the logistics impact of the channel tunnel

The Logistics Impact of the Channel TunnelAuthor(s): Philippe-Pierre Dornier and Ricardo ErnstSource: Interfaces, Vol. 27, No. 3 (May - Jun., 1997), pp. 39-59Published by: INFORMSStable URL: http://www.jstor.org/stable/25062249 .

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The Logistics Impact of the Channel Tunnel

Philippe-Pierre Dornier

Ricardo Ernst

Department of Logistics and Production

ESSEC

Cergy Pontoise

France

School of Business

Georgetown University

Washington, DC 20057

The tunnel linking England and France is remarkable in its im

pact. As the global logistics network grows, the tunnel improves travel for people and goods moving between the UK and the continent. Although many speculated about the financial impli cations of the tunnel, no one had done a serious study regarding the logistics implications of this new rail infrastructure. This

study was motivated by the French train company dedicated to

freight (Fret SNCF) in their need to explore commercial oppor tunities through the tunnel. We started by performing a survey (in cooperation with Coopers & Lybrand) with European ex

porting and transportation companies of expectations and stra

tegic evaluation for the channel tunnel as a logistics alternative.

We then develop some analytical models to offer guidelines for

defining the range of values that would make one transporta tion alternative superior. In the study we worked with data pro vided by Fret SNCF as well as with consultation with many Eu

ropean companies to validate the models and present specific solutions from different areas in the continent to the UK. In par ticular, we examined nine feasible scenarios for going to London from seven different areas in the European continent.

Copyright ? 1997, Institute for Operations Research and the Management Sciences

0092-2102/97/2703/0039$05.00 This paper was refereed.

DECISION ANALYSIS?APPLICATIONS TRANSPORTATION?ROUTE SELECTION

INTERFACES 27: 3 May-June 1997 (pp. 39-59)



DORMER, ERNST

The

channel tunnel (Chunnel) linking

England and France, which opened in

1994, greatly improves travel for both peo

ple and goods moving between the UK and

the continent. The tunnel connects the rail

systems of the UK and France and indi

rectly their road systems. It adds an impor tant component to the economic integration of Europe which (unlike the US, which has

not built a railroad in decades) is building a network of tunnels, bridges, and high

speed railroads [Sloan 1991]. The Chunnel

is important for linking the European conti

nent, not just France and England. It con

sists of two rail-only tunnels and one ser

vice tunnel running the 50 km between the

terminals located at Folkestone in the

United Kingdom and Sangatte in northern

France. The respective ports of entry are

Dover and Calais. Each of the twin rail tun

nels is used exclusively for trains (capable of moving cars and their passengers,

trucks, freight, and just passengers) which

operate in one direction only. There are

some cross-over sections between the main

tunnels to allow for repair of the rail lines.

The smaller service tunnel lies between the

two rail tunnels and provides access for

routine maintenance, ventilation, and safe

refuge in the event of an emergency

[Merchant, Knowles, and Acheson 1991].

The Chunnel will affect European busi

nesses in three major areas. First, it will

change travel patterns for business and lei

sure purposes, particularly between the

South of England, and the North of France

and Belgium, since the travel time between

London and Paris is no more than three

hours. Second, it will affect the location of

new business and commercial centers as

traffic increases. Third, it will alter the or

ganization, management, and control of lo

gistics in companies that move goods, since

the Chunnel offers shuttle services for

freight trains and trucks.

The Chunnel offers an interesting new

option to be considered in evaluating logis tics alternatives in Europe. It has advan

tages that go beyond any advantage in cost.

It offers continuity in service, that is trans

port service will not be affected by stormy weather or ship timetables. The Chunnel

will always be open (365 days a year), with

three trains departing per hour in each di

rection during heavy activity and at least

one departure per hour otherwise. The

quality of transport has also improved with

the reduction in transfers among modes of

transport, since it is now possible to load

freight on a train in a location at the south

of France and unload it in the northern UK

without the exchange from train to ferry and back at the channel (Figure 1). These

conveniences have to be considered in com

paring the Chunnel to other alternatives,

instead of using only simple transportation cost calculations based on distance.

From a financial point of view, the Chun

nel has not been a successful project. Euro

tunnel (the publicly traded British-French

company that manages the tunnel) has

spent more than double its $7.5 billion pro

jection to build the tunnel, and only in the

summer of 1995 was it able to cover its op

erating costs and capital expenditures out

of its cash flow for the first time. It is still

far from able to meet interest charges on its

$12 billion debt, which are accumulating at

a rate of $90 million a month. The company

expects to have sufficient revenues in six to

10 years to pay its interest bill. By the end

of 1995, it had captured 41 percent of the

INTERFACES 27:3 40



CHANNEL TUNNEL

Figure 1: The Chunnel offers a new alternative for linking the continent and the UK. Should a

Spanish company shipping goods to the UK use its current existing Route 3, or the Chunnel with the combination Route 1 and Route 2? The same question applies to a German company going to the North of the UK. Should it use its current Route 3' or the Chunnel with the combination

Route V + Route 27

cross-channel market for cars, 45 percent of

the coach market, and 47 percent of the

freight market.

The Channel Tunnel as a Logistics Alternative

The tunnel links Calais in France to Folk

stone in the United Kingdom, joining the

European railway of 240,000 km to the Brit

ish railway network of 15,000 km. The tun

nel is 50 km long: 38 km are under the sea,

three km are in France, and nine km are in

the UK. The freight traffic crossing the

channel at the beginning of the 21st century

is expected to be 122.6 million tons each

year, of which, 21.1 will be through the

Chunnel (Table 1).

