A model to calculate the cost of logistics at a macro
level: a case study of South Africa
F.J. Botes, C.G. Jacobs & W.J. Pienaar A B S T R A C T The article identifies the need to calculate the cost of logistics in South Africa. Current data sources do not fulfil this purpose; for example, figures on the cost of logistics published in South African national accounts are becoming less useful over time as communications becomes an increasingly larger component of the transport, storage and communication sub-sector for which figures are available. A Logistics Cost Model was developed for the purpose of calculating the cost of logistics in South Africa. The model enables relatively easy updating of the data to predict the costs of logistics in future years, as well as time series comparisons by retrofitting historical data to the model. It also enables updating of the results with improved data as the study progresses, as well as enhancing the performance of sensitivity analysis of key input parameters. Based on the output of the model, it can be deduced, firstly, that the cost of logistics represents a considerable percentage (14.7%) of the gross geographic product, and secondly, that the propensity to outsource logistics tasks is low (33%) and that about two thirds of all logistics tasks are currently undertaken inhouse INTRODUCTION Need to calculate the cost of logistics A number of studies, including those of the Reynders Commission (1972: 489), Dehlen (1993: 10), Porter (Monitor Group 1995: Appendix), Naude (2001: 142) and Pretorius (1997), have highlighted high logistics cost as one of the factors that inhibit South Africa's competitive advantage. Yet South African transport policy and transport plans focus almost entirely on passenger transport rather than on freight transport (Radebe 2005). Although the importance of lower logistics cost has recently Dr Botes, Mr Jacobs and Prof. Pienaar are in the Department of Logistics, University of Stellenbosch. E mail: fjbotes@sun.ac.za 1 Southern African Business Review Volume 10 Number 3 been noted at the highest level (South Africa 2005), government still does not appreciate the full extent of the problem and the need to implement an action plan to address current deficiencies in the logistics system. In order to understand and appreciate the full extent of the cost of logistics in the South African economy, it is imperative that the logistics cost be available. This would be of benefit to a number of stakeholders. Firstly, government departments and parastatals should have an interest in the overall cost of logistics as (1) it is an indicator of the overall state of the economy, (2) logistics has a direct impact on the competitive advantage of a country and is thus an important input in the development of trade policy, and (3) it should be an input in the development of transport policy, as it provides information on the cost of transport per commodity per mode. Secondly, knowledge of logistics cost would benefit producers and marketers who seek to compare the cost of logistics of their commodity or sector with that of other commodities or sectors locally or abroad. Furthermore, it serves to indicate the relative cost of specific components in the logistics chain, which enables such companies to focus their efforts on the particular aspects where costs are highest. Thirdly, companies that provide third-party logistics would be able to view the size of different markets, for example, the value of the transportation or warehousing cost for different commodities and the modal composition of the transportation of different commodities. It would also provide a benchmark to such firms that would enable them to monitor their relative competitiveness in a certain market segment. Current sources of logistics data There are currently two organisations in South Africa that publish official data on the cost of logistics, namely the South African Reserve Bank (SARB) and Statistics South Africa (StatsSA). The SARB lists logistics cost in the Quarterly Bulletin under the `Transport, storage and communication' heading (SARB 2004: S-111). StatsSA lists total volume (tonnage) of goods transported by road and rail, as well as the total gross income of third-party road transport providers and Transnet (StatsSA 2003a: 16.10). Although the accuracy of the data published by these sources is not disputed, the following deficiencies have been identified when the data are to be used for the logistics planning purposes listed: . The aggregation of transport, storage and communication cost in the SARB official published data is meaningless for logistics planning purposes. . Both the SARB and StatsSA base transport and storage costs on total gross income of primary service companies (namely, third-party providers). This means that transport and storage that are provided inhouse, which in fact constitute a major share of total logistics cost, are excluded from the official published figures. 