tully as possible, in order to represent more accurately the behaviour of the user and facilitate better economic evaluation. This involves essentially the treatment of direct and indirect transport costs. In the course of the following analysis it will become apparent that a thorough understanding of logistics operations and business management is critical. On the other hand, models will help to piece together an overall picture of the cost impact, once such knowledge of direct and indirect transport costs is incorporated in the implementation.

Direct and indirect transport costs are no alien to transport analysis and modelling. For example, the cost implications of time and service quality elements of metropolitan passenger travel are in general well understood. However, the understanding and representation of freight transport costs are a lot less satisfactory. ]'his is mainly because in conventional modelling, transport is represented independent of the remainder of the logistics operation. Usually only the line haul and transhipment costs are included in modelling; in some instances terminal handling and value of goods in transit are considered. Yet the connection of transport to warehouse distribution and production/supply management is so far largely ignored in strategic modelling. At a more detailed level, there is a considerable body of literature and documentation of the direct and indirect costs of freight transport, and the task appears to be one of making use of them in modelling.

Business passenger travel appears to be a rather different issue. In metropolitan modelling in course of business trips are often modelled in a way analogous to personal travel. However, the relationship between industrial activity and business travel is yet very much a topic under study, and a large number of issues are in need of clarification. A recent survey shows that even a considerable number of manufacturing and service sector company themselves, which spend a fair share in course of business travel, do not monitor effectively these costs (Ernst & Young, 1906, p5 and p7). Here the issue is mainly to do with develop a better understanding of the business travel demand

The issues seem to be most acute with medium to long distance interregional transport, which is growing at a considerably higher rate than shorter distance movements in Europe. This paper will focus on issues in this area. Also, the discussion below will concentrate on freight and business passenger travel, whilst leaving medium to long distance personal passenger travel to a separate analysis.

2. TYPES OF COSTS RELATED TO TRANSPORT

We shall start the discussion with the types of transport costs that are broadly related to the use of transport, and in particular focus on those aspects that are likely to affect the volume, frequency of usage and the choice of modes.

2.1 Costs Involved in Freight Transport

The costs involved in freight transport could be summarised as

• Direct costs incurred in the course of transport, including transit and loading/unloading at terminals and transhipment sites

• Costs associated with transport service quality, which include time-related inventory costs, operation-related inventory costs, and product quality related costs

The firm's decisions on the volume, frequency as well as modal choice do imply a certain level of energy consumption, pollution, accident rate, etc. Some of these elements are being internalised as monetary costs to some extent, and environmental consciousness have in some instances promoted the use of transport which is thought to be causing less environmental problems. Once these external costs are internalised, the savings and losses to firms may be assessed as part of the direct and indirect costs discussed above in economic evaluation. The outcome of this procedure will then be incorporated in a wider framework of multi-criteria analysis, which will not be dealt with here.

The direct and indirect costs are well understood in Iogistics circles; though in modelling, the indirect costs are often treated inadequately. The costs are reviewed briefly below.

2.1.1 Direct Transport Costs

Direct monetary costs have been the main focus of attention in traditional transport studies. They include costs inculred on the line haul, as well as through loading/nnloading and temporary storage associated with transhipment.

Improvement and optimisation in transport infrastructure mid operations result in cost savings to operators, some of which are then passed on to the users. For example for road transport, better roads, larger vehicle pay-toad capacity, reduction of empty running lead to benefits to the operator, and eventually, to the user. On rail and short sea shipping, improvement in intermodal operations would lead to reduction of cost for general freight, as well as improved service quality; for bulk products innovations on the line haul could also contribute to cost savings.

For bulk freight, direct line haul and transhipment charges are likely to be the main elements of transport-related costs. For general freight the direct transport costs are also substantial, yet they are increasingly looked at as a component in a broader sphere of logistics operations. In other words, whilst it is evident that the freight transport users have an interest in reducing the direct transport costs, they seem to be more concerned with overall optimisation in supply logistics through establishing a complete distribution system that suits the need of the industry (AT Kearney, 1996; Ernst & Young, 1996).