The tunnel system is designed to accom

modate shuttles that can transport 180 cars

every 15 minutes during peak periods, giv

ing it the capacity to transport 10,080 car

passengers in each direction per day. There

are also 40 high-speed passenger trains (no

cars) per day in each direction. It is also ex

pected to transport up to 28 trucks travel

ing each way daily. In addition, trains car

rying freight accommodate 35 shuttles that

May-June 1997 41



DORMER, ERNST

Opening Channel Traffic 94/95 2003 2013

Passenger cars:

Million cars/year 67.1 93.6 118.7

Chunnel share 29.7 39.5 46.6

Freight: Million tons/

year 84.4 122.6 170.4

Chunnel share 14.8 21.1 27.8

Table 1: The 1993 Eurotunnel forecast for channel traffic predicts an increase for

passengers and freight between 1994 and 2013.

are allocated as follows: 22 for combined

transportation, that is, carrying containers

of merchandise that are transferred from

trucks to the train and at the other end of

the Chunnel transferred back to trucks

(about 4 million tons during the first year); five for conventional freight (about 2 mil

lion tons during the first year); and eight for new cars, that is, trains moving new

cars, such as Renaults (about 0.5 million

tons during the first year). There are sepa rate loading platforms for freight and pas

senger traffic, and separate custom facilities

to expedite the processes. Since Britain joined the common market

in 1973, its exports to the continent have

grown from $6 billion in 1973 to $42 billion in 1986 [Project Cost-CEE 1993]. Currently

exports to the continent account for ap

proximately 65 percent of Britain's foreign trade in services and goods, excluding pe

troleum products [Merchant, Knowles, and

Acheson 1991]. According to customs data

for 1992, the total flow of merchandise, in

cluding petroleum products, is 56,363,000

tons from the continent to the UK and of

79,962,400 tons from the UK to the conti

nent. Excluding petroleum products (which

are generally moved by pipe), the numbers

change to 47,016,200 and 35,671,800 respec

tively (Figure 2).

For almost all the exchanges between the

largest continental countries and the UK,

the balance favors the continent. This bal

ance depends on several factors:

?It depends on the nature of the product. For example, the flow of agriculture and

food products from the continent is twice

that from the UK. For cars, chemicals, and

health care products, the ratio goes down

to 1.5.

?It depends on the country, with France

exporting 40 percent more than it imports from the UK, the Netherlands 80 percent,

Germany 30 percent, and Spain 20 percent. ?It depends on the country and the prod uct. The ratio between exports from and

imports to for France in agricultural and

food products is 4.6, while for Germany it

is only 2.2.

?It also depends on the mode of transpor tation. Forty-six percent of the products

coming into the UK are in containers, while

38 percent of those leaving the UK going to

the continent are in containers.

These figures explain why transportation

prices and commercial conditions differ be

tween the UK and each country in the con

tinent. Today for example, the prices are 40

percent higher from France to the UK than

from the UK to France. This study was mo

tivated by the French train company dedi

cated to freight (Fret SNCF) in their need to

explore commercial opportunities through the channel tunnel. We worked with data

provided by Fret SNCF and in consultation

with many of the logistic providers in Eu

rope to validate our ideas. We started the

INTERFACES 27:3 42



CHANNEL TUNNEL

Figure 2: The figures at the head of the arrows show the merchandise that flows between the continent and the UK in millions of tons (excluding petroleum products). The percentages refer to

types of products: A indicates agriculture and food, B indicates intermediate goods, and C indicates chemicals (Customs data from 1992).

study with a survey of expectations for the

Chunnel with exporting and transportation

companies. The survey was performed in

cooperation with Coopers and Lybrand Eu

rope during the period July 1993 to March

1994.

Logistics Opportunities of the Chunnel

Using the tunnel has advantages and dis

advantages: In terms of service, measured

as the time it takes to go from the continent

to the UK or vice versa, the tunnel crossing is fast and reliable (London to Paris in

three hours), 35 minutes from Calais to

Folkstone (versus two hours by ferry), and

80 minutes from the French highways to

the British highways. For passenger traffic

(those traveling by train through the Chun

nel without cars), the time advantage is

even greater since the train goes to train

stations situated inside the cities (the train

station in France is in Paris). For freight, a

difference of less than 1.5 hours makes little

difference except in special cases. The dis

advantages are mainly the problems of mo

nopoly in case of a strike (highly unlikely) and that the transit time does not allow

May-June 1997 43



DORMER, ERNST

truck drivers much rest time so trucks

might need a second driver.

For truck drivers, the Chunnel's quicker transit gives no significant advantage over

Moving containers required five handling steps on average.

the ferry. Ferry companies offer services on

board, such as restaurants and private cab

ins. Therefore, price is the factor available

to obtain the truck drivers' business.

In terms of quality, the Chunnel requires fewer changes of modes of transportation

(relative to the ferry) for merchandise trav

eling directly by train from factories on the

continent to final clients in the UK. That is,

with the ferry the merchandise might need

to be transferred from the train or truck to

the ferry and then, at the other end, to the

train or the truck (each mode of transporta tion is called a platform). With the Chunnel

the intermediate exchange of platforms for

crossing the channel is avoided, and there

fore there is less manipulation of the mer

chandise, which reduces the opportunities for accidents. In addition, orders could be

consolidated at different points on the train

network. In fact, the Transport Develop ment Group (TDG) has invested over $10

million in the construction of the UK's first

distribution center (250,000 square feet)

dedicated to rail and road transport and lo

cated next to the Chunnel rail terminal to

offer customers direct access throughout the UK and Europe.

In terms of cost, experts foresee a price war between the tunnel and the ferry. The

cost of ferries from the north of Europe to

the south of the UK has decreased by 20

percent between January 1994 and July 1996. The Chunnel competes with the ferry,

especially in the Calais-Folkstone area

[Journal de la Marine Marchande 1994]. Even

if enough market exists to support the two

modes, a price war for market share is ex

pected. In fact, the current figures on mar

ket share for the Chunnel are below expec tations because of delays in the delivery of

trains, railway strikes in France and Bel

gium in December of 1995, and aggressive fare cutting by ferry companies.

