by The impact on growth of investment in transport infrastructure varies in the different stages of a country’s economic development. In low-income countries, investment in basic infrastructure provision can make a very large difference in access to education, jobs and services. As incomes rise, better transport services are needed to support the growth of business activities, exports and value creation, and the focus for infrastructure investment shifts to supporting these sectors of the economy. In more mature economies, priorities tend to shift towards addressing issues of congestion and bottlenecks in reasonably complete networks, the upgrade and maintenance of existing assets, and providing for technological innovation. Typically, the economic impact of transport infrastructure is more transformative at lower levels of development, and the incremental impact of new investment decreases at more advanced stages of development. Transport infrastructure plays a critical role in the transition from a middle- to high-income economy. Theoretical and empirical studies have underscored the positive relationship between high-quality infrastructure and economy-wide productivity. This relationship is underpinned by a number of economic mechanisms triggered by improvements in transport infrastructure, including the following:
- High-quality infrastructure is a precondition for the provision of efficient transport services for both freight and passenger movements, which in turn supports core economic activities and removes geographic barriers to competition.
- Well-functioning logistics systems facilitate trade through lowering access costs to international markets and by improving the competitiveness of domestic firms.
- Passenger transport connectivity enhances the productive capacity of the economy by widening and deepening labour markets and through agglomeration gains, facilitating industrial specialisation and enabling face-to-face interactions between businesses and specialised workers in high-value service sectors of the economy.
- Infrastructure can be an effective policy tool to address social and territorial imbalances by connecting rural and remote areas to larger centres of production and consumption, creating more economic opportunities for residents and reducing out-migration.
When new transportation infrastructure is built, companies take advantage of the new capacity by adjusting their logistics processes and supply chains to improve service and reduce costs. In the short term, they change purchasing and operations behavior. In the longer term, they make input substitutions and reconfigure production processes to take advantage of transportation system improvements. For example, new transportation connectors, gateways, and intermodal links allow shippers to source from more distant suppliers at a lower cost; to reduce transportation costs by forming “hub and spoke” networks that connect multiple distribution points through central operating hubs; and to reduce inventory by switching from bulk shipments to smaller, more frequent orders.
Here are some other ways shippers benefit from adjusting their supply chains in response to more efficient transportation systems:
Lower sourcing costs. Companies want to source from a more diverse base of lower-cost suppliers because it increases their margins. Often this involves offshore sourcing, a strategy that requires managing logistics and transportation over long distances. The lower transportation and logistics costs achieved through efficient freight flows can make it economically rewarding for companies to source from overseas suppliers. High transportation and logistics costs, caused in part by inadequate infrastructure (and the resulting congestion), can make it uneconomical for shippers to do so.
Lower transport costs and an efficient transportation network also help shippers source from fewer locations. Because it is more affordable to ship longer distances from each facility, they are able to reduce the number of plants they operate and thereby increase their return on assets.
Reduced fleet, warehousing, and inventory costs. Infrastructure improvements increase a transportation system’s capacity and reduce or eliminate congestion, thus improving the system’s reliability. This, in turn, reduces variability in transit times, making it possible to predict on-time performance with greater accuracy. As a result, shippers need fewer vehicles to maintain service levels on congested roadways and can downsize their fleets.
Improved reliability also allows shippers to consolidate warehouses that had been holding inventory to buffer against the congestion-related unreliability of inbound shipments. Moreover, when line-haul transportation flows freely (and therefore predictably), shippers can replace traditional warehouses with efficient cross-dock operations that keep inventory in transit instead of putting it in storage.
With better transit time visibility that is, information about where shipments and vehicles are located and when they will arrive at their destinations shippers can safely postpone final assembly or configuration. This production strategy allows them to not only decrease inventory but also increase customer satisfaction (and sales) by providing a broader product mix with shorter lead times.
Increased revenue. Perhaps the biggest albeit indirect supply chain benefit of a transportation infrastructure project is the potential enhancement of revenues through the adoption of new business models. Shippers can take the savings they realize as a result of infrastructure improvements and reinvest in more competitive pricing. Infrastructure improvements can also help companies reach a broader market, facilitating increased sales. Alternatively, they may decide to offer higher service levels (shorter order-to-delivery lead times) instead of, or in addition to, pocketing the savings.
It is not easy to quantify the relationship between infrastructure investment and increased revenues for shippers. There is no question, however, that such investments improve supply chain efficiency. When one considers that some of the most successful companies are those that use their supply chains as competitive weapons Zara, Wal-Mart, Dell Computer, and Amazon.com are just some that come to mind it seems likely that investing in transportation infrastructure will provide economic benefits, including sales growth, for the companies using that infrastructure.
