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Lecture Notes
in Economics and
Mathematical Systems
Managing Editors: M. Beckmann and W. Krelle

317

Lucio Bianco Agostino La Bella (Eds.)

Freight Transport
Planning and Logistics
Proceedings of an International Seminar on
Freight Transport Planning and Logistics
Held in Bressanone, Italy, July 1987

Springer-Verlag Berlin Heidelberg GmbH

Editorial Board

H.Albach M.Beckmann (Managing Editor) P.Dhrymes

G. Fandel G. Feichtinger J. Green W. Hildenbrand W. Krelle (Managing Editor)
H.P.Kunzi K.Ritter R.Sato U.Schittko P.Schonfeld R.Selten

Managing Editors

Prof. Dr. M. Beckmann

Brown University
Providence, RI 02912, USA

Prof. Dr. W. Krelle

Institut fur Gesellschafts- und Wirtschaftswissenschaften
der Universitat Bonn
Adenauerallee 24-42, 0-5300 Bonn, FRG

Editors

Professor Lucio Bianco

Professor Agostino La Bella
Consiglio Nazionale delle Ricerche
Istituto di Analisi dei Sistemi ed Informatica
and
Progetto Finalizzato Trasporti
Viale dell'Universita, 11,1-00185 Rome, Italy

ISBN 978-3-540-50232-6 ISBN 978-3-662-02551-2 (eBook)

DOI 10.1007/978-3-662-02551-2

This work is subject to copyright. All rights are reserved, whether the whole or part of the material
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© Springer-Verlag Berlin Heidelberg 1988
Originally published by Springer-Verlag Berlin Heidelberg New York in 1988

2142/31~43210
 FOREWORD

Freight transport has a great economic relevance in most countries,

since the efficiency of the transportation system and the associated
pattern of transportation costs influence the location decisions of the
firms and the regional/sectoral production levels.
The possibility of improving the performance of the freight
transport system are closely related to both technological innovation
and the availability of advanced planning tools. The latter aspect is
relatively less explored than other planning issues in transportation,
like, for instance, urban transportation; therefore this volume
attempts to fill a gap in the existing literature presenting selected
contributions covering the main topics in freight transport
planning, Le.:
- analysis of current trends in developed countries;
- demand analysis and forecasting;
- flows simulation and prediction;
- production and logistics;
- shipment and delivery problems;
- regulation problems;
- investment evaluation.
The first issue is discussed in two papers. Edward K. Mor10k reviews
the current status and major trends in freight transportation in
North America; three key themes permeate his discussion: regulatory
reform, or reduced regulation; major changes in the production and
distribution of goods; development of new transportation services and
new technology, with particular emphasis on intermodal services.
In the second paper, by Antonio Bartolucci and Maria Silvestrelli,
the European situation is represented by the changes occurred in
Italy both in freight transport demand and in modal sectors from 1971
to 1984. The paper centers in particular on the problem of matching
demand and supply, emphasyzing the role of advanced planning and
 IV

management methods.
The issue of demand analysis and forecasting is tackled by Paolo
Costa, presenting a methodology based on the use of Input-Output
models. The methodology has been developed in the framework of a
study carried out in Italy in order to evaluate alternative
transportation policies. Costa reviews the fundamental hypotheses of
the study, the models utilized, the simulation procedures and the
results obtained.
The modal split of the transportation demand is discussed by
Christopher A. Nash and Antony E. Whiteing from the point of view of
the general distribution strategy of the firms. On the basis of a
number of case studies, carried out in Britain, it is suggested that
choice of mode should be regarded as an investment decision to be
evaluated by comparing total distribution costs.
The next two papers deal with the problem of the estimation of
freight flows. Michael Florian and Jacques Guelat present a normative
mod;el for simulating freight flows of multiple products on a
multimodal network. An important component of the solution
algorithm is the computation of shortest paths with intermodal
transfer costs. Computational results demonstrate that the proposed
model is applicable to large multi modal networks for strategic
planning of freight flows.
Guy Picard and Sang Nguyen describe the generation-distribution
component of an integrated freight transportation model for Canada.
The paper discusses in particular the procedure for the calibration of
the model, and illustrates its capability to measure the impact due to
changes in transportation costs andlor final demands.
The subject of logistics is introduced with the paper by Lucio Bianco,
which underlines the contribution of computer technology and
quantitative methods to the field. Bianco illustrates the structure of
logistic systems and the fundamental mathematical models for
network design and key decision problems.
 v