2 A model to calculate the cost of logistics at a macro level: a case study of South Africa . The SARB definition of `transport' includes both freight and passenger transport, whereas the transportation of passengers does not form part of logistics. . Income of companies that provide both passenger-related services and goods- handling and storage facilities (for example, the Airports Company of South Africa) is included in the definition of `storage'. . StatsSA figures exclude cargo transported by air and sea (coastal shipping). Because there is no generally accepted benchmark or standard source that publishes logistics costs in South Africa on an annual basis, the results of ad hoc studies are quoted from time to time. Raath, for example, estimates logistics and transport costs in South Africa at 17% of the gross domestic product (GDP) (Raath 2004: 21). Given that South Africa's GDP was R1 209 497 million in 2003 (SARB 2004), the total logistics cost in South Africa, according to that estimate, amounts to R205 615 million. Apart from the fact that no scientific methodology is described to indicate how this figure was arrived at, it is also not broken down into `transport' and `storage' components. In the light of the foregoing discussion, there is thus a need (1) to provide an unambiguous definition of `logistics costs' and (2) to calculate logistics costs for South Africa in terms of a generally accepted methodology. Literature review on current methodology Delaney (2003) popularised the quantification of logistics costs, which is presented annually for the United States in the State of Logistics Report. The methodology used in this ongoing study to quantify the inventory-carrying cost component of logistics cost is based on the Alford-Bangs formula (Alford & Bangs 1955: 396397), whereas transportation cost is calculated by means of Smith's methodology (Smith 1986: 4). The 2003 State of Logistics Report quotes the logistics costs in the US at $910 billion, which is about 8.7% of GDP (Delaney 2003). Although the State of Logistics Report is currently the generally accepted benchmark of logistics cost in the United States, it is sometimes at odds with other similar reports and benchmarks. For example, it indicates that warehousing costs remained unchanged during the past three years, whereas other reports, such as that by Davis Logistics Cost and Service Database published by Davis (2004), show an increase driven by increased distribution complexity. The latter is an ongoing annual survey in which manufacturers, distributors and retailers participate to receive a customised benchmarking report of logistics cost and service. Although these popular benchmarks sometimes offer conflicting data, they suffer from the same inherent constraint, namely that they rely on surveyed information supplied by companies. Firstly, the accuracy of the output is entirely dependent on the reliability of the information supplied by sources, which can often not be verified. In 3 F.J. Botes, C.G. Jacobs & W.J. Pienaar this regard, it is well known that many companies are not aware of the total cost of inhouse services, of which logistics is no exception. This is not because companies are ignorant about such costs, but financial control systems are often designed to ensure financial control rather than for wider costing and planning purposes. In addition, the definition of cost items may also differ between companies, which makes it extremely difficult to obtain a uniform dataset. Secondly, the sample size may not be sufficiently representative to allow estimation of the national total. This is due to the reluctance of many companies to participate in such surveys on a regular basis. It was, for example, noted in a major transportation policy study that ``it was often easier to find data on SA industries in the USA than in SA. The data that do exist are often inaccurate or out of date'' (Monitor Group 1995: 4). Thirdly, if the study is to be repeated annually, the survey should ideally obtain data from exactly the same companies each year. This is difficult to achieve, as some companies disappear or may withdraw from the programme, which means that the study cannot be repeated exactly from year to year, casting further doubt on the accuracy of the data. Fourthly, it is extremely time consuming, both for the surveyor and for those surveyed, to compile and analyse the data. Based on the literature review, it can be concluded that practices described in the literature to calculate logistics cost have proved to be unsuitable for general application. For this reason, there is a need to develop a generally accepted methodology to calculate