The tunnel can serve the following po

tential markets [Coton 1994]:

Companies that currently ship by train

will find it attractive to continue into the

UK without having to break their trains

down to get them into the ferry. This is

particularly important for companies that

ship bulk products in big volumes (for ex

ample, sand, cement, steel, and paper). The

Chunnel permits complete trains to pass at

specified times (mid-day or nights).

Companies that currently ship full con

tainers to the harbor by train, transfer them

to ships to cross the channel, and then

transfer them again to train or truck to get them to their final destinations (such prod ucts as whiskey and beer from north En

gland, Scotland, and Ireland, or wine from

France). Companies, such as Bell Lines, cur

rently run freight ferries twice a day. Trains

running from source to final destination

may provide advantages of time, quality, and service.

The Chunnel train can also serve compa nies that move small volumes in trailers

(containers with wheels that can be con

nected to trucks), carrying just the trailer

across the channel. Other markets for the

Chunnel are companies that use isolated

INTERFACES 27:3 44



CHANNEL TUNNEL

freight cars for long distances (for example, from Italy to England), those who ship small and high-value parcels to be deliv

ered quickly or automobiles or fresh prod ucts in refrigerated wagons. For example, the rail service operator European Passen

ger Services (EPS) introduced four-hour

parcel delivery services from London to

Paris and Brussels using the Chunnel

trains.

Container Movement: Now an Improved Alternative

The Chunnel makes the container move

ment with a combination of modes of

transport an improved alternative. That is

one of its most important contributions.

Trucks (or trains) can load containers on

any location linked to the train system in

the continent (not necessarily at the channel

crossing point), and cross (through the tun

nel) to the UK where the container can be

delivered closer to a final destination and

picked up by another truck (or linked to

another train system). The UK train system has invested in underslung coaches, that is,

flat cars that carry containers and are low

enough to pass through the existing tun

nels in the UK, to increase the scope of ac

cessible cities.

Before the Chunnel opened, moving con

tainers was not very efficient: it required five handling steps on average and three

modes of transport (truck, train, and boat

or ferry). For instance, a container traveling from the south of France by a combination

of modes (truck and/or train) might be

transferred in Ostende or Zeebrugge from a

train (or truck) to a boat and then reloaded

on a truck (or train) for the final destina

tion.

In our study we found that combining

modes of transport is a competitive alterna

tive (relative to the other options to be dis

cussed later) for freight coming from Italy, eastern and central Spain, the majority of

France, and eastern Germany and Austria.

Reduction in Exchange of Platforms

A boat or a ferry used to be necessary for

all but air transport between the continent

and the UK. Transferring freight from train

or truck to ship adds cost and affects qual

ity without any value added. Direct linkage

by train or combination of modes may

change the logistics network for many com

panies.

Renault, for example, sells between

80,000 and 120,000 automobiles per year in

the UK. Their distribution is affected by such issues as seasonality (25 percent of

sales take place during June and July), the

high value of the product, and the high risk

of damage during transportation. Renault

transports the cars in several steps. First

they ship the cars by boat or train to the

port of Le Havre in France. Then, "jockeys" drive the cars onto roll-on, roll-off ferries,

which carry them to Southampton for de

livery in the south of the UK or to Goole

for delivery in the north. In each of those

ports, Renault maintains a distribution cen

ter that handles deliveries to dealers.

The trip from the plant in France to the

UK distribution centers takes 10 days and

involves a high risk of damage and other

problems associated with changing modes

of transport. With the Chunnel, Renault

could ship directly to its distribution cen

ters, which it could relocate closer to its

customers. The Chunnel would reduce the

transportation time to two days requiring less inventory in the pipeline.

Electrolux/Distrilux in Italy exports ap

May-June 1997 45



DORMER, ERNST

proximately 850,000 appliances per year

from five plants in Italy to five distribution

centers in the UK. This represents about 10

freight cars a day. Currently, 90 percent of

the freight goes to Le Havre by train where

it is off-loaded into a company warehouse,

from which it is shipped by ferry or boat to

the different distribution centers in the UK.

The company is considering shipping di

rectly to its customer markets in the UK via

the Chunnel, which will mean changes in

costs, quality, and speed of delivery. This is the type of analysis that Fret

SNCF was interested in quantifying in their

need to offer logistics solutions to different

companies. Working in collaboration with a

team from the French company, we devel

oped the models presented in this paper as

a tool for evaluating alternatives. Before we

did this study, many ideas existed about

the financial implications of the tunnel.

However, no one had made a serious at

tempt to study the logistics implications of

this new rail infrastructure.

European Companies' Perceptions of the

Chunnel

As part of our research project, we col

laborated with Coopers and Lybrand Con

sultants to survey companies in France, En

gland, and the Netherlands. The objective was to gather information about how these

companies perceived the Chunnel and

what they expected from it. For each coun

try, Coopers & Lybrand divided the sample into exporting companies and transporta tion companies to discover any differences

between companies that sell products and

the companies that deliver them. They ob

tained 83 responses from transporters (17

French and 66 English, 39 percent of the

sample) and 136 responses from exporters

(59 French, 56 English, and 21 Netherlands,

18 percent of the sample). The results of the survey revealed that

the transportation companies or carriers are

more directly involved with the Chunnel

than the exporters. The majority of those

sending goods from the continent to the

UK subcontract their shipping and have no

interest in its route. The exporters then,

have no realistic view of the current prob lems or future opportunities. Even more,

transportation companies are usually free

to select routes (66 percent), and those an

swering the survey questions recognized twice as many ports in Europe as those

representing the exporters. With respect to

informants' awareness about the Chunnel,

we found that 88 percent of the French ex

porters and 63 percent of the French trans

porters were not aware of the services of

fered by Eurotunnel, as opposed to 27

percent of British exporters and nine per cent for the British transporters.