Then, a general model for addressing production-logistics

interactions is presented by Mark A. Turnquist. Specific types of
interactions are illustrated by two examples: lot sizing in relation to
fleet sizing, and simultaneous decisions on mode choice and empty
equipment movements for transporting finished products.
The contribution by Pierre J. Dejax concludes the analysis of logistic
systems with the discussion of the relevant problem of warehouse
location. Although focused on this central question the methodology
presented here can be extended to solve other distribution planning
problems.
The next three papers address problems strictly related to logistics,
i.e. shipment and delivery. Antonio Sassano deals with the problem of
shipping given quantities of crude oil available at origin ports to
required destination ports at minimum cost, with the additional
constraint that each tanker must leave and arrive within specified
time windows. The paper gives also a brief summary of an
implementation of such a model by means of a general purpose
decision support system.
Delivery problems are analysed in a case study presented by
Giuseppe Sciarrone. His papers reports on an application of vehicle
routing model for optimizing the distribution of a daily newspaper in
the Turin urban area. It is shown that considerable benefits can be
obtained in terms of efficiency and productivity of delivery services.
The solution algorithm, even if presented with respect to a specific
case, is of general validity.
A general discussion of goods transport in urban areas is contained
in the paper by Annalisa Morini, where a comparison between the
situations in Italian and US cities is attempted.
Some important economic aspects of freight transport, i.e.
regulation and investment evaluation, are analysed in the following
three papers. The issue is generally discussed by Patrick T. Harker,
who focuses on a general modelling system designed to assess the
 VI

impact of regulatory, investment and pricing decisions within the

context of a spatial economy.
The paper by Robert Gagne concerns a methodology used to analyse
the link between technology and economic regulation. It is shown
how to use technology analysis in order to investigate the questions
of returns to scale, productivity growth and beneficiary of
regulation. Although the paper concentrates primarily on the
application of the methodology to the trucking industry, it must be
noticed that it can be used for other regulated industries as well.
Domenico Campisi and Agostino La Bella address the problem of
investment evaluation, making use of a multiregional Input-Output
model able to represent the wide range of substitution effects which
may be triggered by changes in the transportation system. The model
allows the identification of bottlenecks in transportation
infrastructure which hamper development possibilities for some
regions and the analysis of the impact of transportation supply and
trade patterns on the dynamic equilibrium properties of the economic
system.
Three papers on applications of planning models conclude the
volume. Firstly, Teodor G. Crainic review the main problems and
models related with tactical planning of freight rail transportation.
Then, Louis Delorme, Jacques Roy and Jean-Marc Rousseau review
existing planning models with special attention to those addressing
the tactical level of planning of intercity freight transportation
system; the paper explicitely refers to problems of the trucking
industry.
Finally, an application of quantitative methods to the strategic
planning of seaports systems is presented by Giuseppe Vito. In his
paper the lack of utilization of strategic planning tools, together with
the scarce coordination among different planning authorities, are
identified as the major obstacle to the development of seaports
systems. The general feature of a model for assigning priorities to
 VII

investment alternatives and the results of an application to the

Italian case are also presented.
Obviously, this book is by no means a complete survey of the field. It
is hoped however that the points raised togheter with the unsolved
questions which come up are of sufficient interest to arouse the
curiosity of planners and researchers in this and associated fields.
The papers collected in this book are revised versions of the
contributions presented at the "International Seminar on Freight
Transport Planning and Logistics" held in Bressanone in July 1987.
The seminar was sponsored by the "Progetto Finalizzato Trasporti" of
the Italian National Research Council and by the "Centre de
Recherche sur les Transports" of the University of Montreal.
We are indebted with our canadian colleagues Prof. Michael Florian,
Prof. Jean-Marc Rousseau, and Dr. Christian Lardinois for their
outstanding contributions to the organization of the seminar. We are
also grateful to Dr. Annalisa Morini of "Progetto Finalizzato Trasporti"
whose help was invaluable in the smooth running of the seminar,
and to Ms. Cristina Petrosillo and Ms. Michela Ruggeri for their
carefull assistance in the editorial work.

Lucio Bianco

Agostino La Bella
 CONTENTS

Current Trends and Perspectives on

Freight Transport in North America
E. K. Morlok 1

The Matching of Transport Demand

with Supply in Italy
A. Bartolucci and M. Silvestrelli 50
Using Input-Output to Forecast
Freight Transport Demand
P. Costa 79
Mode Choice: a Total Distribution
Cost Approach
C.A. Nash and A.E. Whiteing 121

The Prediction of Multicommodity

Freight Flows: a Multiproduct
Multimode Model and a Solution Algorithm
M. Florian and J. Guelat 150
Estimation of Interregional Freight
Flows Using Input/Output Analysis
G. Picard and S. Nguyen 186
Mathematical Models in Logistic
System Design
L. Bianco 210
Analyzing Production-Logistics
Interactions
M. A. Turnquist 258
A Methodology for Warehouse
Location and Distribution Systems
Planning
P. J. Dejax 289