Quantifying the benefits
Now that we have a sense of the types of supply chain benefits that can result from infrastructure improvements, we can quantify the impact of some of those benefits.
When the consulting and research firms Boston Strategies International (then Boston Logistics Group), Cambridge Systematics, and the Economic Development Research Group collaborated on a comprehensive economic study, Guide to Quantifying the Economic Impacts of Federal Investments in Large-Scale Freight Transportation Projects, for the United States Department of Transportation in 2006, they concluded that the supply chain benefits of an infrastructure investment that reduces direct transport costs by 10 percent has the potential to reduce a company’s operating cost by an additional 0.5 percent. This estimate was based on a sample of a wide variety of industries.
Since that report was published, however, a number of significant changes have pushed transportation and logistics costs even higher. We estimate that increases in the price of fuel have raised U.S. companies’ transportation costs from roughly 5 percent to about 6 percent of their total expenditures. Meanwhile, safety stocks increased from 20 percent to 25 percent of inventory as a result of more offshoring, which made it necessary for companies to carry more buffer stock. However, labor-cost inflation in China has cut into the savings that drew companies to source there. In our estimation, the cumulative effects of these and other relevant changes have increased the potential supply chain benefit of the scenario described above to 1.0 percent of operating costs. Note that this savings does not account for the additional revenue that can be derived from improved transportation infrastructure by allowing shippers and carriers to increase service levels, convert cost savings into price reductions, and build ondemand supply chains.
This revised estimate by type of infrastructure improvement and its resulting supply chain benefits. In this analysis, the hypothetical infrastructure investment reduced transportation costs by 10 percent. If a company responded to this improvement by optimizing its supply chain (through such steps as switching to more distant but lower-cost suppliers, consolidating plants, using cheaper transportation modes, and reducing shipment size), we believe that it could see an additional 0.5-percent reduction in operating costs. This estimation is based on Boston Strategies International’s strategic sourcing survey of 182 companies in 13 service and product industries, its analyses of low-cost country sourcing economics, and a major consumer goods company’s actual experience with plant consolidation. A transportation infrastructure investment that reduced transportation costs by a higher or lower percentage would yield higher or lower benefits.
Furthermore, if that infrastructure improvement increased capacity by 10 percent, we believe that the resulting fleet and warehouse rationalization and reduction in safety stock would amount to a 0.1-percent reduction in operating cost. This estimate is based on Boston Strategies’ analysis of the inventory of 29 companies in six different types of supply chains and inventory and fleet benchmarks from its analyses of four companies’ logistics networks; data from published sources such as CSCMP’s annual State of Logistics study; and fleet data collected by the American Trucking Associations.
Finally, if that infrastructure improvement increased in-transit visibility by 10 percent, and the company takes advantage of this to implement postponement, it will be able to reduce operating costs by at least 0.2 percent. This reduction in operating costs is based on reductions in stockouts experienced at retailers such as Wal-Mart and consumer packagedgoods suppliers such as Procter & Gamble.
While the aforementioned examples are from the United States, the same principles apply to major economies worldwide, especially large countries and economic areas where shippers can take advantage of hub-and-spoke infrastructure to design more economically efficient supply chains.
Why are supply chain benefits ignored?
Despite these demonstrated benefits, government transportation officials and their consultants rarely account for short-term and longterm supply chain effects in their financial evaluations of freight transportation investments. There are two main reasons why this is so.
First, whereas the infrastructure priority following World War II was to construct highways, today’s freight movements are substantially different. Typically, freight travel involves longer distances than passenger travel, and thus it involves more governmental jurisdictions in infrastructure decisions.
Furthermore, private sector stakeholders own many key rail and marine assets, and these companies do not have standard procedures for participating in the public funding and authorization process. In addition, many freight movements today are multimodal, and infrastructure decisions for this type of traffic require deeper transportation experience and more complex analytics than had ever been needed for passenger traffic infrastructure.
Second, decision makers don’t always have the time to consider every aspect of every potential infrastructure project, especially the smaller ones. Evaluations are complicated because there are many types of costs, benefits, and impacts involved. For example, there are at least eight major types of potential consequences of infrastructure projects:
- Environmental impacts
- Safety and security benefits
- Public operating and capital expense benefits
- Direct user or carrier benefits
- Direct shipper benefits (which include access to terminals and possibly more efficient modes of transportation that could save time and cost)
- Economic impact (jobs, industry and market growth)
- Supply chain benefits
- International economic benefits (through support of international trade)