As a consequence, exporters do not con

sider the opportunities available with the

Chunnel in evaluating their logistics alter

natives. As might be expected, the trans

porters better understand the current prob lems with the ferry than do exporters.

When asked how satisfied they are with

current transportation methods (excluding the Chunnel), 63 percent of the French ex

porters answer they are satisfied versus

only 53 percent of the transporters. The fig ure for British exporters is 69 percent ver

sus 58 percent for the transporters, and for

Dutch exporters, it is 95 percent versus 81

percent for the transporters. We considered the most important fac

tors related to the use of the Chunnel to be

cost, delivery time, weather dependence,

INTERFACES 27:3 46



CHANNEL TUNNEL

A TRANSPORTER

High

Medium

Weak

Cbst

Weak Medium High EXPORTER

4 French ^- English

Figure 3: French and English exporters and transporters differ in their perceptions of the Chunnel

concerning cost, delivery time, weather dependence, labor conflicts, fixed schedules, frequency of

service, speed of service, and exchange of platforms. On the horizontal axis we present the per

ceptions of the exporters and on the vertical axis the perceptions of the transporters. When both observations are on the diagonal, the perceptions of exporters and transporters coincide.

labor conflicts, fixed schedules, frequency of service, speed of service, and exchange of platforms. We charted the results for ex

porters and transporters in France and the

UK (Figure 3). Based on the figure we ob

tain the following general results:

?Cost is an important factor for both

transporters and exporters. Because the

ferry has had a monopoly crossing the

channel, people believe its prices are high.

May-June 1997 47



DORMER, ERNST

?The issue of frequency of service and de

livery time was classified as intermediate in

importance.

?Weather is more important to transport ers than to exporters.

?Labor conflicts are important to French

companies in particular. This might be be

cause the French ports have had labor

problems over the last four years in re

sponse to government attempts to imple ment new laws and regulations.

?Changing modes of transport is not con

sidered a problem by the British since they do it for all their exports. The French are

used to shipping directly to other markets

on the continent. The opportunity to ship direct thanks to the Chunnel seems to be

extremely important to the French, British,

and Dutch transporters but not to export ers.

Sixty-one percent of the British exporters and 41 percent of the French exporters think that the tunnel gives them an oppor

tunity to modify their logistics networks.

For French transporters, the response is 88

percent versus 40 percent for the British.

Here are some of the reasons that might ex

plain this:

?The tunnel alters the competitive situa

tion and will attract new transporters and

third-party companies [Vicherman and

Craven 1986]. Seventeen percent of the

French exporters, 28 percent of the British,

and 14 percent of the Dutch believe that

they will use new transportation companies or third-party logistics companies by the

time the Chunnel is fully operational. They

expect to reallocate freight to different

modes, particularly the British (22 percent of the exporters and 32 percent of the trans

porters). This change should benefit train

companies.

?Suppliers will increasingly send goods

just in time. Exporters (77 percent of the

French, 87 percent of the British, and 48

percent of the Dutch) expect to increase the

frequency of their deliveries. Transporters

expect this increase in demand and there

fore are planning to increase the number of

trips they make (74 percent of the French,

90 percent of the British, and 71 percent of

the Dutch).

Finally the most interesting contrast in

responses between British and French par

ticipants was to the question: Do you think

about the logistics impact of the Chunnel in

your organization? Seventy-seven percent of the French exporters and 63 percent of

the French transporters answered "no"

while 88 percent of the British exporters and 80 percent of the British transporters answered "yes." Given the current flows of

freight between the continent and the UK,

and among the countries on the continent,

the British have a more urgent need to in

clude the Chunnel in evaluating their logis tics since the continent is their main

market.

Optimal Selection of Transportation Alternatives

We constructed a model to permit com

panies to determine the optimal transporta tion alternative for moving a defined quan

tity of products between the continent and

the UK. We assume that the company ships its products by either train or truck and

therefore must choose between a ferry or

the tunnel. To capture the different possi bilities available, the model allows for

changing modes of transportation (from

train to truck or vice versa) before and after

crossing the channel. This generates four

INTERFACES 27:3 48



CHANNEL TUNNEL

possible intervals (two for each side) plus the one crossing the sea, resulting in 32

combinations or alternatives. Some of these

alternatives are very inefficient a priori. We compare, in particular, the option of

using a short route that includes a ship or

ferry (the current alternative) with a longer route that includes the tunnel. Then, for ex

ample, a company in Spain that currently loads its freight on a ship in a nearby har

bor might benefit from a longer route that

includes the tunnel. The main trade-offs for

that company would be greater expendi ture for land transportation (possibly in

cluding the cost of extra drivers) versus the

savings from avoiding changes in logistics

platforms (to use the ferry, shippers must

transfer their goods from either truck or

train to the ferry, and back to truck or train

on shore). When the ferry used is close to

the Chunnel the distance over land may be

the same. The model quantifies the differ

ent options available and selects the option that minimizes total transportation cost

while satisfying a predetermined level of

service measured as the required time to

deliver the predefined freight quantity. We

made the following general assumptions: (1) The shipper can move the predefined

freight quantity by either train or truck,

that is, in each interval, it will use only one

mode of transportation.

(2) Every time the shipment changes mode of transport (from truck to train or

vice versa), the company pays a fixed cost

and a variable cost for changing platforms.

(3) If the company uses a ship or ferry, it

will always pay a fixed cost for changing from either the train or truck to the ferry and then back. If it uses the tunnel without

changing mode of transport, it pays no

such cost.

We formulated the problem as a mixed

integer problem that minimizes total trans

portation cost. The model incorporates no

charge for transit time. In theory, the time

in transit is inventory being kept in the lo

gistics pipeline and therefore should be

part of the decision process. However, we

assumed that the difference in time among

the transportation alternatives (for the type of products to be moved) would not result

in significant inventory costs.