Minimizing Costs in Crude Oil

Transportation
A. Sassano 319
 x
Delivery Problems in Metropolitan
Areas. Optimizing the Distribution of
a Daily Newspaper: an Application
to the Turin Daily "La Stampa"
G. Sciarrone 334
Goods Transport in Urban Areas: a
Comparison between the United
States and Italy
A. Morini 352
Issues and Models for Planning and
Regulating Freight Transport Systems
P. T. Harker 374
Analysis of Regulation Effects in the
Trucking Industry: a Technological
Approach
R. Gagne 409

Evaluating the Economic Impact of

Transportation Investment: an Input-
Output Approach
D. Campisi and A. La Bella 443
Rail Tactical Planning: Issues, Models
and Tools
T. G. Crainic 463
Motor-Carriers Operations Planning
Models: a State of the Art
L. Delorme, J. Roy and J. M. Rousseau 510

Seaport Systems Strategic Planning

G. Vito 546
 CURRENT TRENDS AND PERSPECTIVES ON FREIGHT TRANSPORT
IN NORTH AMERICA

Edward K. Morlok

UPS Foundation Professor of Transportation - Department of Systems -

School of Engineering & Applied Science - University of
Pennsylvania - Philadelphia, PA 19104-6315 - U.SA.

The purpose of this paper is to review current trends and developments

in freight transportation in North America. It begins with an overview of
recent trends in freight traffic, and then turns to a discussion of
underlying changes in the demand for freight transport and changes in
the service, technology and operations of each of the major modes of
freight transportation. Also discussed are major problems in each of the
modes and possible solutions in each. Three major themes permeate the
discussion: (1) regulatory reform, or reduced regulation, of rail, truck,
air, and water transport, (2) major changes in the production and
distribution of goods and shippers' requirements for transportation
services, and (3) the development of new transportation services and
development of new technology, with particular emphasis on intermodal
service.

1. INTRODUCTION

The purpose of this paper is to review the current status and major
trends in freight transportation in North America. Emphasis will
necessarily be on the United States, partly because of familiarity and
partly because of data availability, although major comments will
apply equally well to Canada. The intent is not simply to provide a
factual account, but to provide an identification and interpretation of
major trends and their underlying factors. Such an interpretive
review is necessarily somewhat subjective and personal, but
hopefully will provide much greater insight into recent changes and
existing or emerging problems, and possible opportunities.
This review will begin with a primarily statistical account of major
trends in freight traffic, and then turn to a discussion of changes in
 2

the patterns of production and distribution of goods and attempt to

identify major factors which have had an impact on shippers'
requirements or preferences for different types of transportation. In
addition, various overriding national issues and problems related to
freight transportation will be identified. This sets the stage for a
review of the major subsystems or modes of freight transportation,
including trends in the nature of services offered and their prices,
the technology of service production, and problems and possible
solutions within each of these subsystems. Finally the major
opportunities and alternatives for the future will be presented, with
reference to both transportation technology and institutional
structure.
Three major themes will recur throughout the paper. One is, of
course, regulatory reform or reduction in "economic" regulation
(entry, exit, service and price) of railroads, truck lines, water
transport and air transport. Another is changes in the demand for
freight transportation, to which the carriers have responded in
varying degrees. The third is the deployment of new transportation
technology and creating of new "service-price" packages by various
carriers, primarily since the advent of regulatory reform.

2. BACKGROUND AND TRENDS

A ubiquitous and efficient system of freight transport is obviously

necessary for the maintenance of a high standard of living. The role
of freight transport seems to be growing, as a result of the increasing
spatial specialization of production throughout the world, with
developed nations concentrating more on services and less developed
nations concentrating on production of goods for worldwide
consumption. The result is increased dependence on transportation in
the chain of production from extraction of natural resources to
 3

