49

LOGISTICS IN AUSTRALIA
A preliminary analysis
 Bureau of Transport Economics

LOGISTICS IN AUSTRALIA
A PRELIMINARY ANALYSIS

October 2001
Disclaimers
The BTE seeks to publish its work to the highest professional standards.
However, it cannot accept responsibility for any consequences arising from the
use of information herein. Readers should rely on their own skill and
judgement in applying any information or analysis to particular issues or
circumstances.

ii
CONTENTS

FOREWORD ix

EXECUTIVE SUMMARY xi

CHAPTER 1 INTRODUCTION 1
Recent initiatives 2
Action Agenda 4
Outline of the paper 5

CHAPTER 2 OVERVIEW OF LOGISTICS 7

Definition 7
Major components 9
Concept of chains 12
Networks 13

CHAPTER 3 COMPONENTS OF LOGISTICS 15

Logistics services 15
Information systems 18
Infrastructure and resources 21

CHAPTER 4 ECONOMIC SIGNIFICANCE OF LOGISTICS 25

Data for individual operators 25
Recent studies 26
Limitations of Australian data 29
BTE estimates based on ABS data 30
Interpreting the estimates 32

CHAPTER 5 STRUCTURE AND OPERATION 35

Operating environment 35
Users of logistics services 37
Providers of logistics services 38
Competition 43

CHAPTER 6 PERFORMANCE 45
Total cost analysis 45
Chain management 46
Integration 47
Australian studies 50
Assessing performance 53

iii
CHAPTER 7 FUTURE RESEARCH 55
Structure 55
Conduct 56
Performance 56
Competition 57
Implications for future research 58

CHAPTER 8 CONCLUDING COMMENTS 61

GLOSSARY 63

REFERENCES 67

ABBREVIATIONS 73

iv
TABLES

2.1 Recent definitions of logistics 8

4.1 Revenue and employment of some Australian logistics
service providers, 1999-2000 26
4.2 Some estimates of the economic significance of logistics 28
4.3 Estimation of gross value added in Australian freight
transport, 1999-2000 30

BOXES

2.1 Some firms with Australian logistics-related activities 11

5.1 Some major users of logistics services in Australia 37

v
FIGURES

1 Components of logistics in Australia xii

2.1 Overview of logistics 10
2.2 Simple star and local/long-distance networks 13
3.1 Logistics services 16
3.2 Some basic components of logistics information flows 19
3.3 Logistics infrastructure and resources 22
5.1 Categories of logistics service providers 39
6.1 Analysis of total distribution cost 46

vii
FOREWORD

This Working Paper presents the results of preliminary BTE work on logistics in
Australia. It is the first part of a longer-term project on logistics. The Working
Paper develops a framework for analysing logistics in Australia, and examines
several issues raised by the Secretariat for the Freight Transport Logistics
Industry Action Agenda.
The BTE gratefully acknowledges the information and other assistance
provided by industry and government agencies.
The study was undertaken by Kym Starr and Alistair Nitz, under general
supervision from Joe Motha, Deputy Executive Director.

Tony Slatyer
Executive Director

Bureau of Transport Economics

Canberra
October 2001

ix
EXECUTIVE SUMMARY

This paper presents the results of preliminary BTE work on logistics in

Australia. It draws on the BTE’s experience and expertise in the transport
sector, and also incorporates information on logistics from sources such as a
literature review.

BACKGROUND
The performance of the logistics system has a major impact on cost structures,
revenues, service quality, and competitiveness in Australian industry. Logistics
activities have been evolving rapidly in response to changes such as
globalisation, general industry restructuring, new production processes, and
technological advances.
Many firms, government agencies and joint industry/government bodies are
developing programs to improve logistics performance in Australia. The
initiatives include the Freight Transport Logistics Industry Action Agenda.
This paper develops a broad framework for analysing logistics activities. It also
examines three priority issues identified by the Secretariat for the development
of the Action Agenda—the economic significance of logistics in Australia, the
extent of integration, and the dimensions of a full economic study.

SCOPE OF LOGISTICS
Logistics is broadly defined as the activities required for the movement and
handling of goods and materials, from inputs through production to consumers
and waste disposal. It includes associated reverse flows such as product and
equipment returns, and recycling. Some of the major logistics activities are
transport, storage, procurement, inventory management and packaging.
Figure 1 provides an overview of logistics in Australia. It incorporates logistics
services, and the information systems and infrastructure/resources that are
used to provide the services.
In this paper, logistics is described as a system or set of activities rather than an
industry. This reflects the essential nature of logistics, which is a series of
interdependent activities performed by firms from various industries.

xi
FIGURE 1 COMPONENTS OF LOGISTICS IN AUSTRALIA

Disposal

Logistics
services

Consumers

Logistics
services

Logistics Logistics
information Distribution infrastructure
systems and resources

Logistics
services

Production

Logistics
services

Inputs

Source BTE analysis.

xii
The BTE estimates that the gross value added of logistics activities in Australia
was around $57 billion in 1999-2000. This was equivalent to 9 per cent of GDP,
which represents a substantial proportion of economic activity in Australia. The
figures are lower-bound estimates and are very approximate, as they are based
on limited data and indirect calculations. They do not include flow-on effects to
other industries that provide inputs for logistics services (e.g. production of
packaging materials or transport equipment).

COMPONENTS OF LOGISTICS
Logistics services can be considered in terms of five major groups of activities:
• production processes (production flow management, inventory
management, packaging, order processing, demand forecasting);
• materials and other inputs (procurement, materials management);
• transport and storage;
• product support (parts and services); and
• reverse flows and disposal (product/equipment returns, recycling, waste).
The provision of these services is heavily dependent on reliable and timely
information flows. The basic components of these flows, which facilitate the
integration of related logistics activities, include:
• sales and delivery (e.g. sales information and forecasts, track and trace);
• inputs (e.g. materials, order placement); and
• export/import documentation (particularly customs and quarantine).
The development of e-commerce has significantly increased the capabilities and
lowered the costs of information systems. Internet-based approaches are
providing firms with new mechanisms to interact with customers and
suppliers, and to re-engineer business processes.
The infrastructure and resources used to provide logistics services comprise:
• human resources (managerial and operational);
• financial resources;
• packaging materials;
• warehousing (land, buildings, plant and equipment);
• transport (e. g. pallets, containers, vehicles, terminals); and
• communications facilities, equipment and software.

BUYERS AND PROVIDERS OF SERVICES

The users (buyers) of logistics services include organisations in the mining,
agriculture, manufacturing and service sectors. Many users are located in
Australia, but overseas buyers have a major role in purchasing services (e.g.
shipping) for Australian exports.

xiii
Users of logistics services range from small businesses, which in some cases are
fragmented and uncoordinated, to large firms. The presence of multiple buyers
and suppliers of services may contribute to difficulties in coordinating activities
and optimising logistics performance.
There is significant variation, between industry sectors and between firms, in
arrangements for the supply of logistics services. This variation reflects factors
such as differences in the number of participants and in access to technical
knowledge and economies of scale.
The providers of logistics services can be considered in terms of users’ in-house
operations, and four categories of external providers:
• contractors/specialists (e.g. airlines, road transport owner-drivers);
• brokers/agents (e.g. customs brokers, freight forwarders);
• multi-service logistics operators; and
• integrated logistics providers.
Increased outsourcing of logistics activities has facilitated the growth of
external providers. The strategies of these providers have included expansion
through mergers, acquisitions and partnerships/alliances. Many larger users of
logistics services are reducing the number of external providers that they use.
Major providers typically operate some services and also coordinate the
activities of various contractors.
The Australian Competition and Consumer Commission (ACCC) has stated
that competition among transport and logistics providers is fierce. However, for
some logistics-related services, there are only small numbers of major operators.
Cost analysis provides an important input into logistics decisions. However,
logistics activities may also enhance a firm’s revenue (e.g. through a premium
price for a product delivered in excellent condition). These activities should
therefore be analysed in terms of their impact on both revenues and costs.

INTEGRATION
Logistics activities are a potential source of competitive advantage for many
firms. Components of performance include order cycle times, on-time delivery,
transit times, and product condition on delivery.
The operation and performance of the logistics system is often analysed in
terms of chains (e.g. supply chains). A chain is a series of interdependent
logistics activities (involving major stages between inputs and disposal) for a
particular product. It is based on coordination and cooperation between various
logistics service providers (and users of the services).
The essence of effective chain management is integration—combining
individual logistics activities into a whole that functions seamlessly and
provides good performance. Effective integration within each chain requires:

xiv
• adequate infrastructure;
• good information flows between service providers, between service
providers and users, and between users;
• effective coordination mechanisms and dispute resolution procedures; and
• incentives for each service provider to promote the performance of the total
chain.
Market forces provide some incentives to coordinate activities along and
between logistics chains. Options to promote integration include in-house
provision of services, single providers of multiple services, partnerships and
alliances, chain leaders, and collaboration/voluntary cooperation.
Australian studies over the last decade indicate that logistics activities do not
constitute an integrated industry. Changes recommended in the studies have
included a greater awareness of chain management, better information flows,
and improved communication between logistics chain participants. The studies
have also identified specific logistics issues (e.g. unavailability of uplift space,
inflexibility in quarantine arrangements) that adversely affect the
competitiveness of Australian exporters.
Some of the factors which limit integration are probably industry-specific (e.g.
fragmented structures and independent attitudes of chain participants).
Broader factors such as incompatible information systems and inadequate
infrastructure are also contributing factors.

FUTURE RESEARCH
The BTE’s future research on logistics will be affected by the nature of emerging
policy issues that require Government attention, and the availability of data.
The level of competition in the provision of services is an area of major interest.
Detailed analysis of structure, conduct and performance would require
substantial time and resources. This reflects the wide range of logistics
activities, the large number of issues typically covered in a full economic study,
and limited availability of data.
It therefore seems likely that future research should focus on either broad
overviews of logistics activities or detailed analyses of specific issues. Such
studies could include the size and other characteristics of major parts of the
logistics system, the adequacy of logistics infrastructure, and the impact of
major operating strategies (e.g. mergers/takeovers) on chain performance.
The available data on logistics activities are mainly limited to transport and
some related activities. Any detailed analysis of logistics in Australia will
therefore require the collection of additional data. This is likely to be a resource-
intensive task.

xv
CHAPTER 1 INTRODUCTION

Logistics can be broadly defined as the activities that are required for the
movement and handling of goods and materials. It covers processes involving
inputs, production, distribution, consumption and waste disposal (e.g.
packaging). Examples of the major activities include transport, warehousing,
order processing and inventory management.
The performance of the logistics system has a major impact on the Australian
economy. It affects the cost structures and revenues of Australian producers,
their competitiveness in areas such as delivery times and product quality, and
the responsiveness of producers to consumer requirements.
Many firms are involved as users or buyers of logistics services. For example,
the retailing operations of Coles Myer incorporate the delivery of goods and
services from over 13 000 suppliers (Coles Myer 2000, p. 1).
There are no comprehensive data on the providers of logistics services in
Australia. However, the number of firms involved in these activities is
substantial. For example, the operation of the Port of Fremantle involved the
provision of logistics-related services by more than 140 organisations in 1998-99
(BTE 2000, p. 90). Australia’s 70 commercial trading ports are just one
component of the logistics system.
Some of the larger Australian providers of logistics services, and their activities,
include:
• Toll Holdings—freight forwarding, transport, inventory management, wharf
cartage, container handling, order placement and tracking, warehousing,
contract distribution, packaging design/fabrication, contract packing,
recycling;
• Linfox Transport—supply chain design and management, warehouse design
and management, inventory management, distribution centre management,
freight transfer/consolidation, transport management, freight forwarding;
• Mayne Logistics—supply chain management, transport services,
warehousing, inventory management, fleet management, contract
distribution, wharf-related services, international courier services; and
• Australia Post—mail services, small parcel delivery, home market delivery,
services for business customers in the e-commerce market.

1
Overseas operators (e.g. Danzas AEI, Exel, EGL Eagle Global Logistics) also
have significant activities in Australia.
Various industry associations represent the interests of firms involved in the
transport component of logistics (e.g. road transport, shipping, rail transport,
ports, freight forwarding). Other organisations with members involved in
logistics activities include the Australasian Production and Inventory Control
Society (APICS), the Australian Institute of Purchasing and Materials
Management (AIPMM) and the Australian Institute of Packaging. The Logistics
Association of Australia (LAA), with a membership of 2 500 individuals
throughout Australia, covers a range of providers and users of logistics
services. However, no single organisation represents the views of all
participants in the logistics system, as it is defined in this paper.
The recent development of the logistics system, in Australia and overseas, has
included greater outsourcing of activities that were previously undertaken in-
house. For example, a 1997 study found that more than 69 per cent of Fortune
500 manufacturers used some form of external logistics service (Bade and
Mueller 1999, p. 79). External operators may provide benefits such as:
• lower costs;
• improved service quality;
• better integration of activities;
• enabling management to concentrate on their core competencies and the
firm’s core business;
• global capabilities; and
• capital expenditure savings and working capital reductions.
The level of logistics outsourcing varies between countries. A study of 14
European countries concluded that, on average, 26 per cent of distribution
services were provided by external operators in 1998 (Rushton et. al. 2000,
pp. 58-59). The proportion for individual countries ranged from 12 per cent to
38 per cent. Current industry research reportedly indicates that outsourcing of
logistics activities is relatively low in Australia compared with other countries
such as the UK (TDG Logistics 2000, p. 3).
In a particular country, the level of outsourcing generally varies between
industries and between logistics activities. For example, a survey of North
American companies with outsourced activities indicated that outsourcing
ranged from less than 10 per cent in some areas (e.g. customer service, order
processing) to around 60 per cent for warehousing, outbound transport and
freight bill auditing/payment (Smyrlis 2000, p. 44).