the cost of logistics in South Africa. Terms and definitions There is a need to define the following key terms for the purpose of this study: . `Commodity' is the physical output of production, mining or cultivation, as well as waste and defective goods returned to the supplier and scrap. . `Throughput' represents the total volume of commodities that are transported and stored in the study area. This includes commodities that have both origin and destination in the study area, as well as transport, handling and storage of imported and exported commodities from the point where they pass through a border control point. The activities in a seaport or airport up to the point where the commodities are loaded on to a vessel or aeroplane are thus included. Although the throughput of specific commodities is measured in a variety of units (such as weight, units or volume), this multitude of units is converted to a common physical unit, namely `ton equivalent', for the purposes of this study (for example, one litre of fuel is equal to 0.8 kg). . `Logistics' is considered to be that part of the supply chain process that deals with the transportation, warehousing, and inventory administration and management 4 A model to calculate the cost of logistics at a macro level: a case study of South Africa of commodities between the origin (that is, where they are produced, mined or cultivated) and the destination (that is, the point of delivery to the consumer either as input to further production processes or for consumption). By definition, this excludes the cost of passenger transport, costs such as transport, storage, packaging and handling of mail and luggage, as well as the storage and transport tasks that occur during the production, mining or cultivation process. The extent of logistics within the supply chain process can be explained by means of the following example. Once iron ore enters the smelter, it exits the logistics chain and enters the production process. After the hot rolled steel is produced, it again enters the logistics chain as an altogether different commodity, but exits again when it enters the body-pressing plant of a motor manufacturer. The entire process ends when a consumer finally takes delivery of the commodity, which may consist of many individual commodities that are dealt with separately until they are finally assembled into one product and delivered to the client. . `Cost' means the direct financial cost of performing logistics tasks that will be reflected in national accounts, up to the point where the final consumer purchases the commodity. It therefore excludes external costs, for example, air pollution, noise, vibration, or other disutilities that are not for the account of any party. DESCRIPTION OF THE LOGISTICS COST MODEL Model overview A Logistics Cost Model (LCM) has been developed in order to calculate the logistics cost for South Africa. The LCM is unique in a number of ways and is an improvement on existing approaches for the following reasons: . The LCM employs a `bottom-up' approach to compute logistics cost by aggregating detailed commodity-specific data, including throughput, transport and storage characteristics, as well as transport and warehousing unit costs. The aggregation of logistics costs is based on primary input elements (the amount produced of a specific commodity) and the cost of performing specific tasks (such as transport, storage and handling) of that commodity in the logistics chain. Validity of output data can thus be verified at the primary source before any aggregation takes place. This departs from existing methods that extrapolate logistics cost data that were collected by means of sample surveys. . Although individual data elements are sourced from readily available primary sources mostly census data and industry/sector analyses they do not exclude the undertaking of specific surveys to further enhance the quality and accuracy of input data. However, there is no need to conduct the same surveys every year in order to produce accurate output. Once set up, the LCM subsequently focuses 5 F.J. Botes, C.G. Jacobs & W.J. Pienaar research on the refinement of individual input elements. It would even be possible to add more detailed layers to the LCM in order to undertake a detailed analysis of a particular industry. . The fact that the LCM is able to run off an MS Excel spreadsheet platform means not only that different sensitivity analyses can easily be performed, but also that easy updating of data is possible if more reliable figures are obtained. This would even allow the construction of a past record of logistics costs by retrofitting historical data to the model. . Data are presented per mode (collection/distribution by road, long haul transport by road, rail, air, coastal shipping and pipeline), per cost