State of South African logistics survey out now

"Total logistics costs should have been significantly lower in 2009, due to the financial crisis and contraction of the economy. It would have been fair to have expected this percentage to have dropped to a level of closer to 12.5%, given the downward changes in the two leading cost drivers, namely the sharp drop in the price of diesel and in the interest rate," says Hans Ittmann, executive director of CSIR Built Environment.

The survey, themed 'Value Creation towards Global Competitiveness and Sustainability' states that while investment into transportation infrastructure has been necessary, it has been costly. "A major concern is the effect of the recovery of infrastructural development costs over the next few years," says Ittmann.

"Apart from the logistics costs report released annually by the US, the State of Logistics survey is the only other report that covers the annual logistics costs of a country. Using the reports published the past seven years, one can track trends of various important logistics factors within the country."

Total cost of logistics

"Total tonnage and ton-km decreased in 2009, by 4% and 3.7%, respectively," says Dr Jan Havenga of Stellenbosch University. "Less freight was transported in 2009, with a reduction in transport costs of 9.2% - much less than the fall in the price of diesel (28.3%)."

Totalling R22.7 billion, the majority of the country's externality costs were caused by road transport. At R10.9 billion, accidents comprised the largest cost component, followed by the impact of emissions at R5.2 billion and that of congestion at R4.5 billion.

Notably, 23 million tons of greenhouse gasses were emitted due to land freight transport activities. Havenga adds, "This amounts to 49% of transport emissions and just under 5% of total emissions for the country. Road freight contributed 20.3 million tons and rail 2.7 million, which translates into R4.6 billion and R0.6 billion in costs to the environment."

"Transportation costs, which have always been the highest cost element locally, seem to be equally high contributors to logistics costs in most other countries, whereas our administration costs remain comparatively high."

In 2009, the average inventory requiring financing increased by 15.2%, from R416-billion to R513-billion. Inventories relative to output increased from 17% to 21% between 2007 and 2009.

Havenga explains that as the recession deepened, inventories built up due to lower consumption. "This, in turn, led to larger inventory holdings that needed to be financed and also to less efficient transport due to lower volumes and more empty-hauls. Inventory carrying times increased from 12 to 15 days on a weighted average basis."

Performance by transportation mode

"For the first time since the launch of the survey there has been a decline in transport activity on all typologies, except bulk mining," Ittmann continues. "The impact of the recession is evident. There has been a slight reduction in freight tonnage moved; however, the tonnage split between road and rail remained almost the same at 88.7% on road and 11.3% on rail."

Only profitable rail infrastructure was used, while larger components - notably the branch lines - in the more rural areas were not utilised, while simultaneously becoming increasingly dilapidated. "In terms of rail as a freight transportation mode, we could be dealing with a 'low cost, low service' situation compared to a 'high cost, high service' one."

The survey indicates that South Africa is underperforming in terms of harbour efficiencies. Referring to a recent study commissioned by the Ports Regulator, it cites that the Durban harbour was found to be the most expensive among 12 international harbours used for benchmarking, and its productivity was rated the lowest overall. In this regard, any comparison with other countries must be done within the specific context, a point stressed throughout the 7th survey.

Value creation through outsourcing

The survey indicates that approximately one third of transport activity in South Africa is outsourced. It states: "The major growth opportunity for road hauliers is not among available outsourced freight, but rather growth in outsourcing, often achieved by total logistics arrangements that can highlight savings on cost of ownership," says Marius Swanepoel, CEO of Imperial Logistics.

"While traditional supply chains offer three primary benefits, namely reduced costs, faster delivery and improved delivery, these advantages are no longer sufficient in the modern business world. A new paradigm is emerging where supply chains should also serve as a vehicle for developing and sustaining competitive advantage under a variety of performance objectives."

He says that effective outsourcing can reduce logistics costs by optimising loads, orders and capacity, adding: "Only as good as their weakest link, supply chains should provide one or more of six basic outcomes, namely cost, responsiveness, security, sustainability, resilience and innovation."

Collaboration and competitiveness

The survey reiterates the need for closer collaboration between the public and private sectors to deliver economic infrastructure that supports economic growth and job creation and to tap into the current commodity up-cycle.

"Government recognises that logistics and supply chain management are critical for the competitiveness of the country. According to the recent New Growth Plan for South Africa, bottlenecks and backlogs in logistics hamper economic growth and raise costs," says Ittmann.