RECENT INITIATIVES
Since the early 1990s, industry and governments have placed a major emphasis
on improving logistics performance. These initiatives have reflected the impact

2
of factors such as globalisation, technological advances, and the need to
improve the international competitiveness of the Australian economy.
Many Australian firms have been developing and implementing strategies to
improve their logistics performance. Approaches have included upgrading of
in-house facilities (e.g. distribution centres) and increased use of external
providers. Industry has also been involved in initiatives to consider issues on a
wider basis (e.g. sea and air freight councils).
The Commonwealth has coordinated various efforts to assess the adequacy of
logistics activities, identify problem areas and develop solutions. State
governments have implemented programs to address specific logistics issues.
Broader bodies have brought together representatives of the Commonwealth,
the States and industry. Government and joint government/industry
organisations dealing with logistics issues include the:
• Integrated Logistics Network, a grouping of Commonwealth and
State/Territory government officials with a mission to improve the quality
and efficiency of the services used by shippers to get their products to market
(domestic or overseas);
• Australian Freight Council Network, an informal network of State/Territory-
based sea and air freight councils which develop practical solutions to
logistics problems;
• Supermarket to Asia Council, with a mission to grow Australian food sales to
Asia and increase the number of exporters, using a structure that includes
Supermarket to Asia Ltd and the Transport and Logistics Working Group;
• Australian Transport Council (comprising Commonwealth, State/Territory
and New Zealand Ministers responsible for transport issues), supported by
the Standing Committee on Transport and the National Transport
Secretariat.
There are various linkages between individual organisations (e.g. joint
meetings, circulation of progress reports). The Integrated Logistics Network
and the Australian Freight Council Network regularly conduct joint meetings,
and have also coordinated studies on issues such as cold chain logistics
mapping and re-engineering, export reefer containers, and national food export
monitoring.
Several Commonwealth agencies support logistics initiatives through activities
such as programs to improve practices and performance, the provision of
secretariat services, preparation of background papers and briefings, and
coordination of studies on specific issues. These agencies include the:
• Department of Transport and Regional Services;
• Department of Agriculture, Fisheries and Forestry – Australia;
• Department of Industry, Science and Resources; and
• National Office for the Information Economy.

3
Some of the programs that are directly relevant to logistics activities include the
Value Chain Management Program, the Information Technology Online
Program, and the Food and Fibre Chains Programme.

ACTION AGENDA
In May 2000, the Commonwealth Government announced that an Action
Agenda would be developed for the Australian freight transport logistics
industry (Anderson 2000).
Action Agendas are a Commonwealth program supported by State/Territory
Industry Ministers. They are used in a range of Australian industries to build
partnerships between industry and government, with the objective of removing
impediments to growth and capitalising on opportunities. The key elements
include identification of future opportunities, strategic analysis of competitive
position, identification of required changes, and development of action
priorities and responsibilities.
The goals of the Freight Transport Logistics Industry Action Agenda are:
• development of a seamless logistics system, delivering goods on time, in
peak condition, at an agreed value;
• integration of the best available technologies to link management systems
with transport infrastructure;
• achievement of nationally consistent standards and accepted codes of
practice; and
• promotion of professional and accredited logistics specialists.
The Minister for Transport and Regional Services appointed an Industry
Steering Committee to facilitate the development and implementation of the
Action Agenda. The Committee is assisted by a Secretariat in the Cross-Modal
and Maritime Transport Division of the Department of Transport and Regional
Services.
At an early stage, the Secretariat concluded that there was a requirement for
more information about logistics in Australia. The BTE’s work program already
included a major study of logistics. As a more immediate priority, the
Secretariat suggested that the BTE should analyse three issues:
• Is freight logistics an integrated industry or a series of loosely interconnected
industries?
• What is the economic significance of the industry (contribution to GDP and
employment)?
• What are the dimensions of conducting a full economic study of the industry
(known data and information gap analysis)?
The BTE consequently agreed to include these issues in the first stage of its
work on logistics in Australia.

4
OUTLINE OF THE PAPER
This Working Paper develops a framework for analysing logistics in Australia,
and examines the three priority questions identified by the Secretariat for the
Freight Transport Logistics Industry Action Agenda. A draft of the paper was
provided to the Industry Steering Committee and the Secretariat in July 2001.
The analysis is based on a preliminary review of Australian and international
literature on logistics. The literature search particularly focussed on conceptual
issues and the operation of the logistics system. Attendance by BTE officers at a
major Australian logistics conference and exhibition, and visits to five major
logistics operations, provided additional information.
The paper covers the movement and handling of freight, which is traditionally
considered in terms of bulk and non-bulk items. The recent discussion of the
performance of logistics activities in Australia has generally focused on the non-
bulk area.
Chapter 2 develops a general definition of logistics and identifies the major
components of logistics activities. It also describes the concept of chains and
outlines the role of networks.
Chapter 3 describes the major components of logistics in greater detail. It covers
logistics services, information systems, and infrastructure and resources.
Chapter 4 analyses the economic significance of logistics activities. It provides
estimates of gross value added, and the proportion of gross domestic product
(GDP) attributable to these activities.
Chapter 5 outlines the structure and operation of logistics activities in terms of
the operating environment, the users and providers of services, and
competition.
Chapter 6 covers the performance of the logistics system. It incorporates an
overview of total cost analysis, logistics chain management, and integration.
There is also a discussion of recent Australian performance, and an assessment
of the level of integration.
Chapter 7 examines future research areas and associated data requirements.
These issues are primarily considered in terms of structure, conduct and
performance.
Concluding remarks are presented in chapter 8.

5
CHAPTER 2 OVERVIEW OF LOGISTICS

The modern concept of logistics incorporates activities (e.g. transport, storage)

which date back to the earliest forms of organised trade (Lambert et. al. 1998,
p. 5). The term was initially developed in the context of military activities in the
late 18th and early 19th centuries.1
A key element of logistics, the trade-off between transport and inventory costs,
was formally recognised in economics at least as early as the mid-1880s
(Langley 1992, pp. 19-20). Other early writings in economics included a 1901
text on the costs of distributing farm products (Grunnet 1996, p. 28). The
literature on management increasingly recognised the role of logistics from the
1950s, with Peter Drucker focusing attention in the early 1960s on the challenges
and opportunities in logistics and distribution.
This chapter provides a definition of logistics. It also outlines the major
components of logistics , the concept of chains and the role of networks.

DEFINITION
The concept of logistics has evolved over time in response to factors such as
changes in the business environment. Grunnet (1996, p. 32) notes that the focus
was inventories in the 1950s, distribution in the 1960s, production in the 1970s,
purchasing/production/sales in the 1980s, and business process in the 1990s.
A review of the literature indicates that there is no universal definition of
logistics. Table 2.1 presents some recent definitions. They are based on a range
of approaches including processes, functions, frameworks, flows and strategic
management. There is some commonality among the definitions in terms of the
concept of moving and handling goods and materials, from the beginning to the
end of the production and sales process. The recent definitions typically
incorporate some common activities (e.g. transport, warehousing, inventory).
For the purposes of the BTE’s analysis, logistics is broadly defined as the
activities required for the movement and handling of goods and materials, from

1 The probable origin of the term is the Greek logistikos, meaning ‘skilled in calculating’.
Military definitions typically incorporate the supply, movement and quartering of troops.

7
TABLE 2.1 RECENT DEFINITIONS OF LOGISTICS
Source Definition Components
Council of That part of the supply chain As earlier interpreted by Langley,
Logistics process that plans, implements, incorporates functions such as
Management and controls the efficient, effective transportation, order processing and
flow and storage of goods, related distribution centre operations,
services, and related information inventory control, purchasing, production,
from the point of origin to the point and customer and sales services.
of consumption in order to meet
customers requirements
Kasilingam All functions essential to provide Purchasing, inventory control, facilities
place and time value to a product, location and layout, transportation and
including all functions that are intra-facility logistics (e.g. capacity
necessary to move a product from planning, warehouse design, order picking
point of production to point of rules).
consumption safely and efficiently
Michael The process of strategically Inventory (e.g. service level decisions,
Docherty & managing the movement and materials planning), information (e.g.
Associates storage of materials, parts, and order processing, demand forecasting),
finished inventory from supplier, warehousing and handling (e.g. depot
through the firm, and on to location, unitisation and packaging),
customers transport (e.g. mode decisions).
OECD Management of flows along links Transport flows/systems (transport
in various kinds of networks, in networks), material flows/systems
particular involving the (buyer/supplier networks), information
manufacturing and trading of flows/systems (communications
goods and services (business networks), money flows/systems (financial
logistics) networks).
Arthur D Little The process of anticipating Transportation, facility structure,
and customer needs and wants; inventory, material handling,
Pennsylvania acquiring the capital, materials, communications and information.
State people, technologies, and
University information necessary to meet
those needs and wants;
optimising the goods- or service-
producing network to fulfil
customer requests; and utilising
the network to fulfil customer
requests in a timely way
(integrated logistics)
Coyle, Bardi To ensure the availability of the n.p.
and Langley right product, in the right quantity,
and in the right condition, at the
right place, for the right customer,
at the right cost
Grunnet The overall point of Supply (supplier relations, purchasing,
view strategic, tactical and material control, raw materials),
operational on the company and production (buffers, production processes,
[its] business partners, with personnel, components), distribution
material flow as integrator (finished goods, dispatching, warehouse,
customer service), service (installation,
maintenance, redistribution, disposal).
n.p. not provided
Sources Bloomberg et. al. (1998, p. 2). Council of Logistics Management (2001, p. 1). Grunnet (1996, p. 26, p. 73,
pp.118-120). Kasilingam (1998, p. 6). Langley (1992, p. 22). Michael Docherty & Associates (1997, pp. 1-2).
OECD (1996, pp.˚22-23).

8
inputs through production to consumers and waste disposal. It includes
associated reverse flows such as product and equipment returns, and recycling.
Some of the major activities covered by this definition are transport, storage,
packaging, procurement, and inventory management (see chapter 3).
Other terms that are used to describe logistics activities (or to extend the basic
concept) include supply chains, value chains and demand chains. While the
analysis of logistics has often focused on cost minimisation, the concept of
chains also emphasises the potential impact on revenue (e.g. through logistics
activities that enable a product to be delivered in good condition and sold at a
premium price). In this paper, the general term ‘logistics chain’ is used to cover
the various applications of the chain concept.
Logistics is best described as a system or set of activities rather than an
industry.2 This reflects the essential nature of logistics—a series of
interdependent activities performed by firms from various industries. Some
logistics activities, such as inventory control and order processing, are
undertaken by firms in virtually all industries. As noted in chapter 1, a
significant number of associations cover logistics activities in Australia.

MAJOR COMPONENTS
Figure 2.1 provides an overview of the logistics system. The operation of the
Australian economy is affected by local and overseas logistics activities.
For the purposes of analysis, these activities can be divided into logistics
services, and the information systems and infrastructure/resources used to
provide the services. In practice, the three components are closely linked.
Logistics services support the movement of materials and products from inputs
through production to consumers, as well as associated waste disposal and
reverse flows. They include activities undertaken in-house by the users of the
services (e.g. storage or inventory control at a manufacturer’s plant) and the
operations of external service providers. Logistics services comprise physical
activities (e.g. transport, storage) as well as non-physical activities (e.g. supply
chain design, selection of contractors, freight rate negotiations).
Increased outsourcing of logistics activities, that were previously undertaken
in-house, has facilitated the growth of external service providers. This trend has
probably accelerated over the last decade. A recent overview of 26 major
external providers of transport and warehousing services in Australia indicated
that they had around 34 000 employees and operated 436 distribution centres
(Supply Chain Review 2000, pp. 36-38).

2 Caves et. al. (1987, p. 2) define an industry as ‘any collection of firms which have plants
giving them the capacity to produce products with which they can compete for sales’.
Another definition is ‘a group of establishments engaged in the same, or similar, kinds of
activity’ (ABS 2000, p. 71).

9
FIGURE 2.1 OVERVIEW OF LOGISTICS

Disposal

Logistics
services

Consumers

Logistics
services

Logistics Logistics
information Distribution infrastructure
systems and resources

Logistics
services

Production

Logistics
services

Inputs

Source BTE analysis.

10
Box 2.1 lists some firms involved in logistics-related activities in Australia. They
comprise a small, random sample of the thousands of firms that currently
provide logistics-related services. In 1996, the National Road Transport
Commission (NRTC) noted that there were 30 960 road transport fleets in the
hire and reward sector in Australia, including 760 fleets of 10 or more vehicles
(NOIE 1999, p. 5). Road transport is just one component of logistics.
The strategies of logistics service providers in Australia have incorporated
industry consolidation and partnerships/alliances. There have been many
mergers and acquisitions, with some of the recent changes including the:
• acquisition of Carpentaria Transport, Refrigerated Roadways, IPEC,
Finemore Holdings, Strang Stevedoring Australia, ARN Logistics and TNT’s
port operations by Toll Holdings;
• merger of Westgate Logistics and the Brimac Transport Group;
• move to full ownership of MPG Logistics by Mayne Nickless;
• merger of Brambles Industries and GKN;

BOX 2.1 SOME FIRMS WITH AUSTRALIAN LOGISTICS-RELATED ACTIVITIES

ABX Logistics AirRoad Logistics Support 1st Fleet Logistics

Accenture APEX Logistics People Australia Post
Allied Express Australian Personnel Solutions Blue Star Logistics
Brambles Industries BHP Transport & Logistics Group Dalton Packaging
Danzas AEI EGL Eagle Global Logistics DHL Australia
Dawson Consulting Expediters International f(x) Logistics Solutions
Dexion FCL Interstate Transport Services Glen Cameron Group
EAN Australia Flexible Services Warehousing Gregory s Transport
ELogistics interBiz Supply Chain Group K&S Corporation
Exel Australia Kagan Warehousing & Distribution Kuehne & Nagel
EXE Technologies Logistics Recruitment Solutions Lang Corporation
Freight Australia Mannesman Dematic Colby Linfox Transport
FreightCorp National Rail Corporation Maersk Logistics
Logistics Bureau New Wave Logistics (Australia) MARC Global Services
LOSCAM Paperless Warehousing Mayne Logistics
Nexus-Global RMS Transport Solutions Mills Transport
Sinclair Knight Merz Schaefer Systems International P&O Australia
Strang-Tradex Group Simon National Carriers Retail Logistics Group
Supply-LINQ Specialised Container Transport Seatons Transport
Swisslog Australia Sydney Ports Corporation Star Track Express
TNT Australia United Transport Services TDG Logistics
Toll Holdings Wallenius Wilhelmsen Lines UPS Logistics Group
Tradegate ECA Westgate-Brimac Logistics Wesfarmers Transport

11
• purchase of Refrigerated Freight Lines, Liberty Cargo Group, Holyman, SSD
Freight, JPC Containers and Mayne Nickless’s Australian port service
operations by Lang Corporation;
• acquisition of The Total Logistics Company by Exel; and
• merger of GrainCorp and Victorian Grain Services.
This process has enabled many logistics service providers to increase the range
of services that they provide. For example, several freight forwarders have
become multi-service operators or integrated logistics providers. The large
traditional transport operators (TNT, Mayne Nickless, Brambles) have sold
many of their transport businesses to focus on broader logistics activities.