2.1.2 Costs Associated with Transport Service Quality

In Europe, 30 years ago, since the main freight is bulk, the cost of moving freight is the main issue. Now the situation has changed radically: the economic base is no longer as dependent on heavy industries, and the growth of light industries and the

service sector means that general freight is taking the central stage in transport. As the value of goods becomes higher, the supply deadline more stringent, and the product requirement more user-specific, the quality of transport service is becoming as important as, if not more than, the cost of transport. Furthermore, there is growing body of documented evidence which suggests that improvement of transport service quality may prompt or lead to further savings in other stages of the production process.

In particular, the unique requirement for high value freight is reflected through the rapid development of time sensitive distribution, which is increasingly affecting all types of production as well as final consumption. This results from, on the one hand, growing expectation of consumers for choice and quality of products, and on the other, improvement of different aspects along the production chain: Quality management and control which ensures production of goods with 'zero defects', which encourage the recipient producer to reduce their stock to a minimum: rapid development of information technology enables the producers and freighters to have accurate inIbrmation about where the products are, the means to exercise control on them, and the ability to review and optimise every detail of production and supply logistics: centratisation of stockholding, improvements in communications between customers and suppliers, and high reliability of the supply system which replenish stock quickly and accurately all have contribute to the changes in logistics. Utilisation of return load capacity and changes in attitudes towards the sharing of facilities further improve the efficiency of the system.

Service quality is a general term which covers a wide set of requirements which vary according to the type of freight. For example, speed of delivery is an important factor |k~r high value freight; for other goods, adherence to delivery schedules would often be the main concern than speed. Thus reliability and punctuality mean different things to different freight users. Security, flexibility, minimised damage to goods are also becoming increasingly important. It is often found that the users are willing to pay a premium for high quality service, especially when the value of goods is high.

There are a wide variety of studies on the myriad aspects of service quality, and the reasons why they are important to the freight user. In cost terms, it seems that the reasons would fall generally in the following 3 categories: time related inventory costs, operation related inventory costs, and product quality related costs.

• T i m e - r e l a t e d i n v e n t o r y cos t s

That is, the cost incurred by the user through the time spent shipping the goods. Two components have been identified (Peeters et al, 1995, Chapter III p16):

i

ii

Capital costs incurred whilst the goods are in transit, subject to the value of goods and the interest rate depreciation of the goods whilst in transit, subject to the product life time

For low value freight such as bulk products, these costs should be minimal. However, lbr high value goods such as computers, the value of freight could be as high as

US$100,000 per ton, which, assuming an interest rate of 15 per cent per annum, means an interest cost of US$ 41 per ton per day. Machinery valued US$ 40,000 per ton would similarly incur an interest cost of US$16 per ton per day. Perishable products, on the other hand, are associated with a high depreciation cost. For example, vegetables valued at US$1000 per ton having a product life of 30 days would incur a depreciation cost of US$ 33 per ton per day on average (ibid., pl 7).

• Operat ion related inventory costs

These costs stem from the fact that firms increasingly tend to optimise the supply logistics operation as a whole, such as in time sensitive distribution. This often involve the dispatcher and the recipient as well the carrier of freight. For example, time sensitive distribution is viewed as 'a partnership between supplier, carrier and customer to improve efficiency and reduce waste' (FTA 1995a). Through modern consolidation systems it contributes to the reduction of warehousing, waste, vehicle movements, handling at depots, quality and choice of goods, and the competitiveness of the producers in general.

For example, the use of regional distribution centres by the superstore food retailers means that the manufacturers no longer deliver products directly to stores. As a result, cost of holding and handling stocks at stores is reduced to a minimum, more space is devoted to sales, better quality products are achieved owing to fewer days of stock cover. Also, suppliers' vehicles delivering to a regional distribution centre may even be used by the superstore to deliver goods from the centre to the local supermarkets, using the return load capacity..Further shared use of delivery vehicles and storage facilities between different firms have appeared. Similarly, a car manufacturer has organised ex-works collection which consolidates supplies and exert better control over the timing and frequency of supply deliveries. The move from producer controlled to customer controlled transport has provided greater opportunities for loads to be consolidated into larger but fewer and more efficient movements. There are also large firms which set up joint production sites to so as to avoid bulky supply delivery using transport. Examples of this type are being documented more systematically (FTA, 1995a; Ernst & Young, 1996).