component (transportation, warehousing, inventory management, holding cost, as well as administration and management) and per industry/sector (as defined in terms of the standard classification of primary (agriculture and mining) and secondary (manufacturing) sectors. The LCM consist of four sub-models, namely the transport cost sub-model, warehousing cost sub-model, inventory cost sub-model, and management and administration cost sub-model. The following section provides a detailed description of each of the sub-models. Total logistics cost TLC is the national total logistics cost from (1.1) TOTC is the total overall transport cost from (2.9) TSHC is the total shipping and handling cost from (3.11) TIC is the total inventory cost from (4.9) TMAC is the total management and administration cost from (5.3) TLC = TOTC + TSHC+ TIC + TMAC (1.1) Transport cost sub-model Transport cost is calculated as a function of throughput, modal usage, transport distance and the unit cost of transport per ton throughput. Tonnages of commodity transported are calculated by estimating the percentage of the total throughput transported per specific mode and multiplying the estimated percentage by the actual tonnages per commodity: ET ik is the estimated tonnage of commodity i transported by mode k (2.1) EP ik is the estimated percentage of commodity i transported by mode k (2.2) AT i is the actual total tonnage of commodity i (2.3) ET ik = EP ik . AT i (2.4) 6 A model to calculate the cost of logistics at a macro level: a case study of South Africa The total overall transport cost is the sum for all commodities of the total transport cost per commodity. The total cost of transport per commodity is the sum of the cost of transport per mode for the commodity, which in turn is the estimated tonnage transported per mode, multiplied by the mode unit cost in Rand per ton- kilometre, multiplied by the mode average distance transported of each commodity in kilometres. The subscript indices that will be used are i for commodity family/commodity and k for the transport mode: TTCP i is the total transport cost per commodity i (2.5) MCTK k is the modal unit cost per ton-kilometre per transport mode k (2.6) PATD ik is the commodity-specific average distance transported per commodity i by mode k (2.7) TTCP i = P n k 1 ET ik . MCTK k . PATD ik (2.8) TOTC is the total overall transport cost TOTC = P m i 1 TTCP i (2.9) Warehousing cost sub-model Warehousing cost is a function of the duration and volume of storage, the unit cost of storage and the handling cost of goods. For each commodity, the average intra- seasonal storage time is estimated as the time-weighted difference between time of production and time of consumption. (It is assumed that the quantities produced and consumed are equal in the long run.) The subscript indices that will be used are i for commodity family/commodity and j for the month of the year: p ij is the fraction of commodity i produced in month j (3.1) c ij is the fraction of commodity i consumed in month j (3.2) IST i is the intra-seasonal storage time in months of commodity i IST i = P 12 j 1 j . p ij
P 12 j 1 j . c ij (3.3) The total average storage time for a commodity is the sum of intra-seasonal storage time as well as the average time spent at storage facilities for consolidation purposes: TAST i the total average storage time in months for commodity i (3.4) CC i is the collection consolidation time in months for commodity i (3.5) DC i is the distribution consolidation time in months for commodity i (3.6) TAST i = IST i + CC i + DC i (3.7) 7 F.J. Botes, C.G. Jacobs & W.J. Pienaar The storage cost per ton is the commodity of the storage cost per ton-month and the total average time spent in storage. SCTM i is the storage cost per ton-month (3.8) SCPT i = SCTM i . TAST i (3.9) The cost of storage and handling per ton of commodity is the sum of the storage cost, handling cost, and warehousing administration and overhead cost per ton of commodity: SHCPT i is the storage and handling cost per ton for commodity i HCPT i is the handling (loading and off-loading) cost per ton for commodity i WAOHPT i is the warehousing administration and overhead cost per ton for commodity i SHCPT i = SCPT i = WAOHPT i + HCPT i (3.10) The total storage and handling cost for all commodities that were stored and handled is the sum of the cost for storage and handling per ton of commodity (3.10) multiplied by the actual tonnage of commodity (2.3): TSHC = P n i 1 SHCPT i . AT i (3.11) Inventory cost sub-model Inventory cost is a function of the value of commodities, the volume of goods transported and stored, the time in transit and the time value of money. The inventory cost per commodity i is the prevailing annual interest rate, multiplied by the average value per ton of commodity, multiplied by