CONCEPT OF CHAINS
The operation and performance of the logistics system is often analysed in
terms of chains. A chain is a series of interdependent logistics activities
(involving major stages between inputs and disposal) for a particular product,
based on coordination and cooperation between logistics service providers (and
users of the services).
The concept of chains emphasises the close links between individual logistics
activities for a particular product, and the adverse impact on overall
performance from the failure of individual activities (i.e. ‘breaking the chain’).
For example, the competitiveness of Australian fresh fruit exporters in Asian
markets reflects the performance of a large number of logistics activities, from
the farms to the supermarkets in Asia. Poor performance in just one activity
(e.g. temperature control at storage facilities in Australia) will adversely affect
the condition (and price) of the fruit delivered to Asian consumers.
The economy may be viewed as a large number of chains, each of which can be
represented simplistically by figure 2.1. Examples of chains include:
• organisation of components for the assembly of computers, and the delivery
of completed systems to consumers;
• mining and export of coal; and
• movement of fruit from the orchard to supermarket shelves.
There are also links between individual chains. For example, one logistics chain
may involve the stages from raw materials (iron ore, coal, etc.) to the
production of steel. In turn, steel may be the first stage for several other logistics
chains (e.g. production of machinery, motor vehicles, building products).
It should be noted that, for the purposes of analysis, the structure of a logistics
chain may be affected by the perspective of the user or analyst. For example, a
primary producer may view the chain as activities from inputs (e.g. seed,
chemicals) to the processing plant. In contrast, the wholesaler may view the
chain as all activities from the farm to the supermarket.

12
NETWORKS
Table 2.1 on page 8 indicates that the OECD has analysed logistics in terms of
four kinds of networks—transport, buyer/supplier, communications and
financial. The extent to which logistics activities involve networks will affect the
structure and operation of the system.

Concept
A network can be defined as a collection of nodes (e.g. locations) connected by
facilities (e.g. roads) along which entities (e.g. goods) move (Button and Stough
2000, pp. 11-12). For an activity such as logistics, the key characteristics are one-
or two-way connections between multiple points that include common paths.
Networks can be either physical or virtual (e.g. the Internet).
Figure 2.2 illustrates two typical networks. They comprise a simple star
network (e.g. distribution to local customers from a central manufacturing

FIGURE 2.2 SIMPLE STAR AND LOCAL/LONG-DISTANCE NETWORKS

B
H

S C
G
D

F
E

A1
B1 B2
A2

SA SB

A3

A4 B4 B3

Source Economides (1996).

13
plant) and a local/long-distance network (e.g. local collection and interstate
delivery). In the simple star network, A can deliver goods to B by travelling
along AS, switching at S, and then travelling along SB. This is a classic example
of a two-way network. The local and long-distance network is more extensive,
as it permits movement between local networks using long-distance exchanges.

Applications to logistics
Each logistics chain involves a series of connected activities. For certain
activities, many chains use common systems (e.g. the long-distance road
transport network). The overall economy may therefore be viewed as a series of
logistics chains, which effectively touch or intersect at certain points.
In addition, the end of one chain often connects to the beginning of another
chain. For example, the processes from mining iron ore through to the
production of steel might be viewed as one chain, with the transformation of
this steel into machinery involving a subsequent chain.
Logistics activities have some network characteristics. Most, if not all, logistics
chains incorporate network activities, such as transport and information
systems. In addition, some activities undertaken in-house by users of logistics
services (e.g. the operation of multiple production facilities or warehouses)
would probably be classified as networks. The extent of integration of logistics
activities is considered in chapter 6.

Economic implications
The existence of networks potentially enables some providers of logistics
services to access opportunities for cost reductions.
Economies of scope occur when the cost of producing two or more outputs
together (e.g. by one firm) is lower than the cost of producing the outputs
separately (e.g. by several firms). For example, a firm may be able to use
common infrastructure (e.g. terminals) to provide several logistics services at
lower cost than individual firms.
Economies of traffic density occur when the average cost of production declines
as the amount of traffic increases between any given set of points. For example,
transport operators may be able to utilise larger trucks (due to increased traffic)
by setting up hubbing centres. The resulting access to economies of scale
provides lower unit transport and delivery costs.
Network externalities occur when the actions of market participants affect
others without compensation being paid. Shapiro and Varian (1999, p. 183) see
networks as having mostly positive externalities, such as the greater number of
destinations and increased frequency provided by a larger network when
additional participants join. However, negative externalities (e.g. increased
congestion for other road users) may occur around major facilities.

14
CHAPTER 3 COMPONENTS OF LOGISTICS

This chapter presents more detailed information about the components of

logistics introduced in chapter 2. It covers logistics services, and the information
systems and infrastructure/resources that are used to provide the services.

LOGISTICS SERVICES
Figure 3.1 provides an overview of logistics services in terms of five major
groups of activities—production processes, materials and other inputs,
transport and storage, product support, and reverse flows and disposal.

Production processes
Production processes incorporate production flow management, inventory
management, packaging, order processing and demand forecasting. These
processes were traditionally regarded as the core functions of a firm, and were
often undertaken in-house. More recently, there has been increased outsourcing
of some of these activities, particularly inventory management and packaging.
Developments such as assembly in transit have led to a blurring of the
distinction between producers and service providers in some cases.
Production flow management includes production planning. It also
incorporates materials handling, which is ‘virtually all aspects of all movements
of raw materials, work in process, or finished goods within a plant or
warehouse’ (Lambert et. al. 1998, p. 18).
The holding of inventory facilitates access to economies of scale (through longer
production runs), handling of seasonal variations in demand, and rapid
response to changes in demand. Effective inventory management can improve
customer service and reduce holding costs, although at some point there is a
trade-off between these two aspects of performance.
Packaging is used to protect products from deterioration, damage, pilferage and
tampering. Potential sources of deterioration and damage include temperature
extremes, moisture, dirt, dust, light, fumes, odours, shocks, vibration and
bacteria. Packaging also facilitates the safe containment of dangerous goods
during storage, handling and transport. In addition, it provides standard

15
FIGURE 3.1 LOGISTICS SERVICES
Reverse
flows and
disposal

Product, Recycling
equipment and waste
returns disposal

Production
processes
Materials
Production Product
and other
flow support
inputs
management

Inventory Parts
Procurement management support

Packaging
Materials Service
management support
Order
processing

Demand
forecasting

Transport and
storage

Transport Warehousing
and storage

Source BTE analysis.

16
quantities of a product that reflect consumer requirements, contributes to
marketing and promotion, and facilitates transport and storage by conforming
to the requirements of equipment such as pallets and containers.
Order processing is the system through which a firm receives orders from
customers, tracks the filling of the orders, and despatches them.
Forecasting incorporates predictions of future demand for a firm’s output. It
affects production planning, the quantities of inputs ordered from suppliers,
and decisions about the amount (and mix) of products to be transported or
stored in each market.

Materials and other inputs

Procurement and materials management potentially have a major impact on the
competitive position of a firm. Key issues include price, quality, reliability and
availability of inputs when required.
Procurement is defined as the purchase of goods and services from outside
suppliers for use in the firm’s production, sales and distribution activities. It is
generally undertaken by in-house staff, although the use of external operators
(e.g. brokers) is common in some industries.
Greater outsourcing of logistics (and other) activities has increased the
importance of the procurement function in many firms. Procurement has
evolved from an operational process to a strategic activity, with a key role in
managing and optimising logistics expenditure and supplier performance.

Transport and storage

Transport is generally the largest single component of logistics costs (see
chapter 4). Warehousing and storage are also major activities.
The choice of transport services for inputs and products is particularly affected
by the distances involved. The major activities, and typical arrangements, are:
• local pick-up/delivery—mainly road transport;
• regional transport—mainly road or rail transport;
• long-distance transport—road, rail, air or sea transport, with the major mode
also varying in response to factors such as cargo characteristics (e.g. unit
values, tonnages) and route (e.g. domestic or overseas).
Pipelines are used for the carriage of liquids (including solid materials
transformed into slurries) and gases. Applications range from transfers within
production facilities to long-distance movements.
Warehousing and storage can be considered in terms of services for the
production process and for product distribution. There have been major
changes in the number and location of facilities in Australia since the 1980s,
with the closure of many single-user warehouses and an expansion of

17
consolidation facilities and distribution centres. These developments reflect
factors such as better transport services (e.g. due to upgrading of major roads)
and pressures to improve logistics performance.

Product support
With the increased emphasis on service quality in many sectors of the economy,
product support is a key component of many firms’ competitive strategies.
Parts and service support (including installation and maintenance) can be used
to enhance the attractiveness and reputation of a firm and its products. These
activities are particularly important in situations where any delays or
equipment down-time would impose significant costs on the firm’s customers.

Reverse flows and disposal

Logistics services typically have a major focus on supporting the production
process and the movement of products to customers. However, reverse flows
and disposal of waste (e.g. packaging) are also important activities. Reverse
logistics comprises ‘the handling, storage and movement of material that flows
from the end customer back to the seller or supplier’ (Kasilingam 1998, p. 245).
Appropriate handling of product returns assists a firm to enhance its relations
with customers and to identify problems in production processes or product
design. Efficient practices in equipment returns (e.g. empty containers, pallets)
facilitate cost savings and adequate availability of equipment.
Many firms have developed detailed strategies for recycling and waste
disposal. This reflects environmental issues, including regulatory requirements,
and cost considerations (e.g. savings through re-use of off-cuts generated in the
production process). Poor performance in these areas may adversely affect
public perceptions of a firm and therefore weaken its market position.
Activities that maximise the value of returned products may make a significant
contribution to a firm’s profitability (Andel 1997, pp. 61-64). Rather than being
destroyed, these products may be returned to finished goods inventory,
refurbished for resale, or sold on the secondary market. Some hazardous and
other wastes may be resold to other manufacturers or sent as scrap to recyclers.

INFORMATION SYSTEMS
The efficient and effective operation of the logistics system depends on reliable
and timely information flows, involving both providers and users of services.
An information system is an electronic, paper-based or voice network that
enables each participant to share operating data with other participants.
The development of e-commerce, initially involving activities such as email and
electronic data interchange (EDI), has increased the capabilities and lowered the

18
costs of information systems. For example, EDI has enabled some firms to use
electronic transmission in place of paper-based arrangements for documents
such as purchase orders, invoices, consignment notes, remittance advices and
customs documents. Internet-based systems are providing firms with new e-
commerce mechanisms to interact with other businesses (B2B) and with
customers (B2C), and to re-engineer business processes.
Figure 3.2 illustrates some basic components of logistics information flows. In
practice, a logistics chain usually incorporates a variety of information systems
operated by different participants (e.g. suppliers, transport operators, retailers).
The flow of information along a chain is often hindered by the use of
proprietary systems based on different standards (e.g. numbering for barcodes).

FIGURE 3.2 SOME BASIC COMPONENTS OF LOGISTICS INFORMATION FLOWS

Materials/product
tracking

Logistics Logistics
providers providers

Order
Input Producers placement
requirements

Sales and
Order forecasts
placement Import/export
documentation

Customer
requirements
Input suppliers
Customs,
Quarantine, etc.

Source BTE analysis.

19
It should be noted that figure 3.2 provides a general overview of information
flows. The provision of sophisticated logistics services typically requires
specific systems for activities such as vehicle routing and scheduling, track and
trace, warehouse management, generation of performance reports, and
processing of payments.
The components of figure 3.2 can be considered in terms of sales and delivery,
materials and other inputs, and export/import documentation.

Sales and delivery

Ideally, information on customer requirements is incorporated in the features of
a product during the design phase. In addition, comments from customers after
production and sales have commenced may provide further information, which
then contributes to product modifications or redesign.
Forecasts and sales data provide the basis for product orders and decisions
about the volume and timing of production. The resulting production levels
and delivery schedules determine the logistics services required by the firm,
and must therefore be communicated to the providers of these services.
The development of e-commerce has contributed to the creation of more
effective sales processes. Internet-based systems are providing firms with new
mechanisms for interacting with consumers (e.g. product promotion and
processing of orders).
Track and trace systems, using processes such as bar coding, provide
information on the location of specific consignments between despatch and
receival. The information is particularly useful for monitoring delivery
performance and responding to inquiries about late or missing deliveries.

Materials and other inputs

Planned production levels and delivery schedules provide the basis for
determining input requirements and the resulting orders from suppliers.
Efficient transmission of this information to suppliers is an important
component of a firm’s operations, as it facilitates the minimisation of inventory
costs and implementation of strategies such as just-in-time (JIT) manufacturing.
The development of e-commerce has provided new mechanisms for firms to
purchase inputs. For example, corProcure was established in 2000 by 14 major
Australian firms to provide an Internet-based procurement marketplace. These
mechanisms potentially provide benefits such as reductions in transaction and
processing costs, fewer errors, faster business processes and improved
information about supply options.
Tracking systems assist firms to monitor materials flows and to optimise their
production processes.

20
Export/import documentation
Information about certain input/product movements between Australia and
overseas origins/destinations must be provided to the Australian Customs
Service (ACS) and the Australian Quarantine and Inspection Service (AQIS).
The information is required for purposes such as barrier control, collection of
customs duties, prevention of the entry of pests and diseases into Australia, and
quality certification of some exports.
Various organisations are involved in the provision and processing of this
information. They include shippers, shipping lines, terminal operators, customs
brokers and freight forwarders, as well as the ACS and AQIS. Other agencies,
such as State/Territory agriculture departments, may have related functions.
Efficient transmission of information is therefore necessary to expedite the
clearance of cargoes and to avoid or minimise delays. The ACS provides
facilities for electronic lodgement of documentation and clearance of cargoes.

INFRASTRUCTURE AND RESOURCES

Figure 3.3 outlines the major components of infrastructure and resources that
are used to provide logistics services. They comprise human resources, financial
resources, packaging materials, warehousing, transport and communications.