It is clear that in the optimisation process, the firms tend to focus on the overall cost savings in which transport is an important element. However, not all of the objectives are complementary, and under each particular set of circumstances a combination of, and possibly trade-offs between, the components have to be worked out. For example, 'tighter scheduling of collections and deliveries making it more difficult for some firms to arrange return loads' (FTA, 1995b). Also, time sensitive systems depends on a highly reliable transport network, and the cost will be high once it is made unreliable by recurring congestion.

* Product quality related costs

In addition to the drive to optimise logistics, producers may also impose higher service quality requirements upon transport in order to compete effectively on the

sales market. Increasing pressure in sales competition tends to exert higher requirements not only on the quality of the product itself, but also on its delivery to retailers or other customers. A reliable and flexible transport service often provides opportunities for a producer to optimise production scheduling, as well as to deliver products as and when the customers require. In such cases transport costs are weighed against savings that are to be achieved elsewhere in the production chain, and in marketing benefits.

2.2 Business Travel

For business travel, the issue is yet of a better understanding. A key problem is that with many firms the travel expenses are not monitored, or monitored in a manner that would help the understanding of the behaviour. The main focus of transport cost monitoring tbr many manufacturing firms is their costs in moving goods; they rarely include individuals' travelling expenses in transport costs, even though in some high value added sectors such as pharmaceuticals the cost of goods transport was less than 1 per cent of the total business costs, whereas the travelling expenses of employees could be as high as 4.5 per cent (Ernst & Young, 1996).

Generally speaking business travel costs may also be divided into direct costs and indirect costs, where the indirect costs could be related to

• Time related costs • Costs of travel packages • Product quality related costs

2.2.1 Direct Costs for Business Travel

Conventional models handle the direct out-of-pocket costs of business travel in a way analogous to other passenger travel, taking into account fares, as well as parking, transfers and other terminal charges.

Whilst the models may function fairly accurately in accounting for the cost of travel, they often provide a very crude representation of how the business traveller decide on the length and frequency of their journeys as well as their choice of modes. There is some evidence to suggest that the current tax rules on company cars and business mileage are leading to individuals driving when they can either conduct business by telephone or travel by other modes ( Ernst & Young, 1996). Also, the expenses of overnight stays away from home are rarely taken into account in modelling medium to long distance travel.

2.2.2 Indirect Costs for Business Travel

Some indirect costs for business travel, such as time-related costs, are understood in a way similar to personal travel. Other indirect costs are often absent from the conventional model formulation.

• Time related costs

The significance of time related costs are understood in modelling circles, and are conventionally represented through using the value of time in the disutility function. Nevertheless such costs are conceivably variable across the sectors of the industry, which is much less well documented.

• Costs of travel packages

In addition to modal service quality such as comfort, reliability, punctuality, safety and flexibility, there are other indirect costs. In interregional travel, the indirect costs may take a rather different form to that of metropolitan travel. As travel distance becomes further away from home, timing and scheduling of the trips, luggage requirements, local transport upon arrival and lodging away from home are increasingly to become part of the travel package within which potential trade-offs take place. Furthermore, travel by private car has a limited distance range beyond which stops/lodging would have to be arranged. It would not be unreasonable to assume that a traveller would optimise on the overall travel package, the cost of which wnuId affect the number and frequency of trips, timing and scheduling, distance range, as well as modal choice.

• Product quality related costs

Since business travel is only a means to an end - either to provide a service or to improve the quality of service - the costs involved in transport are quite naturally weighed against the requirements of product quality that the business traveller is responsible for. A change in direct transport cost may lead the business traveller to modify the existing balance between

3. INCORPORATION OF TRANSPORT COSTS IN MODELLING

This section reviews the methods used in integrated regional economic and transport modelling, and in particular, discusses how the indirect costs may be incorporated in the modelling framework.

The incorporation of indirect costs would take place at these two levels:

• behaviour modelling, i.e. how the direct and indirect costs affect the decision of the user with regard to the use of transport

• cost accounting, i.e. the savings and losses by each type of user in terms of direct and indirect costs, and their impact on spatial distribution of activities

~ o

It is clear from the discussion in Section 2, that without taking into account of the indirect costs a model is unlikely to represent well the behaviours of freight shippers and passengers. At the same time, the costs of transport and production in general would not be accounted properly.