Companies can use the model to discover

which way is the cheapest, using a ferry or

the Chunnel, train or truck, and to examine

sensitivity on price increases. The results

can be used as a benchmark for comparison

purposes. The model's application is lim

ited, given its specific assumptions. For ex

ample, in addition to the two alternatives,

train or truck, a company could use the

combined mode. Modeling this alternative

Transportation companies are

more directly involved with the Chunnel than exporters.

is complicated because the stations that ac

commodate change of platforms for com

bined mode may not necessarily be those at

which changes of regular transport mode

are made. Also, in the model we assume

that the routes by train and truck are of the

same length, which might not be the case.

To study the hypothetical implications of

the different alternatives, we performed a

sensitivity analysis on two different scenar

ios (Figures 4 and 5). One scenario is for a

company in Spain moving products to the

UK with two possible routes, a short one

May-June 1997 49



DORMER, ERNST

using the boat and a long one using the

Chunnel. The other scenario is for a com

pany in Germany moving products to the

UK with the same two possible routes. We

started the analysis with a base case for

each scenario (Tables 2 and 3). Our objec tive was to find out how changes in the dif

ferent parameters would change the solu

tion. In particular, we wanted to know

what increase or decrease in the fixed and

variable costs for the Chunnel versus the

ferry would make it optimal for shippers to

switch between alternatives. We performed the same kind of analysis for train and

truck options. We didn't include a sensitiv

ity analysis for the service level constraint.

Coming from the South

For the first scenario, we obtained the

following results (Table 2). The company

currently ships goods from Spain to the UK

by train on the continent, boat across the

channel, and truck in the UK. Train service

in the UK is not as good as that in France.

For the company to switch to using trucks

^

Figure 4: We used the analytical model to perform a sensitivity analysis and compare two trans

portation alternatives for a company in Spain moving products to the UK. One alternative is us

ing a short route combined with the boat and the other is to use a long route crossing the chan nel. Lll and L12 are the two segments of the long route on the continent, and L21 and L22 are the two segments in the UK. The intersection point in each case allows (if necessary) a change in

mode of transport. The same applies to the short route (Sll, S12, S21, S22).

INTERFACES 27:3 50



CHANNEL TUNNEL

Figure 5: For goods coming from the north, we use the analytical model to perform a sensitivity analysis and compare two transportation alternatives for a company in Germany moving products to the UK. One alternative is using a short route combined with the ferry and the other is to use a

long route crossing the channel. Lll and L12 are the two segments of the long route in the conti

nent, and L21 and L22 are the two segments in the UK. The intersection point in each case allows

(if necessary) a change in mode of transport. The same applies to the short route (SU, S12, S21, S22).

for the entire route, the truck company in

Spain must reduce its variable cost to just four percent over the variable cost of the

train.

To obtain the business of this company, the UK train company must reduce its vari

able cost to just two percent over the truck

cost in the UK. The company could then

use train transport for the entire route.

These results are based on the assumption that the variable cost for the boat is 25 per cent higher than the variable cost of the

Chunnel.

We next explored what happens when

the variable cost of the boat increases. It

has to be 50 percent higher than that of the

Chunnel for the company to switch from

the boat to the Chunnel for the channel

crossing. If the variable cost of the boat is

just 20 percent over that of the Chunnel,

the company is better off using the boat. It

will, however, use the train for the first

three intervals (the first two in the conti

nent and one in the UK) and change to the

truck only for the last one; that saves the

additional charge for changing modes of

May-June 1997 51



DORMER, ERNST

Continent UK

Interval 1 Interval 2 Crossing Interval 3 Interval 4

Truck

Fxi = 10

VKQl = 1.0

VKDl = 1.1

Fpju = 10

S? = 250

Ln = 750

Train

FTl = 6

VTQl = 1.0

VVdi = 1.0

FPT1 = 10

Truck

FK2 = 10

Vkqi = 1.0

VxD2 = LI

FPK2 = 10

S12 = 250

L12 = 900

Train

Fn = 6

VTQ2 = 1.0

yTD2 = lo

FPT2 = 10

Ferry Ff

= 5

Vfq = 1.0

yfD = 1.25

FPf = 10

Df =

1,000

Chunnel

Fc = 7

VCQ = 1.0

yDC = lo

Fpc = 10

Dc = 50

Truck

Fks = 10

VkQ3 = LO

VKD3 = 1.0

Fpx3 = 10

S21 = 100

Ln = 150

Train

fr3 = 6

VTQ3 = 1.0

yTD3 =.

1.05

Fpt3 = 10

Truck

FK4 = 10

Wq4 = TO

V*D4 = LO

FPK4 = 10

S22 = 600

L22 = 800

Train

FT4 = 6

WQ4 = 1.0

VTD4 = 1.05

FpT4 = 10

Table 2: In evaluating the analytical model, we used this base case of parameters for the scenario

for freight coming from the south of Spain and going to the north of the UK.

transport at the crossing point (there is an

incremental cost for changing from train to

truck before crossing). The company will

use the Chunnel instead of the boat if the

variable cost of the boat is maintained at 50

percent over that of the Chunnel, but the

Continent UK

Interval 1 Interval 2 Crossing Interval 3 Interval 4

Truck

Fxi = 10

VKQ, = 1.0

VKDl = 1.1

FpKi = 10

Sn = 250

L? = 650

Train

FT\ = 6

Vtqi = 1.0

V-rm = 1.0

FP71 = 10

Truck

Fk2 = 10

Vkqi = 1.0

VkD2 = 1.1

Fpx2 = 10

S12 = 250

L12 = 500

Train

Fn = 6

Vtqi = 1.0

Vtto = 1.0

FPr2 = 10

Ferry

Ff = 5

Vfq = 1.0

yFD = 1.25

FPF = 10

Df = 900

Chunnel

Fc = 7

Vcq = 1.0

yDC = l.o

Fpc = 10

Dc = 50

Truck

FK3 = 10

VkQ3 = 1.0

VKD3 = 1.0

Fpk3 = 10

S21 = 100

L21 = 150

Train

Fi3 = 6

VYQ3 = 1.0

Vtd3 = 1.05

FPT3 = 10

Truck

FK4 = 10

VKQ4 = 1.0

VKD4 = 1.0

Fpx4 = 10

S22 = 300

L22 = 800

Train

FT4 = 6

Vtqa = 1.0

VTD4 = 1.05

FPT4 = 10

Table 3: In evaluating the analytical model, we used this base case of parameters for the scenario of freight coming from the north in Germany and going to the north in the UK.