Human resources
The delivery of efficient and effective logistics services requires highly skilled
managerial and operational staff. The development of appropriate skills
involves both recruitment and training. There are reportedly current, or
emerging, shortages of skilled staff in various parts of the logistics system.
Expenditure on training is below levels in other sectors of the economy.
Some of the organisations involved in logistics skills development in Australia
include RMIT University, the Institute of Applied Logistics, APICS Institute of
Education and Research, Southern Sydney Institute of TAFE, Macquarie
University, the Australian Institute of Packaging, St. George College of TAFE,
Central Queensland University, and University of Technology, Sydney.

Financial resources
The provision of logistics services requires financial resources for plant and
equipment, other inputs and working capital. The capital costs of major
facilities such as ports and rail links are substantial.
Sources of finance available to private operators (external and in-house) include
leases, borrowings, and equity raisings. The public sector has traditionally been
a major source of finance for infrastructure projects, particularly in the road and

21
FIGURE 3.3 LOGISTICS INFRASTRUCTURE AND RESOURCES

Financial
resources

Packaging Human
materials resources

Training

Recruitment

Warehousing Communications

Land Equipment

Buildings Software

Plant and Transmission

equipment facilities

Transport

Pallets Containers Vehicles Corridors Terminals

Source BTE analysis.

22
rail sectors. The privatisation of public enterprises in logistics-related areas (e.g.
airport operations) has changed the financing options that are available for
some activities.

Packaging materials
The packaging used for a particular product is determined by factors such as
the product’s physical characteristics, the target market, and the arrangements
for transport and storage.
The major packaging materials include paper, paperboard, cardboard, wood,
glass, metals (e.g. steel, aluminium), plastics and composite materials. They are
used in various forms such as bags, sacks, boxes, cartons, cans, tubes,
wrappings, bottles, jars, sachets, packets, drums, pails and cups.

Warehousing
Activities at warehouses (and distribution centres) include receival from
suppliers, storage, order picking and assembly, packaging and re-packaging,
and transfers between transport vehicles (i.e. cross-docking). Warehouses and
depots facilitate lower production costs (e.g. by allowing longer production
runs), transport cost savings (e.g. through bulk deliveries) and handling of
significant changes in product demand.
Buildings may be owned by the user of logistics services, the provider of these
services or other organisations (e.g. private investors or property trusts). Some
of the plant and equipment (leased or owned) that may be used include racking
systems, forklifts, cranes, pallet trucks, stacker trucks, order picking trucks, and
side loaders.
The development of efficient warehousing incorporates optimal numbers and
locations of warehouses, taking into account factors such as customer
requirements/characteristics and the location of production facilities.

Transport
Figure 3.3 indicates that transport infrastructure includes a wide range of
facilities and equipment.
Pallets contribute to the efficient storage and transport of many non-bulk
traffics (e.g. packaged groceries) by facilitating the process of unitisation. They
are generally sourced from national pools of pallets, although some firms own
their own pallets.
Containers are used extensively in the transport of non-bulk cargoes,
particularly in the overseas trades. International containers are generally owned
by leasing firms or transport operators, and are managed by transport operators
(e.g. shipping lines).

23
Transport vehicles include trucks, locomotives and rolling stock, ships and
aircraft.
Corridors are the facilities used by transport vehicles. They include roads,
railway lines, pipelines, sea lanes, air corridors and associated facilities (e.g.
signalling, traffic control).
Terminals comprise uni-modal operations as well as multi-modal facilities that
handle two or more modes. They also include ports and airports.

Communications
The operation of logistics communications services requires equipment (e.g.
computers, terminals) and software. It also involves transmission facilities such
as the telecommunications network.

24
CHAPTER 4 ECONOMIC SIGNIFICANCE OF LOGISTICS

As noted in chapter 1, the Secretariat for the Freight Transport Logistics

Industry Action Agenda asked the BTE to analyse the economic significance of
logistics activities in Australia. With the time and resources available for this
study, the BTE was not able to conduct a comprehensive data collection exercise
(e.g. a survey). The analysis was therefore based on Australian Bureau of
Statistics (ABS) data and other information.
This chapter presents revenue and employment data for some Australian
logistics service providers, the results of recent studies of the economic
significance of logistics, and the BTE’s estimates for Australia.

DATA FOR INDIVIDUAL OPERATORS

A major industry participant has stated that revenue from prime contract
transport and logistics activities in Australia totals $18 billion per annum
(Sullivan 2001, p. 23). Toll Holdings, Mayne Nickless, TNT Australia, BHP,
Linfox and K&S/Scott Group reportedly account for $6 billion of this revenue,
with another 30 operators each generating more than $100 million per annum.
Table 4.1 presents information on revenue and employment for some logistics
service providers in Australia in 1999-2000. It is mainly based on information
from commercial databases and company annual reports. The operators
included in the table reflect the coverage of the data that were readily accessible
to the BTE. They mainly provide transport, warehousing and postal services.
The 36 logistics service providers in table 4.1 had combined revenue of around
$16.1 billion in 1999-2000. This figure mainly covers operating revenue from
logistics activities in Australia, although there is also some overseas revenue.
The Brambles data include revenue from the company’s overseas logistics
operations, but exclude revenue from some of its Australian logistics activities
(pallet hire and waste management).
The figures in table 4.1 incorporate some non-logistics activities (e.g. Australia
Post’s banking and bill payment services), and there may be an element of
double counting (due to transactions between operators in the table). Any
comparison of figures for individual operators in table 4.1 should therefore be
interpreted with caution.

25
The activities of some operators have been affected by takeovers, mergers or
asset sales since 1999-2000. For example, Toll Holdings’ revenue increased to
$1.6 billion in 2000-01, and BHP Billiton is restructuring its logistics activities.

RECENT STUDIES
Table 4.2 summarises some recent Australian and overseas studies of the
economic significance of logistics activities. The studies typically indicate
logistics costs as a proportion of sales, or gross value added as a proportion of
GDP. The approaches in the studies have included surveys of individual firms
and analysis of data from national statistics agencies.
There is significant diversity in the estimates. For example, the figures range
from around 10 per cent to 21 per cent in Australia, and from 7 per cent to over
21 per cent in the US. The diversity probably reflects differences in the scope of
logistics activities in individual countries, and variations between studies in
definitions, approaches and data.
The proportion of sales or gross value added attributable to logistics activities
also varies between industries in response to factors such as differences in

TABLE 4.1 REVENUE AND EMPLOYMENT OF SOME AUSTRALIAN LOGISTICS SERVICE

PROVIDERS, 1999-2000
Company Revenue ($m) Employees (no.)
a
Australia Post 3˚743 35˚397
b
BHP Transport & Logistics Group 1˚382 1˚904
c
Toll Holdings 1˚360 5˚980
d
QR 1˚035 n.p.
e
Mayne Nickless 943 n.p.
f
Brambles Industries 931 n.p.
TNT Australia 814 5˚665
FreightCorp 639 2˚265
Linfox Transport 618 3˚500
Lang Corporation 583 n.p.
National Rail Corporation 460 1˚225
g
Finemore Holdings 376 2˚018
Owens Group 286 1˚071
Australian airExpress 268 1˚251
Westrail Freight 257 797
K&S Corporation 256 1˚100
Scott s Transport 233 n.p.
h
Discount Freight Express 230 1˚510

26
TABLE 4.1 (CONT.) REVENUE AND EMPLOYMENT OF SOME AUSTRALIAN LOGISTICS
SERVICE PROVIDERS, 1999-2000
Company Revenue ($m) Employees (no.)
Co-operative Bulk Handling 214 1˚303
Freight Australia 185 693
i
GrainCorp 167 n.p.
Heggies Bulkhaul 139 440
TDG Logistics 92 n.p.
i
AusBulk 90 n.p.
Specialised Container Transport 82 325
st
1 Fleet 80 600
Allied Express 80 406
j
Darowa Corporation 76 n.p.
k
LP International Freight Services 73 180
Westgate Logistics 71 530
Wridgways Australia 68 n.p.
g
ARN Logistics 67 n.p.
i
Grainco Australia 66 n.p.
Cootes Holdings 66 400
P Cleland Enterprises 49 400
Chalmers 26 190
n.p. not provided
a. Includes some non-logistics services such as personal banking, bill payment network, retail merchandise.
b. Incorporates logistics activities for BHP s steel, minerals and petroleum groups, and for external customers.
Excludes logistics activities within BHP s other customer sector groups (e.g. rail activities for iron ore in Western
Australia). Employment figure is for mid-2001. Revenue increased to $1˚659 million in 2000-2001.
c. Excludes Finemore Holdings, which was acquired after 1999-2000.
d. Coal and mainline freight only. Excludes metropolitan and regional services, tourist and long-distance passenger
services, and government community services.
e. Covers Mayne Nickless s Australian and Pacific logistics activities (Armaguard, MPG Logistics, Mayne Nickless
Express). Does not include $831 million of revenue from company s international logistics operations (Mayne
Nickless Express Europe, Loomis Courier) in 1999-2000.
f. As defined by Brambles Industries, transport and logistics activities cover: specialised transport, security, shipping
and towage in Australia; freight forwarding, security and wagon fleet in Europe; and security in other parts of the
world. Revenue figure in table does not include other Australian operations that are classified as logistics activities
in this paper hire of pallets and crates (CHEP) and waste management (Cleanaway).
g. Subsequently acquired by Toll Holdings.
h. Now Star Track Express.
i. Storage and handling activities only. Excludes marketing and other activities.
j. Transport and related services only.
k. Subsequently acquired by Australian arm of Union-Transport (Netherlands) Holdings.
Sources AusBulk (2000, p. 7). Australia Post (2000, p. 9). BHP Billiton (2001a, p. 36; 2001b, p. 1; pers. comm.
Oct.˚2001). Brambles Industries (2000, pp. 54-55). BRW (2000a, pp. 154-155; 2000b, pp. 92-99; 2001,
pp.˚50-76). Co-operative Bulk Handling (2000, p. 37, p. 49). Darowa Corporation (2000, p. 30). Dun &
Bradstreet (2001a, pp. 1-2; 2001b, pp. 1-2; 2001c, pp.˚1-2; 2001d, p. 1). FreightCorp (2000a, p. 1; 2000b,
p.˚1). Grainco Australia (2000, p. 7). GrainCorp (2000, p. 8). Lang Corporation (2000, p. 3). Mayne Nickless
(2000, p. 5). National Rail Corporation (2000, p. 20, p. 36). QR (2000, p. 27). TDG Logistics (2000, p. 5). Toll
Holdings (2000, p. 32). Van Onselen (2001, p.˚8). Westrail (2000, p. 22, p. 33).

27
TABLE 4.2 SOME ESTIMATES OF THE ECONOMIC SIGNIFICANCE OF LOGISTICS
Source Country Logistics resources Comments
Hall Australia 9.8 per cent of average Mainly comprises transport (4.3
selling price per cent) and warehousing (4.7
per cent.
Gilmour Australia 21.1 per cent of sales Comprises transport (2.7 per
cent), receiving and despatch
(1.0 per cent), warehousing (2.2
per cent), packaging (3.2 per
cent), inventory (7.2 per cent),
order processing (2.0 per cent),
administration (2.8 per cent).
Delaney US 10.5 per cent of GDP Comprises freight transport (5.9
per cent), warehousing, storage
& carrying inventory (4.1 per
cent) and other logistics
expenses (0.5 per cent).
Davis US 7.2 per cent of sales Comprises transport (3.1 per
cent), warehousing (1.8 per
cent), inventory (1.6 per cent),
order processing (0.4 per cent),
administration (0.3 per cent).
Davis and US 8 per cent of sales Comprises purchasing,
Drumm inventory control, facilities
location and layout,
transportation (40 per cent of
logistics costs), intra-facility
logistics.
Shapiro US >21 per cent of sales n.p.
McDonald Canada 7.3 per cent of GDP Freight transport 40 per cent
Gilmour and Japan 26.5 per cent of sales Transport (13.5 per cent) and
Rimmer packaging (13.0 per cent).
Office for UK Nearly 4 per cent of gross Core logistics activities only.
National output
Statistics
Dept. of the UK 5-10 per cent of business Proportion can be considerably
Environment, costs (freight transport higher in some heavy industrial
Transport and element of logistics only) sectors.
the Regions
Institute of UK 7.4 per cent of sales Comprises transport (2.9 per
Logistics and cent), warehousing (2.3 per
Distribution cent), packaging (0.3 per cent),
Management inventory (1.3 per cent),
administration (0.6 per cent).
Michigan State 20 10-15 per cent of GDP in n.p.
University countries North American, Asian,
European countries
OECD Worldwide 16 per cent of world GDP n.p.
n.p. not provided
Sources Department of the Environment, Transport and the Regions (1998, p. 1). Gilmore (1993, p. 9). Hall (1999,
p.˚120). HLB Decision Economics (2001, p. 2). Kasilingam (1998, pp. 5-8). Lambert et. al. (1998, p. 10).
OECD (1996, p. 31). Rushton et. al. (2000, pp.˚10-11). Shapiro (1992, p. 58).

28
product characteristics and transport requirements. For example, data for UK
firms in 14 industries indicate that distribution costs range from 0.8 per cent of
sales for spirits to 46.0 per cent for cement (Rushton et. al. 2000, p. 12).
The most recent estimate for logistics in Australia (9.8 per cent of average
selling price) was prepared by Hall, in a cooperative research initiative
formulated by industry partners, the LAA and Monash University. The study
incorporated a survey of firms in various sectors of the economy.
Earlier estimates for Australia were prepared by Gilmour. His work provided
significantly higher figures for the resources used in logistics activities.
Gilmour’s most recent figure (21.1 per cent of sales) incorporated a relatively
high estimate (7.2 per cent of sales) for inventory costs.

LIMITATIONS OF AUSTRALIAN DATA

The ABS has not attempted to estimate the economic significance of logistics
activities in Australia (ABS pers. comm. Apr. 2001). Industry associations,
individual operators and academics do not collect comprehensive data on these
activities. However, the contribution of logistics to GDP and employment can
be roughly estimated using ABS national accounts data and other information.3
The classification of activities used by the ABS is based on the Australian and
New Zealand Standard Industrial Classification (ANZSIC). Logistics activities
that are separately identified in this framework mainly involve:
• transport and storage (freight and passengers);
• postal services;
• courier services; and
• waste disposal services.
The ABS data do not separately identify other major components of logistics
activities such as inventory management, order processing or procurement.
Another limitation of the ABS data is that the allocation of a firm’s activities to
an industry classification is based on the principal activity of the firm. This
means that in-house logistics activities (particularly transport) are typically
included in non-logistics categories. For example, the in-house road transport
operations of a firm primarily involved in manufacturing would generally be
allocated to the relevant manufacturing classification.4

3 The national accounts provide a systematic summary of national economic activity. There
are three approaches to the measurement of GDP—the production approach (summing the
value added at each stage of production), the income approach (summing the incomes
generated by production), and the expenditure approach (summing the final expenditures
on goods and services produced).
4 In some cases, in-house transport activities may be allocated to the transport classification if
they are undertaken through a separate management unit (e.g. a subsidiary company).