the sum of the ton-years spent in transit and in storage: AMTS k is the average modal travel speed in km/h (4.1) TTPT ik = PATD ik / AMTS k / 24/ 365 is the transit time per ton of commodity i per mode k (4.2) STPTY i = TAST i /12 is the storage time per ton of commodity i in years (4.3) TTT = P n k 1 TTPT ik . ET ik is the total ton-years in transit of commodity i (4.4) TST i = AT i . STPTY i is the total ton-years in storage for commodity i (4.5) AVPT i is the average value per ton of commodity i (4.6) IR is the prevailing interest rate per year (4.7) IC i = IR . AVPT i . (TTT i + TST i ) is the inventory cost per commodity i (4.8) 8 A model to calculate the cost of logistics at a macro level: a case study of South Africa The total inventory cost is the sum over all commodities of the inventory cost per commodity TIC = P n i 1 IC i (4.9) Management and administration cost sub-model Total management and administration cost per ton of commodity is the warehousing administrative and overhead cost per ton of commodity, plus the sum for all modes of the modal transport cost per ton of commodity, multiplied by the commodity-specific average transported distance for the mode, multiplied by a mode-specific administrative percentage: MAPC k is the mode-specific administrative percentage of cost for mode k (5.1) MACT i = WAOHPT i + P n k 1 MCTK k . PATD ik . MAPC k (5.2) Total management cost for all commodities is the sum for commodities of the total management and administration cost per ton of commodity (4.2) multiplied by the actual tonnage of commodity (1.3). TMAC = P n i 1 MACT i . AT i (5.3) CALCULATION OF THE LOGISTICS COST IN SOUTH AFRICA FOR 2003 Introduction The following application of the LCM calculates the logistics cost for South Africa in 2003. Apart from demonstrating the practical worth of the results to interested parties in South Africa, it could also serve as a guideline for constructing similar models in other study areas. The description of the methodology of the application of the model, the sources of the input parameters for each of the sub-models, as well as the output and results of the model are outlined in the following sections. Determine the throughput Throughput is the primary input parameter on which all other cost calculations are based. For the purpose of calculating throughput, commodities are listed in three main categories (see Table 1). The two primary sector categories are mining and agriculture, whereas the secondary sector includes all industry (namely, the manufacturing sector). Further commodity breakdowns are in accordance with those of officially published data. In the case of `minerals', the Department of Minerals and Energy classification (Jonck, Van Averbeke, Harding, Duval, Mwape & Perold 2003) was used; for `agriculture', the classification of the Department of Agriculture (Brouwer 2004) was used, and for `manufacturing', the Standard Industrial Classification (SIC) as applied by StatsSA 1 was used. 9 F.J. Botes, C.G. Jacobs & W.J. Pienaar Table 1: List of commodities PRIMARY SECTOR SECONDARY (MANUFACTURED/ PROCESSED) MINING PRECIOUS METALS AND MINERALS ENERGY MINERALS Coal Hydrocarbon fuels Uranium NON FERROUS METALS AND MINERALS Aluminium (metal) Aluminium (concentrate) Aluminium (refined) Antimony Antimony (processed) Cobalt Copper Lead Lead (refined) Nickel Titanium Zinc Zirconium Tungsten Magnesium Tin FERROUS MINERALS Chromium Iron Ore Manganese Silicon Vanadium INDUSTRIAL MINERALS Aggregate and sand Alumino-silicates Dimension stone Fluorspar Limestone and dolomite Magnetite Phosphate rock Processed phosphates Special clays Sulphur Vermiculite Other AGRICULTURE HORTICULTURE Apples Apricots Grapes (domestic market) Grapes (export) Grapes (process) Grapes (dried) Graped (pressed) Pears Peaches Plums Prunes, cherries, quinces Figs Strawberries, berries Watermelon, melon, other summer fruit Avocados, bananas Granadillas, litchis Guavas, loquats Mangoes, pawpaw Naartjies Pineapples Oranges Lemons Grapefruit Fruit (dried) Vegetables FIELD CROPS Maize Wheat Grain sorghum Groundnuts Sunflower seed Soya beans Oats Barley Rye Dry beans Cowpeas, drypeas, lentils Chicory Sugar cane Chicory Cotton (lint) Cotton (seed) Cotton (seed-cotton) Wattle bark Lucerne, hay Tobacco LIVESTOCK Red meat White meat Butter Cheese Condensed milk, powdered milk Fresh milk IRON AND STEEL BASED PRODUCTS Basic iron and steel products Basic non-ferrous metal products Fabricated metal products Machinery and equipment Electrical machinery and apparatus Motor vehicles, parts and accessories Miscellaneous products CHEMICALS AND PETROLEUM BASED PRODUCTS Industrial chemicals Other chemical products Petroleum products Rubber products Plastic products Non-metallic mineral products PROCESSED FOODS AND BEVERAGES Canned and prepared meats Dairy products