transport mode, were derived from information obtained from
operators and practitioners.
OUTPUT OF THE LOGISTICS COST MODEL
The results of the aggregate approach are presented in Tables 4 to 6. The following
points serve to highlight the main aspects of the results of the case study:
. Logistics cost in South Africa, as defined in this study, amounts to R177 978
million. This represent 14.7% of GDP.
. Transport cost is by far the main contributor to logistics cost, contributing 75% to
the total.
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A model to calculate the cost of logistics at a macro level: a case study of South Africa
Table 4: Total logistics cost for 2003
Transport
(R)
Storage
(R)
Management
and
Administration
(R)
Inventory
(R)
TOTAL
(R)
Primary 17 622 4 562 6 615 616 29 416
Secondary 115 451 9 595 21 945 1 572 148 563
TOTAL 133 073 14 157 28 560 2 188 177 978
Table 5: Logistics cost as a percentage of GDP
Transport
%
Storage
%
Management
and
Administration
%
Inventory
%
TOTAL
%
Primary 1.46 0.38 0.55 0.05 2.43
Secondary 9.55 0.79 1.81 0.13 12.28
TOTAL 11.0 1.2 2.4 0.2 14.7
Table 6: Logistics cost items as a percentage of total logistics cost
Transport
%
Storage
%
Management
and
Administration
%
Inventory
%
TOTAL
%
Primary 9.90 2.56 3.72 0.35 16.53
Secondary 64.87 5.39 12.33 0.88 83.47
TOTAL 74.8 8.0 16.0 1.2 100.0
. The secondary sector (manufacturing and processing) accounts for 84% of all
logistics cost.
. Inventory holding cost is the most sensitive to external changes, despite the fact
that it makes up the smallest component of logistics cost. The primary reason for
this is that any change in the prime lending rate has an immediate and direct
effect on the opportunity cost of the value of the inventory. A sensitivity analysis
showed that, if interest rates return to their 1996 level of about 20% inventory, and
assuming that all other costs remain constant, holding cost would increase to
R3 502 million (2.4% of total logistics cost).
In this respect, it should be borne in mind that interest levels during 2003 were
at their lowest levels for almost three decades. This has a further implication in
15
F.J. Botes, C.G. Jacobs & W.J. Pienaar
that there is not much scope for a further reduction of this component, and the
most likely trend in the near future would be upward should the prime lending
rate increase.
. It is estimated that goods transport contributes R40 490 million (37%) and that
storage constitutes R4 694 million (4%) of the total `transport, communication and
storage' figure of R110 709 million indicated in the national accounts of South
Africa (Botes 2004). This means that third-party goods transport and storage
(warehousing) account for 3.7% of GDP.
. Given that third-party logistics is estimated to amount to R45 184 million, the
propensity to outsource logistics is fairly low at 0.33.
. Goods transport accounts for 73% of total diesel fuel consumption in South Africa.
CONCLUSIONS
. The development of the model provides a lasting product that enables relatively
easy updating of the data to reflect the cost of logistics in future years, as well as
time series comparisons by retrofitting historical data to the model. It also enables
updating of the results with improved data as the study progresses and the
performance of sensitivity analysis of key input parameters.
. Logistics cost represents a considerable percentage of GDP. However, its
contribution is less than some reports in the popular press suggest.
. The propensity to outsource logistics tasks is low (33%), and about two thirds of all
logistics tasks are currently undertaken inhouse.
. Figures on logistics costs published by the SARB are becoming less useful over
time as communications becomes an increasingly larger component of the
transport, storage and communication sub-sector.
OPPORTUNITIES FOR FURTHER RESEARCH AND REFINEMENT
. The study should be extended to allow for a more detailed analysis of specific
input parameters.
. The procedure should be undertaken on an annual basis to develop a historical
database that in time will allow time-series analyses to be performed.
. A survey should be undertaken to understand the underlying reasons for the low
propensity to outsource logistics tasks.
. The South African Reserve Bank should be requested to separate logistics and
communications as items in their future reporting.
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A model to calculate the cost of logistics at a macro level: a case study of South Africa
NOTES
1 The 1993 edition of the Standard Industrial Classification (SIC) of all Economic Activities,
5th edition, Report No. 09-90-02, was used to classify the statistical units in the StatsSA
survey. The SIC is based on the 1990 International Standard Industrial Classification of
all Economic Activities (ISIC), with suitable adaptations for local conditions.
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A model to calculate the cost of logistics at a macro level: a case study of South Africa