29
BTE ESTIMATES BASED ON ABS DATA
Despite these limitations, ABS data provide the basis for a multi-step procedure
to estimate the contribution of logistics activities to GDP and employment. The
procedure is based on the freight component of transport. Table 4.3 outlines the
major stages of the estimation process.

Transport and storage

Gross value added of the transport and storage sector was $34 496 million (5.6
per cent of GDP) in 1999-2000 (ABS 2001a, p. 54). This sector comprises:
• road transport ($11 052 million);
• air and space transport ($5 077 million);
• water transport ($783 million);
• rail, pipeline and other transport ($5 593 million); and
• transport services and storage ($11 991 million).

Freight transport
Logistics, as defined in this study, focuses on the movement and handling of
goods and materials. As the ABS does not publish separate data for freight
transport, it is therefore necessary to remove the passenger components from
the published figures for transport and storage. Gross value added for storage
activities must also be subtracted, in order to obtain an estimate for freight
transport only.
The ABS provided the BTE with figures for gross value added in storage
($1 192 million) and the passenger part of road transport ($3 068 million).

TABLE 4.3 ESTIMATION OF GROSS VALUE ADDED IN AUSTRALIAN FREIGHT

TRANSPORT, 1999-2000
Component Gross value added ($m)
Transport and storage 34˚496
Less
Storage 1˚192
Road transport passengers 3˚068
Air and space transport passengers 4˚722
Rail, pipeline and other transport passengers 1˚734
Services to air transport passengers 946
Total deductions 11˚662
Freight transport 22˚834
Sources BTE analysis based on ABS (2001a, p. 54; pers. comm. May 2001; pers. comm. June 2001), BTCE (1995,
pp.˚18-69), Qantas Airways (2000, p. 27).

30
The BTE estimated the other passenger components using several approaches:
• air and space transport—93 per cent of gross value added, based on the
proportion of Qantas passenger and freight revenue attributable to
passengers (Qantas Airways 2000, p. 27)5;
• services to air transport—unpublished ABS data on gross value added
($1 017 million) combined with the proportion of Qantas passenger and
freight revenue attributable to passengers; and
• rail passengers—31 per cent of gross value added in rail, pipeline and other
transport, based on the passenger proportion of railways’ cashbox receipts,
concession reimbursements and subsidies in 1993-94 (BTCE 1995, pp. 18-69).6
On the basis of these data, the BTE estimated that the gross value added of
freight transport was $22 834 million in 1999-2000. This figure still includes
some passenger activities in the form of travel agency services and parking
services. However, these activities would probably comprise a small proportion
of gross value added in transport.

Logistics
Several studies (e.g. Davis and Drumm, Institute of Logistics and Distribution
Management, Hall, Davis, McDonald) have indicated that transport comprises
around 40-45 per cent of total logistics costs. A US survey provided a figure of
46 per cent, and a European study concluded that transport typically represents
41 per cent of total logistics costs (Rushton et. al. 2000, pp. 10-12). While lower
and higher proportions have been reported in other studies, it seems reasonable
to use a primary figure of 40 per cent in the analysis of Australian logistics.7
Combining the figures of $22 834 million (gross value added in freight
transport) and 40 per cent (freight transport share of logistics activities) results
in an estimate of around $57 billion for logistics in Australia.8 This figure, which
covers bulk and non-bulk traffics, is equivalent to 9.2 per cent of GDP in 1999-

5 This method provides only a very approximate estimate of the proportion of gross value
added attributable to passenger activities in air transport as a whole.
6 This proportion overestimates passenger activities (and underestimates freight activities) for
rail operations as the data do not include freight-only railways in north-west Australia. Its
application to pipelines, which carry freight only, also contributes to over-estimation.
7 In the literature examined by the BTE, the highest estimate for transport as a proportion of
logistics costs is 60 per cent (Canada) and the lowest estimate is 25 per cent (OECD).
However, there is only one example of each of these extreme estimates.
8 The gross value added figures in this section are not directly comparable with the revenue
figures in table 4.1. Relationships between value added and revenue in the BTE’s port impact
studies suggest that the total revenue of $16.1 billion for the 36 operators in table 4.1
represents value added of around $10.1 billion. Removal of the figure for Australia Post
(probably included in postal services by the ABS) reduces total revenue to $12.4 billion. This
figure mainly covers transport and storage, and represents around $7.8 billion of value
added—equivalent to 34 per cent of the BTE’s estimate of $22.8 billion for freight transport.

31
2000.9 It is broadly comparable with Hall’s Australian estimate of 9.8 per cent
(logistics costs divided by average selling price), and is at the lower end of the
overseas estimates reported in table 4.2.
The BTE’s estimate of gross value added as a proportion of GDP is sensitive to
the freight transport share of logistics activities that is used in the analysis. The
GDP proportion declines to 7.4 per cent with a 50 per cent share for freight
transport, and to 6.1 per cent with a 60 per cent share. It increases to 12.3 per
cent if a freight transport share of 30 per cent is used in the analysis. The BTE’s
preferred figure of 40 per cent, which results in a GDP proportion of 9.2 per
cent, reflects the predominant range of estimates for the freight transport share.
The results of the BTE’s analysis indicate that logistics activities comprise a
significant proportion of economic activity in Australia. The estimate of around
9 per cent for logistics compares with figures of 11 per cent for wholesale and
retail trade, 12 per cent for manufacturing, and 12 per cent for mining,
construction and utilities combined (DoTRS 2000, p. 4).
A similar (but more approximate) approach can be used to prepare an estimate
of employment in logistics activities. There were 418 700 persons employed in
the transport and storage sector at the end of 1999-2000 (ABS 2001b). The BTE’s
analysis indicates that gross value added in logistics was 1.65 times gross value
added in the transport and storage sector in 1999-2000. Applying this ratio to
employment in transport and storage provides a very rough estimate of around
690 000 employed persons (full-time equivalent) in logistics.

INTERPRETING THE ESTIMATES

The estimate of the contribution of logistics to GDP (and employment) is very
approximate, as it is based on limited data and indirect calculations. The
reliability of the estimate is also affected by the national accounts data, which
become less accurate as more disaggregated components are examined.
The GDP proportion of 9.2 per cent is probably conservative. The estimate for
the freight transport component of the calculations does not include some
transport activities that are undertaken in-house by firms primarily involved in
other activities. These omitted activities are significant—for example, in the
mid-1990s it was reported that 50 per cent of all truck-kilometres in Australia
were performed by firms whose main activity was outside transport (i.e. in-
house operations).10 It also seems likely that some or all of the substantial rail

9 The national accounts cover production in Australia for domestic and export markets. Any
overseas production is therefore excluded from the data.
10 Unpublished NRTC paper cited in NOIE (1999, p. 4). Gross value added for in-house (i.e.
ancillary) road freight transport can be roughly estimated using the road freight component
in the national accounts, on the assumption that this component covers external (i.e. hire and
reward) operators only and that average payloads for in-house and external operators are
similar. Adding this figure ($7 984 million) to freight transport would increase the estimate

32
activities undertaken by mining companies in north-west Australia are
excluded from the transport figures. This factor is likely to significantly
outweigh the impact of the passenger activities (travel agency services, parking
services) that could not be removed from the transport data.11
The estimate of the proportion of GDP attributable to logistics activities
provides only partial information on their economic significance. It does not
indicate the total impact on the Australian economy. This reflects the broader
role of logistics as an enabler or facilitator of economic activity, and its effect on
Australia’s international competitiveness. Logistics activities support the
operation of all other industries, and are therefore an indispensable component
of economic activity.
Increased efficiency in logistics activities would potentially reduce the
proportion of GDP attributable to these activities. However, this would not
reflect a reduction in the importance of logistics in the broader economy, and
resources could be released for use in other areas of the economy. 12 It might
also be argued that the allocation of additional resources to logistics could be
desirable if improved services facilitated increased output in other areas of the
economy. The proportion of GDP or employment attributable to logistics
activities should therefore be interpreted with caution.
The BTE’s estimate of gross value added in logistics does not incorporate inputs
provided by other industries. The flow-on effects to these industries are
probably significant. For example, sales of packaging in Australia (i.e. domestic
manufacture and imports of empty packaging) were reportedly equivalent to
around 1.3 per cent of GDP in 1993-94 (Industry Commission 1996, p. 3).

for logistics as a proportion of GDP to 12.4 per cent (with a freight transport share of 40 per
cent). However, this figure would be an overestimate as external operators would be
expected to have higher average payloads, and the proportion of the task undertaken by in-
house operators has probably fallen as a result of increased outsourcing since the mid-1990s.
11 Satellite accounts prepared for the US Department of Transportation indicate that in-house
transport services represented almost 40 per cent of value added in US transport in 1992,
with the remainder being provided by external operators (Bureau of Transportation
Statistics 1998, p. 1). Adjusting the Australian freight transport data to include an in-house
component of this magnitude would increase the logistics estimate to 15.0 per cent of GDP
(freight transport share 40 per cent). However, the US figures are unlikely to be applicable to
Australia, as there are significant differences in the structure of the transport sector in the
two countries.
12 One observer has noted that GDP in the US increased from US$2.88 trillion in 1980 to
US$9.26 trillion in 1999 (Trunick 2000, p. 50). Over the same period, estimated logistics costs
rose from US$451 billion to US$921 billion. These figures indicate that the proportion of GDP
attributable to logistics in the US declined from 15.7 per cent in 1980 to 9.9 per cent in 1999.

33
CHAPTER 5 STRUCTURE AND OPERATION

The logistics system has been evolving rapidly in response to the changing
requirements of industry and consumers. Major developments have included
increased outsourcing and strategies to promote greater integration.
This chapter describes the structure and operation of logistics in terms of the
operating environment, users and providers of services, and competition.

OPERATING ENVIRONMENT
Changes in the global and local economies have had major effects on logistics
activities in Australia. Improved performance, and a wider range, of logistics
services have also facilitated some of these developments.

Globalisation
A reduction of trade barriers, growth of financial markets and improvements in
information technology have contributed to a major expansion of international
commerce. This expansion has been accompanied by increased requirements
for logistics services, and a restructuring of services to support increasingly
global businesses.
The involvement of more firms in international trade has also increased the
scope and complexity of logistics activities. Movement of products in overseas
markets can involve a range of difficulties (e.g. maintaining product quality),
particularly in countries where logistics services are not well-developed.

Industry restructuring
Globalisation and microeconomic reform (e.g. deregulation and privatisation)
have contributed to major changes in Australian industry. In particular,
reduced levels of protection have exposed many local firms to increased
international competition. Their responses have included a greater emphasis on
logistics activities in order to improve product quality, increase responsiveness
to market requirements, and reduce costs.
There have also been significant changes in industry structure, with contraction
of some local activities (e.g. clothing, textiles, footwear) and expansion in other

35
areas (e.g. tourism). This restructuring has often led to a requirement for more
sophisticated logistics services.
The growth of the Australian economy has also contributed to the expansion
and restructuring of logistics activities. In particular, increased levels of
economic activity have provided more opportunities for the development of
specialised providers of logistics services.

Production processes
The introduction of more efficient production processes, partly in response to
increased global competition, has required more sophisticated logistics services.
Just-in-time (JIT) manufacturing provides an early example of new production
processes. The operation of production lines (e.g. motor vehicle assembly) with
very low levels of inventory required smaller, more frequent deliveries of
inputs and close relationships with suppliers. Any significant disruptions to
logistics activities would quickly halt production, and eliminate (or outweigh)
the savings from just-in-time manufacturing.
There have also been changes in inventory management. For example, the
efficient consumer response (ECR) technique incorporates continuous
replenishment of inventory and flow through distribution (Lambert et. al. 1998,
p. 30). This enables inventory to be managed on a just-in-time basis, rather than
stockpiling goods in warehouses and distribution centres.
Other changes affecting logistics activities have included total quality
management (TQM), single or dual sourcing policies, transnational sourcing,
increased use of contract manufacturing, assembly to order, and shortening of
product life-cycles.

Technology
Advances in technology have increased the capacity, speed and interactivity of
information systems. These developments have facilitated the growth of
e-commerce, the introduction of more effective services (e.g. track and trace),
and the expansion of external logistics providers.
Technological change has also contributed to improvements in infrastructure
and equipment, resulting in lower costs and better performance. Examples
include the development of large container ships, more fuel-efficient engines,
road-rail systems, packaging that increases the shelf-life of perishables, satellite
navigation systems, and product tags incorporating wireless technology.

Infrastructure
Upgrading of national infrastructure has removed some restrictions on logistics
activities, and facilitated the introduction of more sophisticated services.

36
The developments have included improvements to telecommunications
facilities, which have substantially increased the speed and capacity of data
services. Upgrading of national highways and rail infrastructure has facilitated
faster and more reliable transit times.

USERS OF LOGISTICS SERVICES

The users (buyers) of logistics services include a wide range of organisations in
the mining, agriculture, manufacturing and service sectors. For example, the
provision of airline services depends on the timely availability of inputs such as
fuel and equipment.
Box 5.1 provides a sample of some major users of logistics services in Australia.
They include supermarket groups, other retailers, mining companies, food
processors, beverage producers, other manufacturers, and suppliers of services.
Users of logistics services range from small businesses, which in some cases are
fragmented and uncoordinated, to large firms. The presence of multiple buyers
and providers of services in a logistics chain may contribute to difficulties in
coordinating activities and optimising chain performance.
Overseas buyers (including shippers) have a major role in purchasing logistics
services for Australian exports. For example, Japanese steel mills and electricity
companies typically arrange (and pay for) the shipping of coal to Japan. Goods
imported into Australia incorporate logistics activities that are organised by
overseas producers.
Many users of logistics services have in-house operations which provide
services such as demand forecasting, warehousing and inventory management.