Canned fruit and vegetables Fish products and similar foods Vegetable and animal oils and fats Grain mill products Bakery products Sugar Chocolates, sugar confectionery and cocoa Roasted peanuts and other nuts Coffee roasting, tea blending and packaging Food products, not elsewhere classified Animal feeds Distilleries and wineries Soft drinks and carbonated water industries TEXTILE, LEATHER AND WOOD BASED PRODUCTS Woolscouring and combing Spinning, weaving and finishing of textiles Soft furnishings Tents, tarpaulins and other canvas goods Knitted garments, hosiery and knitted cloth Carpets and rugs Other textiles Men's and boys' clothing Women's and girls' clothing Tanneries and leather finishing Footwear Sawmilling from round log Board laminated, plywood, particle, etc. Carpentry and joinery Furniture Packaging Stationery Printing, publishing and allied industries 10 A model to calculate the cost of logistics at a macro level: a case study of South Africa The throughput for each commodity has been sourced from the publications mentioned. Some adjustments were necessary in order not to double-count commodities, as more than one source sometimes listed the same commodity line. For example, the Department of Agriculture includes butter and cheese in its classification of dairy production, whereas these commodities are listed by StatsSA as manufactured items. Total throughput (local production plus imports) amounts to 753 million ton- equivalent. The secondary sector accounts for 44% of the total throughput. The remaining 56% is from the primary sector (mining and agriculture). Input to the transport cost sub-model The inputs required to calculate transport cost are split according to mode in terms of tonnage carried, average distance over which a particular commodity group is transported and the unit cost of transporting a particular commodity type by each available mode. For the purposes of the case study, six modal applications were identified, namely (1) collection and distribution by road, (2) line-haul transport by road, (3) rail transport, (4) air transport, (5) coastal shipping (from the point where goods enter or leave the country) and (6) pipeline transport. The modal split and average distance that each commodity is transported by each mode was determined from information obtained from operators and practitioners. In the case of the primary sector (mining and agriculture), fairly detailed information was available. A recent study published by the CSIR (Van Dyk 2004) on logistics practices in the fruit industry formed the basis for input in that sector. However, no such information was available for the manufacturing industry, and a detailed freight distribution model is required to simulate movements of manufactured and processed goods accurately. The modelling of transport desire lines for the secondary sector is essential to enhance the accuracy of the model in future, particularly because this sector has a major impact on total transport cost. It should also be borne in mind that the hauling distances reflect averages for the different sectors and may vary considerably from commodity to commodity within a particular sector. Unit cost of transport per mode was entered in terms of Rand per ton-kilometre. The aim was to determine a typical cost per ton-kilometre for each mode and commodity category, as the unit cost per unit commodity could differ substantially between commodities, even if they are transported by the same mode. The accuracy of these input data varied greatly between modes and commodities for several reasons: . Some industries were more forthcoming in providing costs than others. The divisions owned by Transnet were reluctant to divulge the cost of air, rail and pipeline transport. In contrast, the organised road freight industry publishes details of the operating cost of different vehicle classes in the Vehicle Cost Schedule (Road 11 F.J. Botes, C.G. Jacobs & W.J. Pienaar Freight Association 2003). Operating cost of road freight transport was verified from data collected and costs calculated independently by the Bureau for Economic Research (2003: 288290). . The cost of coastal shipping fluctuates substantially, depending on the demand for transport at a particular time. A summary of the total transport cost by mode and sector is presented in Table 2, and the amounts transported by mode are summarised in Table 3. Table 2: Transport cost by mode (R million) Road (Distribution) Road (Line haul) Rail Air Pipe- line Water TOTAL Mining 278 4 577 8 146 0 0 0 13 001 Agriculture 945 3 089 579 0 0 8 4 621 Primary 1 223 7 666 8 726 0 0 8 17 622 Secondary 27 247 74 627 2 569 10 702 71 235 115 451 TOTAL 28 469 82 293 11 295 10 702 71 243 133 073 Table 3: Amount transported by mode (million ton) Road (Distribution) Road (Line haul) Rail Other (air, water, pipeline) TOTAL Mining 4 110 143 0 257 Agriculture 32 37 7 1 77 Primary 37 147 149 1 334 Secondary 322 296 28 15 661 TOTAL 359 443 178 16 995 It should be borne in mind that the total tonnage transported by all modes combined exceeds the total throughput, as the same commodity could make use of more than one mode. For example, commodities transported by rail for the line-haul leg of a journey could be delivered to their final destination by road. In other instances where specialised vehicles are used (for example, transportation of motor vehicles), trucks (both road and rail) may return empty, which effectively doubles the travel distance for that product. 