In this section a preliminary structure is presented which details what is envisaged to be necessary to incorporate. Before dealing with the specific issues of freight and passenger transport, a brief review is given of the general regional economic and transport model structure, as used in the package MEPLAN.

3.1 General Modelling Framework

The MEPLAN structure is set up as a context-free modelling system which needs to be implemented for each study area. First of all the study area and the rest of the world are divided into certain number of zones, which represent an level of geographical division appropriate for the policy analysis at hand. The simulation model is best described in terms of its 3 modules:

• a r e g i o n a l e c o n o m i c m o d u l e w h i c h m a k e s u s e o f a r e g i o n a l i s e d i n p u t - o u t p u t t a b l e to represent the various branches of the regional economy; it includes population and other final demand such as export, investment, and public consumption. Import is included as an exogenous input to the study area. The regionalised input-output table is applied to obtain flow of trades between different branches of the economy in one's own zone as well as other zones. Demand for freight transport is simulated through the flow of trades from primary and secondary industries to one's own zone as well as to other zones; business travel is generated through the flow of trades from the tertiary industries. Personal travel is generated through population in each zone

• a t r a n s p o r t m o d u l e w h i c h r e p r e s e n t s t h e s u p p l y o f t r a n s p o r t i n t h e s t u d y a r e a a s well as its connection to the rest of the world with an integrated multi-modal network. It takes the transport demand generated by the regional economic model and carry out modal split and network assignment procedures on the transport network. It then outputs the modelled modal matrices, a loaded network, as well as the monetary transport costs and disuti}ities (i.e. genera}ised cost including the contribution of time and modal quality of service factors).

• a n i n t e r f a c e m o d u l e w h i c h c a r r i e s o u t t h e c o n v e r s i o n o f a n n u a l t r a d e v o l u m e s i n monetary units (that is used in the regional economic module) to appropriate freight tonnes or passenger trips per day; it also converts the transport costs and disutilities from the transport module into units that are appropriate to use in the regional economic module.

In particular, the total production cost of a branch of industry is defined as

p" = 5" a""c .... [3 .1] t t t

where

P," is total production cost for output n in zone i a ..... is demand for input m in order to produce a unit of n

C~" is the consumption cost (i.e. the selling price) of m in zone i

whilst C;" is defined as

C" = ~{(P;" +R;' +c;I) ITd'}I~Td' k k

[3.2]

where

P;" is production cost of input m in zone k R~" is the economic rent commanded by m in zone k over and above

production cost c~' I is the monetary cost of transport incurred for each unit of m

between zones k and i Tff is the volume of trade o f m from zone k to zone i

In this way the cost of inputs, including the transport costs, is accounted for in the model.

On the other hand, the transport disutilities are used in the model to determine the location of activities in the following manner: given the total demand for consumption in a zone j, Yj , supply from a zone i is estimated as

Tij = Y j

where r j= rj= Si= Ci=

[ 2.°'(n'+/(<')-w:')] "S;' e <-

[ "On' " ")] ~',S;" e -2 . + f ( d , , ) - w , i

trade to consumption zonej from production zone i, total demand for consumption in zone j, measure of size of zone i (i.e. capacity for production), cost of production at zone i,

f (do) = a function of d/ j , the disutility of transport between zones i and./', w i = zonal attractor for zone i, 2. = concentration parameter (which is always positive in value).

[3.3]

Transport disutility d!i is a log sum of the disutilities of the modes that are available

for journeys from i toj . The modal disutilities, d~ are conventionally defined, in its simplest form, as a linear sum of direct monetary cost, time, and a modal constant, i.e. ~br a given mode k

d,k=p,k+a*t,,+ [3.4]

where k p,, = direct monetary cost on mode k from i to j k a = value of time attached to mode k

t k = time involved in travelling on mode k from i toj t l

M* = modal constant for mode k representing service characteristics not represented by cost, time and the value of time

The modal disutility function, defined in this form, are generally used to represent the trade-offs open to a user between direct monetary cost, time, and other service characteristics when choosing a mode. It is now widely used in modelling passenger travel. However, for freight transport, if the value of time parameter and the modal constant are consciously calibrated to represent the potential indirect cost savings derived from time savings and modal service quality, then the disutility function could be used, albeit crudely, to gauge more accurately user behaviour in monetary cost terms. Moreover, this formulation would also be significant in economic evaluation. More sophisticated functional forms may become possible as the understanding of logistics and production management improve.