BOX 5.1 SOME MAJOR USERS OF LOGISTICS SERVICES IN AUSTRALIA

AWB Arnott's Biscuits Email

BHP Billiton Cadbury Schweppes Bonlac Foods
CSR Coca–Cola Amatil Coles Myer
Ford Australia Colgate-Palmolive David Jones
Holden Department of Defence Dell Computer
Metcash Trading Foster’s Group Kraft Foods
Nestlé Australia Goodman Fielder Southcorp
Qantas Airways Johnson & Johnson Pacific SPC
Rio Tinto Lion Nathan Unilever
Simplot Australia National Foods Woolworths
Toyota Australia Procter & Gamble Australia WMC

37
In-house logistics expertise is required to operate these services and also to
effectively manage external service providers, particularly where there are
multiple providers. Larger users of logistics services also manage competitive
processes for appointing external service providers, typically including fixed-
term contracts.
Some major users of logistics services in Australia organise their activities on a
regional basis. For example, Lion Nathan operates its outward transport and
distribution activities through Linfox (Queensland), Toll Holdings (New South
Wales), Gregory’s Transport (Victoria), Scott’s Transport (South Australia) and
Wesfarmers Transport (Western Australia). Woolworths has traditionally
organised its supermarket buying/marketing and transport on a State basis, but
has recently moved to central buying for most products and to a zone basis for
transport/distribution (Woolworths 2000, p. 13; Corbett et. al. 2001, p. 10).

PROVIDERS OF LOGISTICS SERVICES

The provision of logistics services in Australia involves thousands of in-house
and external operators. There is significant variation, between industry sectors
and between firms, in arrangements for the supply of services. The variation
reflects factors such as differences in access to technical knowledge, economies
of scale and financial resources, and in requirements for specialised equipment
and infrastructure.
Figure 5.1 presents an overview of the provision of logistics services in
Australia. The providers can be considered in terms of the users of these
services (i.e in-house operators) and four categories of external, or third party,
logistics operators13:
• contractors/specialists;
• brokers/agents;
• multi-service logistics operators; and
• integrated logistics providers.
In practice, the classification of a particular external provider is not always
clear-cut, as there are often similarities between operators in adjacent
categories. For example, a freight forwarder (included in the broker/agent
category) typically arranges multiple services, which is also a characteristic of a
multi-service logistics operator.

13 Some analysts classify all external providers as third party logistics operators, while others
restrict the term to the more integrated providers. More recently, some industry participants
and observers have defined third party logistics operators as organisations that focus on
transport and warehousing, with the term Fourth-Party Logistics Provider (4PL™) being
applied to operators with high levels of technology and a focus on materials, systems,
production and sales.

38
FIGURE 5.1 CATEGORIES OF LOGISTICS SERVICE PROVIDERS

Brokers/ Multi-service
agents logistics
operators

Integrated
Contractors/ logistics
specialists providers

Buyers of
logistics
services

In-house providers

Source BTE analysis.

39
Figure 5.1 indicates that there are also links between providers of logistics
services in different categories. For example, contractors/specialists such as
road transport owner-drivers provide services for many brokers/agents, multi-
service logistics operators and integrated logistics providers.
Many larger users of logistics services are reducing the number of external
providers that they use. Major providers typically operate some services and
also coordinate the activities of various contractors.
Some external providers specialise in the handling of certain traffics. Examples
include temperature-controlled traffics (e.g. P Cleland Enterprises), explosives
(e.g. Helidon Carrying Company), chemicals (e.g. United Transport Services),
grain (e.g. GrainCorp) and motor vehicles (e.g. Prix Car).
As noted in chapter 1, the use of external operators to provide logistics services
may generate benefits such as lower costs, global capabilities and capital
expenditure savings. External operators may also enable the managers of a firm
to concentrate on their core competencies and the firm’s core business.

In-house providers
In-house provision of logistics services may be an attractive option for firms
that have relevant skills. The potential benefits include:
• direct control of core activities—e.g. production processes, procurement,
materials management, and parts and service support;
• good information flows, that are uninterrupted by external intermediaries
(e.g. drivers dealing directly with a firm’s retail customers are able to provide
managers with first-hand information on retailers’ perceptions);
• better integration of activities in some cases;
• greater flexibility and responsiveness in some cases;
• access to specialised equipment in quantities that are too small to be
attractive to external service providers;
• avoidance of transaction costs with external providers; and
• high visibility (e.g. delivery vehicles painted in firm’s colours and logo).
The users of logistics services are major providers of these services in various
areas of mining, manufacturing and retailing. For example, large oil companies
traditionally operated their own shipping fleets, operated storage facilities,
controlled the sales outlets, and undertook marketing activities. Arnott’s
Biscuits operates its own warehouses, and uses its own vehicles for 50 per cent
of long-distance transport in eastern Australia and for metropolitan deliveries.
Some in-house providers also operate as external service providers for other
firms. For example, BHP Billiton operations account for about 75 per cent of the
annual tonnage handled by BHP Transport and Logistics Group, with the
remainder coming from other organisations (BHP Billiton 2001b, p. 1).

40
Contractors/specialists
A contractor/specialist is an organisation that undertakes a small number of
closely related logistics activities, involving narrow interactions with each
buyer of its services. Examples of these service providers include:
• couriers;
• some major rail operators;
• suppliers of pooled pallets;
• airlines (freight operations); and
• road transport owner-drivers.
Contractors/specialists may provide cost savings and/or superior services by
applying specialised skills. Aggregation of traffic from multiple users
potentially enables them to access economies of scale and network economies
that would not be available to users operating their own services. Differences in
working conditions or the cost of capital may also provide cost advantages.
Contractors/specialists range from owner-operators, who have cost advantages
in some activities (e.g. long-distance road transport), to large operators.
Some contractors/specialists have been increasing the coverage of their logistics
activities by acquiring or establishing related businesses. For example, AusBulk
(grain handling and storage) has participated in a bid to acquire Ports Corp SA
(port management).

Brokers/agents
A broker/agent provides advice (e.g. on customs requirements or freight rates)
and arranges various logistics activities that are usually focussed on a specific
sector (particularly transport). Examples of these service providers include:
• traditional freight forwarders;
• custom brokers; and
• warehouse brokers.
Brokers/agents have specialised skills (e.g. knowledge of shipping schedules
and freight rates) but offer a wider range of services than
contractors/specialists. For example, freight forwarders coordinate activities
such as the booking of space, preparation of documentation, customs clearance,
and pick-up and delivery of cargoes. They are particularly important for
smaller shippers selling into export markets.

Multi-service logistics operators

A multi-service logistics operator provides logistics services at several stages of
logistics chains. The services are coordinated with each user’s operations. There
is significant variation in the mix of activities undertaken by individual
operators.

41
Multi-service logistics operators typically focus on closely-related physical
activities, such as transport and warehousing. They may provide some
coordination and enhancement of chain performance using their information
systems, but do not manage a range of services across a chain. These operators
range from organisations with a variety of loosely-connected activities to
operators that provide a limited number of well-coordinated services.
Lang Corporation (incorporating Patrick, Liberty Cargo Systems, Holyman,
Cargolink and RFL) probably provides an example of a multi-service logistics
operator. The company’s activities focus on transport and warehousing. They
include stevedoring, coastal shipping, rail transport, port cartage, freight
forwarding, customs inspections, warehousing and distribution, container
packing and unpacking, fumigation and container maintenance.

Integrated logistics providers

An integrated logistics provider is an organisation that provides logistics
services across major parts of logistics chains. There is a high level of
integration (strategic and operational) through comprehensive sharing of
information with users.14
These providers typically manage major parts of logistics chains for firms such
as large manufacturers. They have specialist skills and equipment, and
integrate various activities to provide ‘complete logistics solutions’. Their
contributions include supply chain design, capital assets, management,
maintenance, and information systems.
An integrated logistics provider may improve the performance of a chain by
identifying and contracting appropriate service providers, aggregating traffic,
redesigning processes and optimising the logistics chain. Its operations
typically incorporate sophisticated information systems that provide
capabilities such as vehicle routing, scheduling, track and trace, warehouse
management and performance reports.
TNT Logistics’ European operations reportedly provide an example of
integrated logistics activities (Critchley 2001, pp. 138-139). The company’s
services for Fiat in Italy include inbound transport and receival,
consolidation/deconsolidation, order management, inspection, central and
regional warehousing, line feeding, scheduling of pickings, packaging and

14 An integrated logistics provider has some similarities with a Fourth-Party Logistics Provider
(4PL™). A 4PL™ is defined as ‘A supply chain integrator who assembles and manages the
resources, capabilities, and technology of its organization with those of complementary
service providers to deliver a comprehensive supply chain solution’ (Bade and Mueller 1999,
p. 79). While a 4PL™ (typically a consulting firm or information technology specialist)
controls other logistics operators on behalf of its clients and is the centralised point of
contact, an integrated logistics provider (as defined in this paper) may also supply
infrastructure and be the operator of some services (e.g. transport).

42
protective treatment, packing/checking/sorting/labelling, outbound transport,
and management of dealers’ claims.
Industry sources have indicated that Danzas AEI (e.g. computers) and Exel (e.g
health care and pharmaceutical products) are among the integrated logistics
providers operating in Australia. Their activities include management of
inbound and outbound transport, warehousing, inventory, packaging and
rework services.
Many integrated logistics providers had their origins in freight forwarding or
road transport, and then expanded into other logistics activities. There are some
similarities with multi-service logistics operators. However, integrated logistics
providers have a broader range of activities that extend beyond physical
activities such as transport and warehousing (e.g. to inventory management).

COMPETITION
Preliminary information on market structure suggests that there is significant
variation in the level of competition within the logistics system. For example,
one major operator reportedly holds 80 per cent of the primary market for pallet
and crate pools in Australia. In contrast, there are many operators in the road
transport industry.
In announcing its decision not to intervene in the proposed acquisition of
Finemore Holdings by Toll Holdings, the Australian Competition and
Consumer Commission (ACCC) stated that competition among transport and
logistics providers is fierce (ACCC 2000a, p. 1). The reasons include relatively
low barriers to small-scale entry and the countervailing power of customers.
The Commission noted that large customers control substantial volumes of
business, and have the option of using either in-house services or contractors.
Small carriers have access to a large number of small logistics service providers.
There have been several convictions of operators in the express freight industry
for breaches of the Trade Practices Act 1974 (ACCC 1996, p. 1; ACCC 2000b, p. 1;
TPC 1994, p. 50). The activities have included:
• a long-running price fixing cartel (1994);
• misleading or deceptive conduct, involving a practice of representing that
goods would be transported by air when they were actually sent by road
(1996); and
• attempts to implement collusive tendering arrangements (1998).
The presence of networks and synergies may affect the level of competition in
logistics activities. Any economies of scale or scope associated with networks or
synergies will potentially enable some providers of logistics services to achieve
cost savings. Competition may be adversely affected if a small number of larger
operators are able to use the associated cost advantages to prevent entry by
other operators.

43
CHAPTER 6 PERFORMANCE

The performance of the logistics system has a major impact on costs, service
quality and competitiveness in Australian industry. Greater exposure to
international competition has contributed to pressures for better performance.
Prior to the 1980s, the logistics strategies of individual firms were focused on
cost reduction. However, logistics activities are now seen as a potential source
of competitive advantage and revenue enhancement. Major users of logistics
services generally attempt to optimise performance in areas such as:
• order cycle times;
• on-time delivery;
• order fill rates;
• transit times;
• order status information;
• condition of product when delivered;
• billing accuracy; and
• costs.
The requirements of individual firms are heavily influenced by the performance
of competitors’ logistics operations, particularly in export markets and in
domestic markets open to competition from imports.
This chapter considers performance issues in terms of total cost analysis, chain
management, integration, and recent Australian performance.

TOTAL COST ANALYSIS

Lambert et. al. (1998, p. 24) note that ‘the primary goal of logistics in any
organization is to support the organization’s customer service goals in an
effective and efficient manner’. A firm developing a logistics strategy should
therefore first identify the desired performance levels (e.g. order response
times). This decision will incorporate aspects of the firm’s broader competitive
strategy, such as the price/quality positioning of its products.
There are often several alternative strategies that can be used to achieve a firm’s
logistics objectives. Any change in a major component of a logistics operation
will typically affect other components, and therefore total logistics costs. A firm

45
should aim to minimise the total costs of achieving its desired performance
levels.
Figure 6.1 illustrates the trade-offs for a firm that is evaluating the most efficient
number of depots for its operations. In this example, storage costs and
information system costs generally increase in direct proportion to the number
of depots. Long-distance transport costs and inventory costs increase at
declining rates. In contrast, local delivery costs decline, since an increase in the
number of depots reduces the average distance for local delivery.
In this example, the optimal arrangement is six depots. This provides the lowest
total distribution costs, reflecting the most efficient trade-off between long-
distance transport, inventory, storage, information system and local delivery
costs.

CHAIN MANAGEMENT
Total cost analysis provides an important input into the logistics decisions faced
by many firms. However, the concept of chain management also emphasises the
potential contribution of logistics activities to a firm’s profitability through
revenue enhancement. In particular, efficient delivery of products (e.g. fruit) in
good condition often enables the supplier to obtain a premium price and to
maximise its revenue. Logistics activities should therefore be analysed in terms
of their impact on both revenues and costs.

FIGURE 6.1 ANALYSIS OF TOTAL DISTRIBUTION COST

Source Rushton et. al. (2000, p. 123).

46
Optimal logistics performance depends on effective management of the overall
chain. As each chain generally involves multiple service providers, a firm needs
to ensure that each provider supplies the required services and that services are
effectively coordinated. Building long-term relationships and collaboration
between chain participants are key parts of this process.
In a competitive market, a logistics service provider will generally attempt to
achieve its own objectives (e.g. earnings) and meet its clients’ performance
requirements. However, in some cases this may impose additional costs on
other parts of the chain and adversely affect overall performance.
For example, a service provider may minimise its costs by allocating a client’s
products to road transport services that were previously underutilised. This
strategy will potentially reduce transport costs and charges, but may also result
in less frequent deliveries or more variable delivery times. The client will incur
additional inventory and storage costs if it wishes to maintain consistent
availability of its product for customers. These additional costs may outweigh
the savings in road transport, thereby increasing total logistics costs.