INTERFACES 27:3 52



CHANNEL TUNNEL

variable cost of the train is reduced to just two percent over the variable cost of the

truck. If, on the contrary, the variable cost

of the truck on the continent is reduced to

just one percent over the variable cost of

the train, the company will ship its goods

by truck and Chunnel for the entire route.

As expected, the cost of the train or truck

affects the choice of train or boat since

companies look at total transportation costs.

Coming from the North

Under this scenario, currently the com

pany uses the train for the entire route with

the ferry for the channel crossing (Table 3).

If the truck reduces its variable cost to just four percent over that of the train on the

continent, the company will switch to using the truck for the entire route. The UK train

should then reduce its variable cost to three

percent over that of the truck to make it at

tractive for the company to switch again and use the train through the entire route.

If we keep the costs of the base case (Ta

ble 3) and change the variable cost of the

ferry, the company will switch to the tun

nel when the variable cost of using the

ferry is 35 percent higher than the variable

cost of the Chunnel. In this case the opti mal combination for the company is to use

the train for three intervals and change in

the last interval to the truck.

If the variable cost of the ferry is 35 per cent greater than that of the tunnel and the

variable cost of the truck on the continent is

reduced to two percent above that of the

train, the company will switch and use the

ferry and the truck for the entire route. The

variable cost of the ferry has to be 40 per cent over that of the Chunnel for the com

pany to use the tunnel instead.

If the train reduces its variable cost to

four percent over the variable cost of the

truck in the UK, the company will use the

train over the entire route and the ferry.

Again, the variable cost of the ferry has to

be 40 percent over that of the Chunnel for

the company to use the tunnel, but if the

trucking company makes an additional re

duction in its variable cost to just two per cent over that of the truck, the company

will use the train over the entire route.

As we can see, the options for freight

coming from the north are highly sensitive

to changes in the variable cost of the ferry relative to the Chunnel. For all the scenar

ios examined, we changed the variable

costs as a function of distance while keep

ing other costs fixed. More than to obtain

normative results, our objective in the sen

sitivity analysis was to determine the po tential outcomes for different possibilities.

We didn't explore a scenario for shipments

coming from Italy, because in that case, the

short and long routes coincide, and the

comparison is simply between fixed and

variable costs for the different transporta tion modes, that is, given the fixed costs for

the ferry and the Chunnel, the variable cost

for the ferry has to be at most four percent over the variable cost of the Chunnel for it

to be attractive.

The model was very useful in helping us

to understand the trade-offs among the dif

ferent transportation alternatives. We could

analyze different scenarios with the model,

but the base cases require detailed valida

tion. Although it doesn't provide exact re

sults, the analytical model offers guidelines for defining the range of values that would

make one alternative superior. In making a

decision, companies would consider addi

May-June 1997 53



DORMER, ERNST

tional variables not included in the model

formulation.

Empirical Approach We could extend the analytical model to

include many realistic restrictions. How

ever, to obtain specific and precise results,

we compiled a database of actual costs re

lated to distance, exchange of transporta tion modes, and physical locations for dif

ferent alternatives, including conventional

train, truck, or combined transport (that is,

when the container is transferred from one

mode to another) and a ferry or boat, or the

Chunnel. In each case, we obtained data for

nine different scenarios (combinations of

transportation modes). The database con

sists of 41 possible departure cities in the

continent and three destinations in the UK

(London, Manchester, and Glasgow). We

chose the departure cities for their impor tance in Europe. The entire database is pre sented in the IHEL report [1994].

For each linkage (one continental city to

one UK city), we examined nine scenarios:

(1) Truck-Ferry 1 (departing from the

most often used port)-Truck.

(2) Truck-Ferry 2 (departing from the

second most used port)-Truck.

(3) Train-Ferry-Truck: The continental

train transfers the goods to a truck at the

ferry port; the truck crosses by ferry and

makes the delivery in the UK.

(4) Train-Shuttle-Truck: As in scenario

3, but the truck crosses the channel on the

Chunnel shuttle.

(5) Train-Boat-Truck: The continental

train transfers the goods to a boat at the

most popular port. A truck picks them up at the UK for final transport.

(6) Truck-Boat-Truck.

(7) Train-Chunnel-Train.

(8) Combined: Containers travel from

the departure city to the closest combined

platform station by truck, travel by train

through the Chunnel to the combined plat form nearest the final destination, and then

by truck.

(9) Truck-Shuttle-Truck: The truck trav

els through the Chunnel on a special car.

For two scenarios, from Milan, Italy to

London, UK and from Porto, Portugal to

London, UK, we calculated the transporta tion costs as the aggregation of all the lo

gistics costs (transportation, handling costs

when necessary, exchange of platforms, and so forth) (Tables 4 and 5). Then we cal

culated a global cost by adding the inven

tory pipeline costs. We adjusted the inven

tory pipeline cost for the delay incurred in

each case (the opportunity cost of the in

ventory in the pipeline). We obtained data on costs from transpor

tation companies (train, trucks, boat, ferry,

combination), industrial companies with in

ternational activities, and specialized con

sulting companies. We hoped to obtain re

alistic costs by taking into account the

commercial conditions. For each of the nine

scenarios, we used a combination of trans

portation and handling costs. We obtained

empirical results for the entire sample and

can draw some general conclusions as to

the best alternative:

?For western Spain and Portugal, trans

porting freight to the UK by ship is the

cheapest option. Truck or combined modes

cost 40 to 50 percent more. For areas east of

a North/South axis going through Madrid,

the various options are in close competi

tion; the worst solution is only 15 percent more expensive than the best.