Consumption disutility of a given product m in a zone j, on the other hand, is defined as the log sum of the disutilities incurred by suppliers from all possible supply zones i, i.e.

D;'-- ,o Z [- x(F,"+ w:">] [3.51

which is consistent with its discrete choice formulation. The production disutility, i.e. average unit disutility associated with the inputs m facing a producer of n in zone i, in turn, may be defined simply as

Q;' = ~ a"' D;" [3.61 t~t

In summary, whilst the production consumption costs reflect the impact of direct monetary cost of transport, the production and consumption disutilities may be fbrmulated in such a way that the potential trade-offs between cost, time, and service quality which have become increasingly important in European freight transport. This tbrmulation will become particularly meaningful in policy and project assessment

%©

where firms are offered opportunities to use reliable, high quality yet more expensive transport services to optimise logistics and production management.

3.2 A Simple Case Study

A simple case analysis was carried out as part of a study commissioned by the Commission of the European Communities Directorate General XV. This is a joint project of TRT and AT Kearney in Milan, and Marcial Echenique and Partners in Cambridge. The project aims to examine the potential benefits of introducing a series of infrastructure investment and policy measures that are designed to improve the efficiency of the functioning of the internal market of the European Union. The study horizon is 2005.

In this context, the issues described in the previous sections become central to the analysis. An integrated regional economic and transport model is set up. in line with the formulations described above. The regional economic model makes use of the Eurostat 1985 7-country input-output tables at the 59 branch level (EurostaL 1995). A multimodal transport model is implemented incorporating all strategic links of road, rail, shipping and inland waterways at the interregional level for the 15 countries of the European Union.

A first issue to resolve with this set up is to introduce the transport costs and disutilities estimated by the strategic transport model, to the accounting structure of the input-output tables. Conventionally, input-output tables are set up in monetary value terms of industrial branches, each of which has a unit input cost of 1.0, although tables using physical units are also possible (Leontief, 1986). The Eurostat 1986 country tables are implemented in monetary units, where the national economy is represented through 59 branches of industries, including 6 branches of transport services (i.e. railway, road, inland waterways, maritime transport, and auxiliary services). In order to introduce the transport cost components from the transport model, and avoid double counting, the input costs of the transport services branches in the input-output tables are set to 0.0. The technical coefficients related to and final demand for these branches are maintained in order to retain the integrity of the input- output tables.

Once the costs of the transport branches are set to zero, the costs and disutilities associated with moving freight/business travel that are estimated in the transport model are fed into the regional economic model. Under ideal circumstances, where all transport services input are accounted for with the transport branches in the regional economic model, and the transport costs are estimated accurately in the transport model, the unit cost of products in the input-output model will become 1.0 on average when the modelled costs are fed in. However, in practice there are several difficulties to overcome. First, it is clear that the transport service branches in the input-output tables do not include all transport inputs, an obvious example being own- account transport; business travel is usually treated as current expenditure, thus intermediate purchases include the cost of travel, and only in a limited number of cases that such intermediate purchases are separately identifiable and attributed to transport services (Eurostat, 1996; HM Treasury, 1996). This means that discounting

7.4~

the costs of the transport branches does not in normal events avoid completely double counting. Own account transport are only used in a limited way, and increasingly so (Ernst & Young, 1996), and in the context of interregional transport it is perhaps even less significant. Business travel, however, remain an issue to be studied further.

Nevertheless, the connection of the regional economic model to the transport model does offer a number of opportunities in modelling. With all the imperfections in cost accounting, the transport branches account for a large share of the transport input. The level of overall product costs in the regional economic model after the modelled transport costs are incorporated may be used as a valuable validity check whether the freight and business travel demand and user tariffs are estimated accurately. At the same time, it is possible to take account of the costs and disutilities of transport in the regionalised input-output framework, which may be used to gauge the impact of direct and indirect transport costs upon production and consumption in space.