INTEGRATION
The essence of effective chain management is integration—combining the parts
(individual logistics activities) into a whole (the chain) that functions seamlessly
and provides good performance (e.g. transit times). It is particularly important
to ensure that the activities within each chain are well-coordinated. Effective
integration requires:
• adequate infrastructure;
• good information flows between service providers, between service
providers and users of logistics services, and between users;
• effective coordination mechanisms (e.g. contracts, regular consultation) and
dispute resolution procedures; and
• incentives for each service provider to promote the performance of the total
chain.
The economy incorporates a large number of logistics chains, many of which
connect end-to-end or use common systems (e.g. the road transport network).
Market forces provide some incentives to facilitate connections between chains
and to promote integration within each chain, as each service provider typically
needs cooperation from the providers of related services.
However, there is significant variation in the effectiveness of market forces, due
to factors such as differences in industry structures. Effective integration is less
likely if the buyers of services are fragmented and there are large numbers of
service providers. In addition, some activities that significantly affect a firm’s
competitiveness (e.g. aspects of distribution in overseas markets) may be
beyond its direct control.

47
In-house operations provide one mechanism for a firm to promote the
integration of logistics activities. However, increased outsourcing has led to
greater reliance on external service providers. Other options to promote
integration include single providers of multiple services, partnerships and
alliances, chain leaders, and collaboration/voluntary cooperation. These
approaches potentially create conditions that are conducive to initiatives such
as improvements in information systems and intermodal facilities.

In-house provision
The users of logistics services are major providers of these services in many
industries (e.g. parts of manufacturing). These arrangements reflect factors such
as the core competencies of each firm, the ability to access scale economies, a
preference to control key aspects of corporate strategy, and possible risks (e.g.
poor performance) with external providers.
In-house providers are potentially able to coordinate logistics activities through
methods including standard processes, central management directives, and
service level agreements between areas of the firm. In practice, the performance
of in-house providers will depend on various factors including the availability
of appropriate skills and the quality of information systems.
The mining and export of iron ore from north-west Australia provides a good
example of user provision of logistics services. Some mining companies operate
mines, rail loading and unloading facilities, rail transport, port storage and ship
loading facilities. When the iron ore is sold on a cost, insurance, freight (c.i.f.)
basis, the mining companies also control ship chartering and delivery to export
markets.

Single providers of multiple services

The supply of multiple logistics services by a single external operator
potentially creates incentives and mechanisms to coordinate these activities.
Integrated logistics providers are able to coordinate multiple activities by
bringing them within one organisation and by using sophisticated information
systems with scheduling and other capabilities. They typically build detailed
relationships with users of their services. Their information systems are closely
integrated with their clients’ systems, and they are often involved in clients’
planning activities.
Multi-service logistics operators and some brokers/agents also supply multiple
services. Their information systems provide a basis for the coordination of
certain logistics activities, although they are generally less extensive than the
systems of integrated logistics providers. Expansion by multi-service operators
into related logistics activities potentially facilitates greater integration through
better information flows and common operating strategies.

48
It should be noted that the provision of multiple logistics services by a single
operator will not necessarily improve integration. There will be little effective
integration if incompatible information systems are retained within a single
organisation. Integration may also be limited if a service provider operates
multiple divisions (e.g. road transport, terminals, storage) which do not have
the systems or financial incentives to achieve synergies through joint activities.

Partnerships and alliances

A partnership/alliance is a formal cooperative arrangement between two or
more firms, with the aim of facilitating the achievement of each firm’s
objectives. It may sometimes involve equity holdings. Logistics activities are
affected by arrangements between:
• users of logistics services (e.g. a computer manufacturer and its component
suppliers);
• users of logistics services and providers of these services (e.g. a major
manufacturer and an integrated logistics provider);
• providers of logistics services undertaking similar activities (e.g. a local
freight forwarder and an overseas freight forwarder);
• providers of logistics services undertaking different activities (e.g. a
packaging firm and a storage/distribution firm); and
• providers of logistics services and major consultants or information
technology specialists.
The creation of a partnership/alliance typically reflects the intention of the
parties to develop a closer relationship. It may lead to improved coordination
through mechanisms such as a better understanding of the partner’s business,
greater information sharing, coordinated investments and joint planning.
Examples of partnerships/alliances in Australian logistics include:
• Australian airExpress, a joint venture between Qantas Airways and Australia
Post;
• a strategic alliance between Grainco Australia and AusBulk;
• a partnership between Bluegum Group (an electronics manufacturing
services provider) and Danzas AEI;
• a joint venture between four State-based operators (Russell TLC Services,
Westchem, Chemwest, Scott’s Transport Industries) to provide a national
service for dangerous goods; and
• a partnership between TDG Logistics and Qenos.

Chain leaders
A chain leader is a participant in a chain that uses its influence (e.g. as a large
buyer) to improve chain performance, through mechanisms such as increased

49
coordination and a better understanding of customer requirements. Examples
include major retailers, processors and commodity marketing organisations.
A chain leader may attempt to improve logistics activities in an industry (e.g.
horticulture) where suppliers are fragmented and logistics performance is poor.
In these industries, individual participants are unlikely to take a whole-of-chain
approach. The chain leader typically has significant influence (and an incentive
to improve chain performance) as it is a major buyer of output.
Chain leaders may also promote restructuring of fragmented industries through
strategies that encourage consolidation of smaller suppliers. The reduced
number (and larger average size) of suppliers may facilitate improved
integration of the logistics chain.

Collaboration and voluntary cooperation

The recent literature on logistics has included frequent reference to the role of
customer and supplier collaboration in improving performance. Collaboration
potentially facilitates initiatives such as automated online ordering systems,
which improve the responsiveness of logistics chains and reduce costs.
The key elements of collaboration include information sharing between chain
participants (e.g. a manufacturer and its suppliers) in areas including
production, shipments, inventory, sales and forecasts. Berger and Gattorna
(2001, p. 137) note that true collaboration cuts across business unit, company
and even industry boundaries. It requires high levels of information sharing
and openness through, for example, shared databases.
The performance of logistics chains may also be improved by voluntary
cooperation between participants. For example, port liaison committees
contribute to operational and planning coordination at various Australian
ports. Similarly, industry associations may support the development of
common standards or procedures (e.g. consistent data formats), which in turn
facilitate improved integration. These arrangements encourage the exchange of
information and a more strategic approach to the coordination of activities.

AUSTRALIAN STUDIES
Over the last decade, various studies of logistics activities in Australia have
been initiated by Parliamentary Committees and government/industry bodies.
These studies have often identified poor coordination/integration as a major
factor impeding logistics performance.

Standing Committee inquiries

Aspects of logistics activities were considered in a 1992 report by the House of
Representatives Standing Committee on Transport, Communications and
Infrastructure (HORSCOTCI 1992). The Committee examined the efficiency of

50
the interface between seaports and land transport (‘warehouse to wharf’). It
concluded that participants along the transport chain operated in isolation and
without regard to the impact of their actions on the overall efficiency of the
chain. The Committee’s recommendations incorporated initiatives to achieve
improved coordination/interaction, simplified documentation, better use of
EDI, and infrastructure development.
Logistics for air freight exports of perishables and time sensitive products were
examined by the House of Representatives Standing Committee on
Communications, Transport and Microeconomic Reform (HORSCOCTMR
1996). The Committee emphasised the need for significant cultural change
among all participants in the export chain. Its recommendations included
improved coordination between participants, better dissemination of
information, and increased flexibility in quarantine services.

Studies of logistics chains

Several studies initiated by government/industry bodies have emphasised the
importance of approaching logistics in terms of total chains rather than
individual activities. They have particularly involved exports of agricultural
commodities.
In 1997, the Department of Transport and Regional Development published a
logistics study for the Supermarket to Asia’s Transport and Logistics Working
Group (DoTRD 1997). The study, which was undertaken to identify weaknesses
in the transport logistics chain, was based on a survey of exporters in the
asparagus, broccoli, cherry and chilled beef industries. The issues covered
transport (e.g. access to appropriate on-airport facilities), product quality (e.g.
closer monitoring of temperature variations) and quarantine (e.g. cost,
flexibility and communication).
The Transport and Logistics Working Group subsequently commissioned a
study of the logistics chain for citrus fruit to Indonesia (TNT Logistics Asia
1998). The report emphasised the importance of consistent product quality and
the need to improve supply chain practices. The key recommendations
included better information flows, improved communication between supply
chain participants, increased coordination and cooperation, and greater
education of industry participants.
In 1998, the Department of Primary Industries and Energy published a report
incorporating eight case studies for the Supermarket to Asia Strategy (DPIE
1998). The report identified four key characteristics of businesses that
successfully operate as partners in a supply chain approach:
• chain coordination;
• customer responsive quality;
• investment in market knowledge; and

51
• global market outlook.
These characteristics were considered to be key elements of the sustainable
global competitiveness achieved by successful exporters. The report noted that
significant work was needed to lift the overall level of Australia’s supply chain
management to international best practice (DPIE 1998, p. 5).
A report for Austroads, published in 1999, provided a review of freight
transport chain case studies (Taylor 1999). The report concluded that
cooperation, flexibility and communication in private-public partnerships
fostered efficiency gains for both sectors. It also proposed consideration of
intermodal advisory committees at a State level, and identified potential gains
through streamlining and automating regulatory procedures and enforcement.
In 1999, the National Office for the Information Economy released a report on
the use of technology and e-commerce in the Australian road freight transport
industry (NOIE 1999). The report concluded that the penetration and use of
technology in the industry was reasonably high, but that there was significant
scope for business improvements using e-commerce. It noted that companies
taking up e-commerce were finding it difficult to justify the expense, as many of
the potential benefits could not be fully realised without the rest of the industry
being e-commerce capable.
The Bureau of Rural Sciences undertook a chain stocktake of some Australian
agricultural and fishing industries in 2000 (Peterson et. al. 2000). The report
covered 15 chains in four industries. It concluded that, in some cases (e.g.
commodity chains), awareness of chain management was limited. The presence
of a significant chain leader (particularly a professional organisation, such as a
major processor or supermarket group) led to higher chain performance. The
report noted that the major factors limiting supply chain integration were the
fragmented structures of some industries (e.g. horticulture) and the
independent nature of many Australian producers.
A study of roads and road transport in the logistics chain was completed in
2001 (Fuller and Tsolakis 2001). The report included the results of consultations
with major shippers, logistics service providers and industry associations.
Shippers indicated a strong commitment to reducing logistics costs and
improving service outcomes. The consultations affirmed the wide range of
logistics tasks and resources, the changes occurring in the configuration of these
tasks, and the mix of resources required to deliver the desired outcomes. The
report concluded that an improved targeting method for investment could be
achieved through a five-stage process, or through a series of stand-alone
projects over a longer period with higher costs.
A study of the grocery supply chain undertaken by PricewaterhouseCoopers
identified potential savings of over $1 billion from more efficient practices and a
possible reduction of over $700 million in finished goods inventory in 1995
(ECR Australasia 2001, pp. 2-3). Improvements of almost $300 million in

52
operating costs and $300 million in inventory were subsequently achieved.
However, a 1999 tracking study indicated that, with industry growth, there
were still potential savings of around $1 billion from operating cost reductions
and $750 million from inventory reductions.

Other studies
The Integrated Logistics Network and the Australian Freight Council Network
have recently been involved in a range of studies examining initiatives to
improve logistics performance. The topics have included:
• cold chain logistics mapping and re-engineering;
• a national logistics framework;
• an integrated freight community electronic portal proposal;
• export reefer containers;
• monitoring of temperatures in food export shipments;
• standards for refrigerated road transport equipment;
• controlled and modified atmosphere sea freight product trials; and
• thermodynamic returnable modular packing.

ASSESSING PERFORMANCE
The Australian studies over the last decade indicate that logistics activities do
not constitute an integrated industry. Integration appears to be particularly
limited in certain agricultural chains.
Some of the factors which limit integration are probably industry-specific (e.g.
fragmented structures and independent attitudes of chain participants).
However, broader factors such as incompatible information systems and
inadequate infrastructure are also contributing factors.
As noted in chapter 3, a logistics chain usually incorporates a variety of
information systems operated by different participants. The flow of information
along a chain is often hindered or prevented by the use of proprietary systems
based on different standards (e.g. numbering used in bar codes). This
incompatibility limits the visibility of logistics chain activities to participants
and therefore adversely affects integration. For example, a producer often relies
on indirect information about retail sales, and is unable to obtain real-time sales
information which would enable it to rapidly adjust production in response to
changing market requirements.
Supermarket groups in Australia have traditionally used various standards (e.g.
for bar coding) and software to manage inventory. Suppliers dealing with more
than one group have therefore had to maintain several systems (Malone 1999,
p. 10). Work to standardise product identification, electronic messaging and

53
cataloguing has been undertaken by groups including the Grocery Industry
Supply Chain Committee and, more recently, ECR Australasia.
In the road transport industry, the use of proprietary systems (particularly for
labelling) is reportedly a major problem for the industry and its customers
(NOIE 1999, p. 10). Specific issues include a lack of standards, or multiple
standards, involving different transponder technologies (wharf access) and bar
coding systems.
Integration in Australian logistics activities is adversely affected by the
limitations of inter-modal transfer points (e.g. road/rail, road/rail/ports) in
transport networks (DoTRS 2000, pp. 15-16). These limitations partly reflect
uncertainty about the allocation of overall responsibility for integration. In the
case of ports and terminals, this uncertainty often reflects ownership diversity
and conflicting priorities (e.g. between public and private operators).
Overseas experience also suggests that integration of logistics activities is
limited. For example, in a survey of North American companies in 2000, only
57 per cent of respondents using third party logistics providers indicated that
there was significant, or some, integration of the services supplied by these
providers (Smyrlis 2000, p. 46).
Some Australian data are incorporated in a survey of logistics practices in
manufacturing industry that is undertaken annually by IndustryWeek
magazine and PricewaterhouseCoopers (Ling 2001). The survey has recently
involved firms in the US, Canada, Mexico and Australia. It includes information
on plant performance (e.g. cycle time, on-time delivery rate), technology (e.g.
computer-aided design), collaboration and manufacturing strategies. The
results of the survey reportedly indicate that there are opportunities to improve
logistics practices and performance in Australia.
Various firms are currently implementing major programs to improve the
integration of their logistics chains. For example, Woolworths is reportedly
moving to control the movement of freight from suppliers to distribution
centres, and to establish an automated ordering system (Guy 2001, p. 20; Boyle
2001, p. 24). Grainco Australia has entered into a partnership with Boeing
Australia to develop an integrated e-business system that will enhance data
sharing, increase efficiency and ensure effective resource management across
the supply chain for grain (Grainco Australia 2001, p. 2).