?For the Atlantic and areas bordering the

INTERFACES 27:3 54



CHANNEL TUNNEL

MODE

Continent Channel

Total Cost Total Cost -

Transportation for20FF/Kg for 150FF/Kg UK Cost (in FF) Delay (in FF) (in FF)

Truck Ferry 1 Truck 10,189 3 10,456 12,162

(Zeebrugge) Truck Ferry 2 Truck 10,189 3 10,456 12,162

(Calais) Train Ferry Truck 9,958 3.5 10,370 12,259 Train Shuttle Truck 11,416 3.5 11,728 13,717 Train Boat Truck 22,452 9 23,253 28,370 Truck Boat Truck 20,288 9 21,039 26,206 Train Chunnel Train 10,204 2 10,383 11,549

Combined (Milan) 9,776 2 9,954 11,091 Truck Shuttle Truck 11,700 3 11,962 13,673

Table 4: We compared different transportation modes for freight coming from Milan, Italy and

going to London, England.

channel between Nantes, France and the

Netherlands, truck is the best option. The

further north the final destination is in the

UK, the more attractive the combined

option becomes.

?For Italy, all modes are competitive, but

shipping by train is usually cheapest. Com

panies must weigh the cost advantage care

fully, because the train offers poor service

in the UK.

?For East Germany, Austria, and the rest

of France, truck and the combined mode

compete closely. ?For most of Germany, truck offers an ad

vantage. However, for final destinations in

the north of the UK, sending freight by

MODE

Continent Channel UK Transportation Cost (in FF) Delay

Total Cost for 20FF/Kg (in FF)

Total Cost for 150FF/Kg (in FF)

Truck Ferry 1 Truck 13,424 4 13,780 16,054

(Cherbourg) Truck Ferry 2 Truck 14,202 4 14,558 16,832

(Calais) Train Ferry Truck 15,169 4.5 15,570 18,127 Train Shuttle Truck 15,367 4.5 15,767 18,326 Train Boat Truck 10,702 7 11,325 13,304 Truck Boat Truck 8,072 7 8,695 12,675 Train Chunnel Train 17,082 3 17,349 19,055

Combined (Bordeaux) 12,090 3 12,357 14,063 Truck Shuttle Truck 15,729 4 16,085 18,359

Table 5: We compared different transportation modes for freight coming from Porto, Portugal and

going to London, England.

May-June 1997 55



DORMER, ERNST

Figure 6: Transportation alternatives vary for goods going to London from different locations in the Continent. Each area indicates the transportation alternative that minimizes total cost. For

Area 1, the boat and truck combination dominates. In Area 2, the best option is boat with either truck or train. In Area 3 all options are competitive. For Area 4, the ferry-truck combination domi

nates. In Area 5, the combined (Chunnel) option is the best. In Area 6, the combinations truck/

ferry/truck, all train, or combined mode are competitive. Finally, in Area 7, the best option is

truck/ferry/truck.

INTERFACES 27:3 56



CHANNEL TUNNEL

ship is more attractive. The state-owned

train company in Germany and the harbor

in the north of Germany provide combined

low-cost service.

For shipments to London, we identified

seven areas in the continent (Figure 6). For

area 1, boat and truck (scenario 6) and less

often boat and train (scenario 5) are the

cheapest options. For area 2, boat with truck

or train is usually most competitive. For area

3, all options are competitive. For area 4, the

only competitive option is ferry-truck (sce

narios 1 and 2). For area 5, the combined op tion dominates. For area 6, truck/ferry/truck, all train, and combined are all competitive. For area 7, the best solution is truck/ferry/ truck (scenarios 1 and 2), but the combined

option (scenario 8) is also competitive. Conclusions

There are no generic solutions to the lo

gistic implications of the Chunnel. Each in

dustry and each company within an indus

try will have its own limitations and

constraints. In some companies, distribu

tion costs are high and significant (relative

to sales) and in others, they are not. How

ever, by developing general frameworks for

the issues and analytical models for specific cases, we offer a tool that will allow com

panies to evaluate and understand the ad

vantages and disadvantages of the Chun

nel. The analytical models supported with

empirical data allow companies to quantify the impact.

One company heavily affected by this

study is the French train company in

charge of freight (Fret SCNF). The head of

its international department recognized that our results are very useful for its stra

tegic thinking and permit it to refine some

of its marketing and commercial decisions.

The opening of the channel tunnel offers

an alternative that can improve freight dis

tribution in Europe. Transportation solu

tions are not better or worse in isolation

but in the context of the overall logistics function. Our research summarizes the

issues that are relevant from a global

logistics point of view.

APPENDIX The general analytical model requires the

following notation.

Define:

/ = subscript that indicates the intervals, i

= 1,2,3,4.

; =

subscript to indicate the mode of trans

portation where t is for train and k is for

truck.

/ = subscript to indicate the linkage be

tween the UK and the continent, that is, / for the ferry and c for the Chunnel.

Q =

predefined quantity to be shipped be

tween the Continent and the UK.

Qji =

quantity of shipment with the mode ; for interval i.

Qi =

quantity of shipment through the

linkage.

Dji = distance on mode ; for interval i.

Di = distance on the linkage, that is, ferry

or Chunnel.

Fji = fixed cost for using mode ; in interval i.

Ff = fixed cost for using the linkage /.

Vjqi = variable cost for using mode j

as a

function of the quantity Q in interval i.