CO2 emissions and carbon tax

To balance economic growth and social development, taking climate change into account, one has to follow the concept of the triple bottom line. This concept advocates a simultaneous concern for economic, ecological and social sustainability in organisational decision-making.

Freight transport is estimated to contribute roughly 8% of energy-related CO2 emissions worldwide. South Africa is the largest CO2 emitter from fuel combustion in Africa. Making logistics 'sustainable' in the longer term will, however, involve more than just cutting carbon emissions.

The transport sector (freight and passenger movement) consumes 27% of South Africa's total final energy, 78% of its liquid fuels and 1.6% of its electricity. In 2009, 23 million tons of greenhouse gasses were emitted in South Africa due to land freight transport activities. This amounts to 49% of transport emissions and just over 5% of total emissions for the country. Road freight contributed 20.3 million tons and rail 2.7 million tons, which translates to R4.6 billion and R0.6 billion in costs to the environment.

Initial indications from Treasury are that these carbon emissions could be taxed at around R165 per ton, with the proposed tax range can be between R75 and R200 per ton of emissions.

Communications

The research contained in the survey emphasises the need for improved communication effectiveness, for example, communication regarding road works and stoppages on routes. This is imperative to minimise the effects of necessary road maintenance on transport companies.

Inventory

The cost of storage, handling, stuffing and picking (at current prices) rose by less than the inflation rate, alleviating the cost impacting of rising inventory levels to some extent and leading to an overall increase in storage costs of 1.2%.

Extra distance

'Extra distance' is the difference between the distance that vehicles actually ran and the distance that they would have needed to have run under 'normal, controlled' circumstances (e.g. no changes in volumes of stock to be moved, no excessive congestion or delays).

The 'extra distance' concept is a way of assessing how efficient or inefficient a distribution network is, the root causes of blockages within the transportation system and the potential costs and CO2 emission savings that can be made. 'Extra distance' provides the facts and forecasts for supply chain management teams that are willing to achieve consistent improvement.

Vehicle and road maintenance costs

In 2009, the estimated road maintenance costs per lane per kilometre on a national road were R150 000. It is assumed that the vehicle maintenance and repair costs on roads ranging from good roads to bad ones vary between R0.96 and R2.11 per kilometre. These costs are only a component of the total vehicle operating costs, with others being fuel, oil and tyre costs. The resulting total vehicle operating costs vary between R3.00 per kilometre for a good road and R 7.00 per kilometre for a bad road.

Benefit-cost ratio

Research on the effect of bad roads on total logistics costs has progressed and the survey shows analyses of the cost benefit between the cost of vehicle repair and maintenance, and the cost of maintaining roads. A benefit-cost analysis for the maintenance of the Gauteng-Durban corridor showed that major benefits can be realised when keeping a road in good condition. One may argue that the most obvious solution to this problem is to repair and maintain roads to address the root cause. As the cost of repairing and maintaining roads is, however, extremely high, the economic feasibility should be investigated properly.

Research pointed to the minimum and maximum benefit-cost ratios of 1.88 and 3.47, respectively. This implies that the potential benefit - in terms of vehicle operating cost savings - that could be realised over a seven-year period is between 1.88 and 3.47 times the cost of maintaining the road.

Seeing that a benefit-cost ratio of 1 implies that the benefit and cost are the same, any benefit-cost ratio above 1 is acceptable. The benefit-cost ratio range of 1.88 to 3.47 therefore shows that maintaining roads in a good condition could indeed be the best solution.

However, this analysis considered only the Gauteng-Durban transport corridor - a road that is generally kept in good condition - and is not necessarily representative of all the roads in the country.

Move from mediocrity

"Supply chain performance will be mediocre unless the organisation, people, skills sets, and culture are world-class. If we settle for such mediocrity, South African business will be sluggish, generating sub-standard economic growth," adds Ittmann. "Our logistics sector needs to outperform its historic highs. As recently stated by finance minister, Pravin Gordhan, the country needs to achieve 7% in economic growth annually, for the next 20 years.

"South Africa is on a potentially exciting growth path. Our new membership to the emerging market leadership, BRICS (Brazil, Russia, India, China and now South Africa) provides a confidence boost to the goal of becoming an entry point for countries and companies looking to do business on the African continent. Cutting our total cost of logistics by applying innovative, pragmatic thinking holds the key to the contribution of logistics to improved global competitiveness for the country," concludes Ittmann.

The survey is available at www.imperiallogistics.co.za/csirebook/.