Measuring the Benefits Gained by Industry from Road Network Improvements

Over the last twenty years, physical distribution has gone through a revolution (McKinnon 1989). Changes in industrial structure, the power structure within the supply chain, service quality standards, marketing and production methods, heavy goods vehicle productivity and capacity, and road network quality have all played a part. External factors such as high real interest rates have made firms acutely sensitive to the costs of holding inventory and to the scope for inventory rationalisation. The purpose of this study is to examine the contribution of road network improvement to the restructuring of physical distribution. There is a particular policy context to this. At a political level, the Government attaches prime importance to the effects of road investment on economic growth (DTp 1989). But at the level of economic appraisal, it is questionable whether the Department of Transport's (DoT) procedures give adequate weight to the benefits to industry of road network improvements. The D.o.T. currently take account of the direct savings which accrue from road improvement schemes (Dawson and Vass 1974)(DTp 1981). This allows for changes in mileage related and time related operating costs, including depreciation, based on the simple assumption that time savings are translated fully into proportionate increases in utilisation of vehicles and crews (Nash 1974). Although at first sight, the existence of scheduling indivisibilities and delivery time constraints might be thought to make this assumption unrealistic, such evidence as there is suggests that it is not an unreasonable rule of thumb (Mackie and Simon 1986). Economic theory suggests that in addition to the direct transport cost savings from road improvements, some indirect "reorganisation" or "restructuring" benefits should also be expected (Mohring and Williamson 1969)(Dodgson 1973). As real transport costs fall, firms should respond by substituting within the production and distribution process so as to arrive at a more transport-intensive, but lower cost solution. The restructuring of the brewery industry into an operation with a few large plants is often attributed, at least in part, to improvements in the road network. A number of restructuring responses to strategic road investment may be listed:-

- Centralisation of manufacturing or production

- Concentration of distribution into fewer depots

- Changes to inter-depot boundaries

- Increases in market areas served by regional firms

- Improvements in service quality (24 hour delivery, etc.)

- Changes in distribution methods (e.g. satellite distribution)

This list suggests that the indirect benefits are likely to be some mixture of economies of scale in production or warehousing, inventory savings, and added value to products. A number of studies have been undertaken in the past into the benefits from road network improvements. It is claim they played a part in the decline of road haulage rates between 1974 and 1984 of 27% (Turner 1987). Their effect on transit times and reliability has been demonstrated (Cooper and Tweddle 1988), as well as on the cost of quality of service enhancement (Walker 1988). Benefits gained in terms of larger trading areas have been revealed by studies of the major estuary crossings, such as the Severn and Humber Bridges (Cleary and Thomas 1973) (Mackie and Simon 1986).

Quarmby's studies of a major retail grocery operation are of particular interest in this context (Quarmby 1989). He examines the effect of reducing the number of depots in a distribution system following improvements to the strategic road network so that each depot now serves a larger area. He finds that the total systems benefits from restructuring the distribution and depot network could exceed the direct transport benefits by 30-50%. He does not demonstrate that either his initial or final depot configuration is optimally balanced with the road network conditions. However, his study provided the stimulus for the research proposal to ESRC and to partner industrial sponsors.