V?i = variable cost for using mode ; as a

function of the distance d in interval i.

Su, S12 = are the two short intervals in the

Continent.

S2i, S22 = are the two short intervals in the

UK.

Lu, L12 = are the two long intervals in the

Continent.

?21/ ^22 = are the two long intervals in the

UK.

6j =

binary variable equal to 1 if the com

pany uses mode / of transportation, 0

otherwise.

May-June 1997 57



DORMER, ERNST

?f =

binary variable equal to 1 if the com

pany uses the ferry, 0 otherwise.

ytki =

binary variable equal to 1 if there is a

change of platform from train to truck at

the end of interval i, 0 otherwise.

y m = binary variable equal to 1 if there is a

change of platform from truck to train at

the end of interval i, 0 otherwise.

Fpji = fixed cost for changing platforms us

ing mode ; at the end of interval i.

(??i =

speed of mode / in interval i.

Ti = time it takes to cross between the UK

and the continent by linkage /.

Minimize

3 4

FkiSk + X (hi + Fpk?jtki + X VkqtQki

+ I VMiDki + Fn6t + X (Fti + Fpti)ykti i=\ i=2

4 4

+ 1 VtqiQti + I VtdiDti 1=1 1=1

+ (Ff+VfdDf)?f+VfqQf

+ (Fc + VcdDc)(l -

6f) + VcqQc

+ Fpf?f + Fpcytk2 + Fpcjka.

Subject to

Qn s Q6t,

Q*i s Q?k,

Qf =

Q6f

Qn + Qh * Q,

Qa + Qn = Q,

Qf + Qc * Q,

Qo + Q? ^ Q,

On + Qh s Q

Qn -

Qt2 s QTfH,

Qm -

Qk ^ Qr?i,

Qf2 -

Qn ^ Qy?t2/

Qki -

Qk3 =? Qym, (3)

Qt3 -

Qt4 ^ Qjtk3,

Qks -

Qk4 ^ Qjkt3

Dn + Dkl > SuSf,

Dt2 + Djt2 ^ Su6f,

Dn + Dtt ^ L?(l -

6f),

Dt2 + Dk2 > L12(l -

?,), (4)

Dt3 + Dt? > S2l?f/

D?4 -h Djt4 >

S226f,

D?3 + Df? ^ L2i(l -

?f),

Dt4 + Dk4 > L22(l -

?,).

(5) Q Lm

Vi,/Am =

11,12,21,22

sm Q

IZ^ + i/T/+(l- fi/)Tc i=l j=t,k ?fi

(6)

< Required Time.

?f A ?,- G {0,1} V;

7f;iG{0,l}Vf =

l,2,3A V;. (7)

The first part in the objective function cap tures the fixed and variable costs of using the

truck in each of the intervals. Wlien the truck is used for any two consecutive intervals, no

extra fixed costs are incurred (only the vari

able costs). This condition is captured by the

binary variable 6t and ytJd. The same is true

for the train in the second part of the objec tive function. The third term in the objective function captures the cost of using either the

ferry (6f = 1) or the tunnel (?f

= 0). The re

maining terms in the objective function cap ture the costs incurred for changing the logis tics platforms at the crossing.

Constraints (1) and (2) make sure that the

INTERFACES 27:3 58



CHANNEL TUNNEL

predetermined quantity Q will be delivered

by any of the possible alternatives. Constraint

(3) captures the changing of platforms and

constraint (4) determines the distances by mode of transportation according to the pre defined short or long distances. It is assumed

that S - - is smaller than L for any subinter

val. Constraint (5) makes sure that if quantity Q is going to be delivered by train (or by truck) in interval i then the corresponding

distance will be traveled by train (or truck). Constraint (6) is a service constraint for the

rninimum lead time required. Finally, con

straint (7) is the binary constraint.

References

Journal de la Marine Marchande 1994, "ADPF: Les liaisons transmanche/' No 393 (February).

Bonnaud, L. 1994, Le Tunnel sous la Manche: Duex Si?cles de Passion, H?chete, Paris.

Coton, M. 1994, "La manche," FRET Magazine, No. Special Tunnel, No. 60 (May), pp. 38-47.

Institut des Hautes Etudes Logistiques 1994,

"Logistics impact of the Chunnel," cahier de

IHEL, No. 2 (November), ESSEC, Cergy Pontoise, France.

Merchant, J. E.; Knowles, J. B.; and Acheson,

J. M. 1991, 'The Chunnel and the changing face of a UXunified European market," Pro

ceedings of the seventh International Logistics Congress, Society of Logistics Engineers, French Chapter, Paris, pp. 198-208.

Project Cost-CEE 1993, "Rapport final d'action: Evaluation des effects du tunnel sous la man

che sur le flux de trafic," Office of Official

Publications, European Community, Luxem

bourg.

Sloan, A. K. 1991, "Eurotunnel vision: The new

focus on site selection, shipping routes, and

business travel," Journal of European Business,

Vol. 2, No. 3 (January-February), pp. 8-12.

Vicherman, R. W. and Graven, J. 1986, "The

fixed channel link: Consequences for regional

growth and development," Regional Studies Association Conference, London, March 21.

Marie France Lagraulet, Chef du D?par tement International, Direction du Fret,

SNCF, 44, Rue de Rome, 75008 Paris,

France, writes,

"Professors Dornier and Ernst developed a

study for the Logistics Impact of the Chan

nel Tunnel in Europe. Before this study was done, many ideas existed about the

economics and financial aspects of the

Channel Tunnel but no serious approach had been taken to the logistics implications of this new rail infrastructure.

"The study allowed a close interaction

between academics and logisticians in Eu

ropean companies, and I would like to ac

knowledge that the results presented are

very useful for our strategic thinking and

permit us to refine some of our marketing and commercial decisions."

May-June 1997 59



the logistics impact of the channel tunnel

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