54
CHAPTER 7 FUTURE RESEARCH

As noted in chapter 1, this paper forms the first part of a longer-term BTE
project on logistics in Australia. This chapter examines the scope of a full
economic study, and identifies potential research areas and associated data
requirements.

STRUCTURE
Market structure comprises the environmental factors that a firm considers in
making its operational and strategic decisions (e.g. pricing). Aspects of
structure include:
• concentration (i.e. number and size distribution) of buyers and sellers;
• product characteristics, including product differentiation;
• barriers to entry and exit (e.g. absolute cost advantages, regulatory/legal
restrictions);
• pool of potential entrants;
• economies of scale and scope; and
• vertical/horizontal integration.
Structure has traditionally been viewed as an important determinant of conduct
and performance. The impact of market concentration has been further
analysed in the alternative framework of contestability theory (potential
competition).
Earlier chapters have examined aspects of the structure of the Australian
logistics system. Publicly available data are limited. Financial and operational
information for some external service providers is available from the annual
reports of public companies and from databases maintained by firms such as
Dun & Bradstreet and IBISWorld. However, several major logistics activities
(e.g. procurement, inventory management, recycling) are not separately
identified in data collections maintained by the ABS or by other areas of
government, industry associations or academics.
Additional data would therefore be required for a more detailed analysis of the
structure of the logistics system or major logistics activities. With the possible
exception of transport, the additional data would include:

55
• the number and size distribution of firms;
• links between firms (e.g. strategic alliances);
• the locations of firms; and
• service and product characteristics.
Collection of these data would probably require significant resources, either for
detailed surveys or to analyse partial databases and directories (e.g. industry
associations’ membership lists).

CONDUCT
Market conduct describes the behaviour adopted by firms in responding to the
structure of the market and other aspects of the operating environment.
Conduct may also have some influence on structure in imperfectly competitive
markets (e.g. the impact of mergers on market concentration). Aspects of
conduct include:
• pricing practices (e.g. price leadership);
• mergers and joint ventures;
• collusion;
• predatory or exclusionary tactics;
• marketing and advertising; and
• investment in research and development.
This paper has provided some information on conduct in Australian logistics. A
detailed analysis of market conduct would require data on the above aspects for
individual logistics activities or for major groups of activities.
Data collection for a significant range of activities would generally be resource-
intensive, as it would require analysis of the behaviour of firms and how they
respond to market developments. Potential approaches include discussions
with users and providers of logistics services, interviews with government
agencies (e.g. the ACCC), and examination of evidence in trade practices cases.
Some data may also be available from stockbrokers’ reviews, which often
include the results of site visits and consultations with company executives.

PERFORMANCE
Many firms and industries are implementing strategies to improve their
logistics performance. Other initiatives, such as the Freight Transport Logistics
Industry Action Agenda and the Supermarket to Asia Council, are also
addressing performance issues.
Market performance incorporates the economic outcomes that flow from
structure and conduct. Aspects of performance include:
• technical efficiency (i.e. cost minimisation for the chosen product mix);

56
• allocative efficiency (i.e. allocation of resources to the product mix that is
most valued by society);
• product quality and variety (e.g. transit times);
• availability of adequate product information to consumers;
• responsiveness to consumer requirements;
• profitability; and
• innovation and technological progress.
The assessment of performance requires information on at least some of these
aspects for various logistics activities. It also involves comparisons with
benchmarks that indicate adequate levels of performance (e.g. costs for similar
activities in comparable markets, or performance of competitors’ chains).
Some information on performance is available from the Australian logistics
chain studies discussed in chapter 6, and from existing studies (e.g.
international comparisons) of transport activities such as coastal shipping, rail
freight and airports. In addition, inquiries into shipping conferences by the
ACCC and the Productivity Commission have covered the performance of liner
shipping services. The IndustryWeek survey of logistics practices may also
contain useful data on practices and performance in Australian manufacturing.
Consultants collect data about various aspects of logistics activities. For
example, Sinclair Knight Merz reportedly has a database of 350 companies
which, among other things, covers order supply costs and transport costs as a
proportion of total sales (Sinclair Knight Merz 2001, p. 7). Other activities
include a survey of salaries for personnel involved in logistics activities.
It appears that detailed performance data are not publicly available for a wide
range of logistics activities such as warehousing, information systems,
inventory management, materials handling, inter-modal transfers, and
procurement. This probably reflects the prominent role of private operators
(e.g. in-house teams or contractors) and commercial confidentiality issues in
these activities. In addition, the markets are often fragmented, with many small
operators that are not covered by common databases.
Collection of detailed performance data for logistics activities outside transport
would generally be resource-intensive. It may therefore be preferable to
undertake preliminary assessments of performance through interviews with, or
surveys of, various users of logistics services. The more detailed analysis could
then be focused on areas with reported performance difficulties.

COMPETITION
The level of competition in logistics activities is of major interest to industry
participants and public policy-makers. Competition involves rivalry between
firms producing goods or services that are close substitutes.

57
The scope and form of competition in a market typically has a major impact on
performance (e.g. technical efficiency, service quality). Low levels of
competition may be accompanied by practices such as collusive behaviour.
The assessment of competition commences with the identification of the
relevant market. Aspects of market definition include the product, the
geographic area, and possibly the functional level (e.g wholesale or retail).
Market definition in logistics is potentially complicated by issues such as
specialisation of some service providers in particular traffics (e.g. refrigerated
food, motor vehicles) and issues of integration and linkages.
The factors that are typically used to assess competition in a market include:
• market shares;
• horizontal and vertical integration;
• barriers to entry and exit;
• pricing practices;
• any evidence of anti-competitive behaviour; and
• profitability (taking into account features such as market growth).
Any impact of networks, synergies or multi-market operations (e.g. activities
undertaken by integrated logistics providers) should also be considered.
Comprehensive analysis of competition in logistics would require detailed data
on market characteristics. Some information for particular activities is available
from the trade practices inquiries undertaken by the ACCC. However, in many
cases, information is not currently available from published sources, and data
would need to be collected for individual logistics activities.
In view of the resources that would be required for data collection, it may be
appropriate to initially focus on areas of major interest to industry participants
and public policy-makers. Potential studies include the assessment of:
• competition between ports in Australia;
• the impact of mergers/takeovers, vertical integration and alliances on
competition between logistics service providers;
• competition in specialised logistics activities that have high barriers to entry;
and
• the effects of consolidation in the logistics system on competition in other
areas of the economy (e.g. when a user of logistics services is also a major
provider of these services to its competitors).

IMPLICATIONS FOR FUTURE RESEARCH

As noted in chapter 1, the Secretariat for the development of the Freight
Transport Logistics Industry Action Agenda asked the BTE to assess the
dimensions of conducting a full economic study of logistics in Australia.

58
Detailed analysis of structure, conduct and performance would require
substantial time and resources. This reflects the wide range of logistics
activities, the large number of issues typically covered in a full economic study,
and limited availability of data. In-house operations, which account for the
majority of logistics services, would be particularly difficult to analyse as they
involve transactions within individual firms.
The BTE’s previous experience with transport research projects (e.g. harbour
towage, general aviation, international aviation) indicates that industry studies
are resource-intensive. The logistics system includes a large number of
activities, and is even more complex.
It therefore seems likely that future research should focus on either broad
overviews of logistics activities or detailed analyses of specific issues. Such
studies could include:
• the size and other characteristics of major parts of the logistics system;
• the adequacy of logistics infrastructure, including its ability to handle
projected increases in demand;
• the impact of operating strategies, such as mergers/takeovers and alliances,
on the performance of logistics chains; and
• the benefits of moving from multiple bar coding systems to a more
integrated approach.
It was noted in chapter 4 that the ABS data on logistics activities are mainly
limited to aspects of transport and storage. It may therefore be appropriate to
consider options for improving the ABS collections, particularly if there is a
requirement for more accurate information about the scope of logistics activities
(e.g. proportion of GDP). The preparation of transport satellite accounts would
potentially provide more accurate information on gross value added in
transport (particularly in-house activities). As an example of the type of
approach that might be used, the Bureau of Tourism Research (BTR) has
undertaken a joint project with the ABS to improve the data on tourism in
Australia.
The BTE’s future research on logistics will be affected by the nature of emerging
policy issues that require Government attention, and the availability of data.

59
CHAPTER 8 CONCLUDING COMMENTS

This Working Paper has presented the results of the BTE’s preliminary work on
logistics in Australia.
Logistics incorporates all activities that are required for the movement and
handling of goods and materials, from inputs through production to consumers
and waste disposal. It includes the associated reverse flows.
Information systems and infrastructure/resources are key inputs in the
provision of logistics services. The available data indicate that logistics activities
comprise a significant component of economic activity in Australia.
The performance of the logistics system has a major impact on cost structures,
service quality and competitiveness in Australian industry. Recent studies have
concluded that there are opportunities to improve performance. The Freight
Transport Logistics Industry Action Agenda is one of the initiatives that are
being used to address these issues.
The operation of the logistics system is often analysed in terms of chains of
related activities. The essence of effective chain management is
integration—combining individual logistics activities into a whole that
functions seamlessly and provides good performance. The performance of
logistics chains affects producers’ revenues and costs.
Options to promote integration of logistics activities include in-house provision,
single providers of multiple services, partnerships and alliances, chain leaders,
and collaboration/voluntary cooperation. The effectiveness of individual
strategies depends on factors such as information flows and the incentives for
each service provider to contribute to the operation of the total chain.
Logistics activities do not comprise a single integrated industry. Integration is
limited by industry-specific factors (e.g. fragmented structures and independent
attitudes of chain participants) and by broader factors such as incompatible
information systems. There appears to be significant variation in the level of
integration in different logistics chains.
The BTE’s future research on logistics will be affected by the nature of emerging
policy issues that require Government attention, and the availability of data. It
appears that the level of competition is a major area of interest. Additional data
will be required for any detailed analysis of logistics activities in Australia.

61
GLOSSARY

Alliance A formal cooperative arrangement between two or

more firms, with the aim of facilitating the
achievement of each firm’s objectives.
Broker/agent Organisation that provides advice (e.g. on customs
requirements) and arranges various logistics
activities that are usually focussed on a specific
sector (particularly transport).
Chain A series of interdependent logistics activities
(involving major stages between inputs and
disposal) for a particular product, based on
coordination and cooperation. Typical terms include
supply chain, value chain and demand chain.
Chain leader A participant in a chain that uses its influence (e.g. as
a large buyer) to improve chain performance
through, for example, increased coordination and a
better understanding of customer requirements.
Competition Rivalry between firms producing goods or services
that are close substitutes.
Conduct Behaviour adopted by firms in responding to the
structure of the market and other aspects of the
operating environment.
Contractor/specialist Organisation that undertakes a small number of
closely related logistics activities, involving narrow
interactions with each buyer of its services.
e-commerce Any form of business transaction undertaken
electronically, as opposed to physical exchange or
personal contact.
Economies of scale Cost reductions that occur when the average cost of
production declines as output increases.
Economies of scope Cost reductions that occur when the cost of
producing two or more outputs together (e.g. by one

63
 firm) is lower than the cost of producing the outputs
separately (e.g. by several firms).
Electronic data Computer-to-computer transfer of standard business
interchange documents between organisations for processing,
using a private network.
Freight forwarder Agent that arranges freight transport, including
services and necessary documentation, for a fee.
Gross domestic product Total market value of goods and services produced
in the nation, after deducting the value of goods and
services used up in the production process, but
before deducting allowances for the consumption of
fixed capital. Equivalent to the sum of gross value
added of all resident producers.
Gross value added Value of output minus the value of goods and
services consumed in the production process.
Information system Electronic, paper-based or voice network that
enables each participant to share operating data with
other participants.
Integrated logistics Organisation that provides logistics services across
provider major parts of logistics chains, incorporating a high
level of operational and strategic integration.
Integration Combining individual logistics activities into a
whole that functions seamlessly and provides good
performance in areas such as costs, transit times and
reliability.
Logistics All activities required for movement and handling of
goods and materials, from inputs through
production to consumers and waste disposal,
including reverse flows.
Multi-service logistics Organisation that provides logistics services at
operator several stages of logistics chains.
Network A collection of nodes connected by facilities along
which entities move. Characterised by one- or two-
way connections between multiple points that
include common paths.
Partnership A formal cooperative arrangement between two or
more firms, with the aim of facilitating the
achievement of each firm’s objectives.
Performance Economic outcomes that flow from market structure
and conduct.

64
Procurement Purchase of goods and services from outside
suppliers for use in the firm’s production, sales and
distribution activities.
Structure Environmental factors considered by a firm in
making its operational and strategic decisions.

65
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 ABBREVIATIONS

ABS Australian Bureau of Statistics

ACCC Australian Competition and Consumer Commission
ACS Australian Customs Service
AGPS Australian Government Publishing Service
AIPMM Australian Institute of Purchasing and Materials
Management
ANZSIC Australian and New Zealand Standard Industrial
Classification
APICS Australasian Production and Inventory Control Society
AQIS Australian Quarantine and Inspection Service
B2B Business-to-business e-commerce
B2C Business-to-customer e-commerce
BTCE Bureau of Transport and Communications Economics
BTE Bureau of Transport Economics
BTR Bureau of Tourism Research
c.i.f. cost, insurance, freight
DoTRD Department of Transport and Regional Development
DoTRS Department of Transport and Regional Services
DPIE Department of Primary Industries and Energy
ECR Efficient consumer response
EDI Electronic data interchange
GDP Gross domestic product
HORSCOCTMR House of Representatives Standing Committee on
Communications, Transport and Microeconomic Reform
HORSCOTCI House of Representatives Standing Committee on
Transport, Communications and Infrastructure

73
ICHCA International Cargo Handling Coordination Association
ISO International Standards Organisation
JIT Just-in-time
LAA Logistics Association of Australia
NOIE National Office for the Information Economy
NRTC National Road Transport Commission
OECD Organisation for Economic Co-operation and
Development
TPC Trade Practices Commission
TQM Total quality management
UK United Kingdom
US United States of America

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