12 A model to calculate the cost of logistics at a macro level: a case study of South Africa Input to the warehousing cost sub-model Duration of storage Two reasons for storage in the logistics chain were identified in this study, namely, storage for freight consolidation purposes and intra-seasonal storage. Freight consolidation takes place where commodities are accumulated at a certain location for onward transport in order to optimise the utilisation of the transport modes delivering to and collecting from the accumulation point. A distinction is also made between consolidation for collection as opposed to consolidation for distribution. An example of consolidation for onward carriage is farmers delivering bananas, typically with a three- to five-ton truck, to cooperatives where the onward consignments are consolidated and hauled to major centres with 28-ton combination trucks. An example of consolidation for distribution is several 28-ton combination trucks, each with a different commodity on board, delivering to a cross-dock centre, where their loads are broken up and commodities re-sorted and combined for delivery to retail outlets with smaller eight-ton trucks. Certain commodities are harvested during a specific season, but are consumed at a constant rate throughout the year (for example, maize). Other commodities are harvested during a specific season but have only a limited storage life, for example, fresh deciduous fruit. The seasonality of production of certain commodities and the delayed consumption thereof necessitate intra-seasonal storage. The intra-seasonal storage duration of commodities that are evenly produced and evenly consumed throughout the year has been assumed to be zero. The duration of storage of all commodities that have a non-zero intra-seasonal storage duration is calculated by determining the difference between the weighted mean time of production and the weighted mean time of consumption. Unit cost of storage Unit costs of storage in terms of Rand per ton per day were collected for each individual commodity line. The following six main types of storage have been identified for the purpose of this study: . Hard standing outside (dry commodities) . Bulk warehouse (dry commodities) . Silo (dry commodities) . Shelved warehouse (dry commodities) . Cold storage (dry commodities) . Bulk tankard (liquid commodities) . Specialised tanks (liquid commodities) . General storage inside (dry commodities) 13 F.J. Botes, C.G. Jacobs & W.J. Pienaar . Cold storage (dry commodities) . Storage tanks (liquid commodities) . Cold storage tanks (liquid commodities). Storage cost is allocated for each commodity type according to the type of storage associated with the commodity. Unit costs of storage include storage and handling costs expressed in Rand per ton. Storage costs are the costs of establishing and maintaining the storage facility and are spread over the expected throughput of the facility. Handling cost reflects the marginal cost of handling each unit of throughput. Storage cost, in Rand per ton, is derived by multiplying the duration of storage of a specific commodity with the storage type-specific storage cost per ton-month. Handling cost accrues to the commodity as it is handled. The sum of this storage cost and handling cost form the storage unit cost. Inventory cost For the purpose of calculating inventory cost for goods in South Africa, primary goods are valued at R290 per ton throughput and secondary goods at R671 per ton throughput. These values were obtained by dividing total throughput by the total value of goods produced as reflected in the national accounts (SARB 2004). Transit time consists of the duration of storage and the transport time. Transport time is based on the amount transported and the transit time for each mode and commodity type. The time value of money is the average annual prime bank lending rate for 2003 (12.5%). Management and administration The cost of management and administration was taken as a percentage of the unit cost of transport and warehousing. These percentages, which vary according to storage type and transport mode, were derived from information obtained from operators and practitioners. OUTPUT OF THE LOGISTICS COST MODEL The results of the aggregate approach are presented in Tables 4 to 6. The following points serve to highlight the main aspects of the results of the case study: . Logistics cost in South Africa, as defined in this study, amounts to R177 978 million. This represent 14.7% of GDP. . Transport cost is by far the main contributor to logistics cost, contributing 75% to the total. 