The validity of the approach would very much depend on the fbrmulation of the modal disutility functions, which is a complex issue and will be dealt with in a separate paper. In this simple case study some initial results appear to be encouraging: in a number of policy runs where the direct transport costs are increased substantially, the regional economic model is capable of picking up the gains by producers and consumers through time savings and improvement service quality. An example is given in Table 1.

4. CONCLUSION

A preliminary discussion is put forward above, illustrated by a simple case study, of the significance of incorporating direct and indirect transport costs in regional economic and transport modelling. A simple and crude formulation is given, which may be taken as a starting point for further work. This is, in many respects, a call for better understanding of the position of transport in logistics and production management, which we shall aim towards in the research projects to be carried out in the near future.

REFERENCES

A T Kearney (1996). The impact of inadequate transport infrastructure on the functioning of the internal market: Logistics excellence study. Milan, March.

Ernst and Young (1996). Transport Infrastructure, Business Costs and Business Location. April.

Eurostat (1995). The Input-Output Tables Database ofEurostat. Eurostat/B2, l,uxembourg. January.

Eurostat (1996). Communications on the nomenclature of products used in tile input- output tables. January.

FTA (1995a). Time Sensitive Distribution. Freight Matters, 1/95. Tunbridge Wells, Kent.

FTA (I995b). Vehicle Utilisation. Freight Matters, 3/95. Tunbridge Wells, Kent.

HM Treasury (1996). Commtmications on treatment of transport costs in input-output tables. January.

Krugman P (1995). Development, Geography and Economic Theory. The MIT Press, London.

Leontief, W (1986). Input-Output Economics, Oxford University Press, Oxford.

Mackie, PJ and Simon D (1984). The direct benefits of road improvements to commercial vehicle operators - a review. Institute for Transport Studies Working Paper 182, University of Leeds.

Peeters, C, Verbeke, A, Declercq, E and Wijnolst, N (1995). Analysis of the Competitive Position of Short Sea Shipping: Development of Policy Measures. Delft University Press, Delft.

Williams IN and Echenique, MH (1978) A regional model for commodity and passenger flows. Proceedings of the PTRC Summer Annual Meeting.

Wilson AG, Coelho JD, Macgill, SM and Williams HCWL (1981). Optimisation in LocationaI and Transport Analysis. Wiley, Chichester.

7. 6,

Table 1 Production and Consumption Cost and Disutility Indicators by Sector and Region: Policy Impact Assessment

Agriculture

Heavy Industries

Other Manufacturing

Services

Total Production

Production Cost Disutility

P~'~ )

Cohesion Countries 1.0030 New Member States 1.0025 Rest of the EU 1.0031 All EURI5 1.0030

Cohesion Countries 1.0022 New Member States 1.0009 Rest of the EU 1.0012 All EURI5 1.0013

Cohesion Countries New Member States Rest of the EU All EUR15

(Q[')

0.9994 0.9994 1.0004 1.0005

0.9952 10060 1.0008 1.0004

Cohesion Countries New Member States Rest of the EU All EUR15

Cohesion Countries New Member States Rest of the EU All EURI5

1.0042 0.9994 1.0033 0.9994 1.0040 1.0004 1.0040 1.0005

1.0043 0.9946 1.0051 0.9933 1.0069 0.9967 1,0065 0.9963

1.0052 0.9997 1.0045 0.9971 1.0054 0.9988 1.0053 0.9988

Notes: 1 2 The cost and disutility indicators are values in the base case to be 1.0000.

Consumption Cost D sut ty

• , - ( D , )

1.0025 1.0014 1.0030 1,0015 1.0044 1.0046 1.0040 1.0039

0.9997 0.9998 ,0003 0.9905

1.0001 0.9999 1.0001 0.9993

1.0019 0.9991 1.0032 1.0011 1.0037 1.0021 1.0034 1.0016

1.0340 0.9928 1.0208 0.9972 1.0223 0.9947 1.0238 0.9946

.0187 0.9964 1.0121 0.9973 1.0129 0.9971 1.0137 0.9970

See Equations 3.1, 3.2, 3.5 and 3.6 for the definitions of costs and disutilities. calculated assuming the corresponding