14 A model to calculate the cost of logistics at a macro level: a case study of South Africa Table 4: Total logistics cost for 2003 Transport (R) Storage (R) Management and Administration (R) Inventory (R) TOTAL (R) Primary 17 622 4 562 6 615 616 29 416 Secondary 115 451 9 595 21 945 1 572 148 563 TOTAL 133 073 14 157 28 560 2 188 177 978 Table 5: Logistics cost as a percentage of GDP Transport % Storage % Management and Administration % Inventory % TOTAL % Primary 1.46 0.38 0.55 0.05 2.43 Secondary 9.55 0.79 1.81 0.13 12.28 TOTAL 11.0 1.2 2.4 0.2 14.7 Table 6: Logistics cost items as a percentage of total logistics cost Transport % Storage % Management and Administration % Inventory % TOTAL % Primary 9.90 2.56 3.72 0.35 16.53 Secondary 64.87 5.39 12.33 0.88 83.47 TOTAL 74.8 8.0 16.0 1.2 100.0 . The secondary sector (manufacturing and processing) accounts for 84% of all logistics cost. . Inventory holding cost is the most sensitive to external changes, despite the fact that it makes up the smallest component of logistics cost. The primary reason for this is that any change in the prime lending rate has an immediate and direct effect on the opportunity cost of the value of the inventory. A sensitivity analysis showed that, if interest rates return to their 1996 level of about 20% inventory, and assuming that all other costs remain constant, holding cost would increase to R3 502 million (2.4% of total logistics cost). In this respect, it should be borne in mind that interest levels during 2003 were at their lowest levels for almost three decades. This has a further implication in 15 F.J. Botes, C.G. Jacobs & W.J. Pienaar that there is not much scope for a further reduction of this component, and the most likely trend in the near future would be upward should the prime lending rate increase. . It is estimated that goods transport contributes R40 490 million (37%) and that storage constitutes R4 694 million (4%) of the total `transport, communication and storage' figure of R110 709 million indicated in the national accounts of South Africa (Botes 2004). This means that third-party goods transport and storage (warehousing) account for 3.7% of GDP. . Given that third-party logistics is estimated to amount to R45 184 million, the propensity to outsource logistics is fairly low at 0.33. . Goods transport accounts for 73% of total diesel fuel consumption in South Africa. CONCLUSIONS . The development of the model provides a lasting product that enables relatively easy updating of the data to reflect the cost of logistics in future years, as well as time series comparisons by retrofitting historical data to the model. It also enables updating of the results with improved data as the study progresses and the performance of sensitivity analysis of key input parameters. . Logistics cost represents a considerable percentage of GDP. However, its contribution is less than some reports in the popular press suggest. . The propensity to outsource logistics tasks is low (33%), and about two thirds of all logistics tasks are currently undertaken inhouse. . Figures on logistics costs published by the SARB are becoming less useful over time as communications becomes an increasingly larger component of the transport, storage and communication sub-sector. OPPORTUNITIES FOR FURTHER RESEARCH AND REFINEMENT . The study should be extended to allow for a more detailed analysis of specific input parameters. . The procedure should be undertaken on an annual basis to develop a historical database that in time will allow time-series analyses to be performed. . A survey should be undertaken to understand the underlying reasons for the low propensity to outsource logistics tasks. . The South African Reserve Bank should be requested to separate logistics and communications as items in their future reporting. 16 A model to calculate the cost of logistics at a macro level: a case study of South Africa NOTES 1 The 1993 edition of the Standard Industrial Classification (SIC) of all Economic Activities, 5th edition, Report No. 09-90-02, was used to classify the statistical units in the StatsSA survey. The SIC is based on the 1990 International Standard Industrial Classification of all Economic Activities (ISIC), with suitable adaptations for local conditions. REFERENCES Alford, L.P. & Bangs, J.R. 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