making the final product available to consumers. It is thus useful to

briefly examine the total amount of freight transport and the rules of
various subsystems or modes.
Table 1 presents information on the magnitude of transportation in
the context of the entire society or economy. As can be seen, overall
transportation has remained approximately one-fifth of the Gross
National Product (GNP) of the U.S. in recent decades. Two measures of
freight transportation activity are presented in Table 2, total domestic
intercity ton-kilometers of freight and the total ton-kilometers of
exports and imports. It is seen that both have grown more rapidly
than population. Domestic ton-kilometers have grown less rapidly
then GNP, while international ton-kilometers have grown more
rapidly than GNP. While projections can be wrong, the same trend is
projected to continue into the next century (National Transportation
Policy Study Commission, 1979).
One useful way to begin to examine major elements of the
transportation system is with a two-way classification, one
classification being between freight and passenger transport, and the
other being between urban, domestic intercity, and international
transport. It might be noted at this point that in U.S. transportation
parlance the term "intercity" usually refers to all domestic transport
which has one end of the journey (or shipment) outside or an urban
area, and thus it encompasses not only intercity transport in the
sense of transport from one city to another, but also transport whitin
rural areas and between rural and urban areas. Due to deficiencies in
gathering data on diverse transportation activities, especially urban
freight transport, on which data are not regularly gathered in any
comprehensive form, it is necessary to rely on estimates for the year
1975 for this purpose.
Table 3 presents the amount and percentage of the total
transportation bill in 1975 spent in these six categories. Rather
interestingly, the total domestic transportation bill was roughly
 4

equally divided among the four (domestic) categories except for

urban freight, which was about half the other three. International
transport represents only a small percentage of the total transport
bill. Each of these types of freight movement will be examined in
more detail,
Turning first to intercity freight transportation, Table 4 presents a
measure of the amount of U.S. domestic intercity freight traffic from
1960 to 1985. The unit of measurement of quantity is the ton kilometer,
which despite many deficiencies is the sole statistic which has been
consistently gathered over these many years. It is by far the most
widely used overall measure of transportation activity. It should be
noted, however, that this unit is an incomplete measure of
transportation system output or performance. It does not take into
account the value of the service nor the value of the material being
transported, and also the distance measure is the actual distance over
which the shipment traveled rather than the straight line distance
between its origin and destination.
Noting these limitations, the distribution of traffic can be
considered. Over this period the total ton kilometers almost doubled,
and interestingly each of the major intercity modes of travel
increased their total traffic. This is even true of the rail mode, which
in many nations has lost a considerable amount of traffic to other
modes, but in the U.S. the rail system traffic has increased by more
than 50% over this period. All other modes grew far more rapidly,
however. Market shares have also changed, with rail and water
declining, road and pipeline increasing somewhat and air transport
increasing substantially (although on a very small base).
Tables 5 and 6 present the financial side of the intercity traffic
distribution. Table 5 presents the average freight revenue per
ton-kilometer of the various modes. It should be noted that the data
base on which these averages were developed is far less complete
than that for ton-kilometers of movement, as major elements of the
 5

road, water, and air transport system do not report a consistent set of
transport revenue data, and indeed private carriage within these
modes has no identifiable revenue component. Nevertheless these
data provide at least an approximate indication of the relative
revenue or price levels per unit of output (as measured by
ton-kilometers) of these carriers. It can be seen that water and oil
transport are quite inexpensive, as would be expected, rail is next in
overall average price, and road transport is more expensive than rail.
However, it should be noted, as will be discussed later, that much of
road transport, particularly full truckload movements, has revenue
levels equal to or just slightly above those of carload rail movement.
Air is, of course, a very expensive carrier.
The size of the various modes as measured by overall revenue is
indicated by the data in Table 6. Again, incomplete reporting of
revenues, or the nonexistence of an identifiable revenue, makes for
difficulties in comparison among the various modes. Rail and truck
are clearly the dominant forms of freight transport by this measure,
truck growing from being roughly equal to rail in 1970 to being
substantially greater in 1983. If a revenue equivalent for other
trucking operations, including private trucking could be included,
the dominance of truck would be clear. Gas pipeline transportation is
also seen to be extremely large, but this reflects to a large extent a
peculiar institutional arrangement in which these revenues include,
in effect, not only transportation but the value of the commodity
itself. Thus while rail is clearly the largest intercity carrier as
measured by ton miles, it is smaller in terms of revenue than some
other carriers.
International freight traffic has also been growing in this same
period, as indicated by the data presented in Table 7. Measured by tons
originating or terminating in the U.S., exports have approximately
tripled.
No review of transport in relation to society would be complete
 6

without some discussion of its significance in terms of important

environmental and resource costs. Two of these are especially
important: energy consumption and losses due to accidents. The trend
of all transport accidents -- separate data for freight and passenger
transport are generally unavailable -- are presented in Table 8. The
overall trend is clearly one of declining accidents and deaths or
injuries. There are, however, substantial variations with modes, and
these will be discussed later. Of special significance is the transport of
hazardous materials, and the trends in accidents, deaths and injuries
for this type of transport is also given in Table 8. Again the trend is
downard since 1980. However, the public concern for hazardous
material transportation seems to be increasing, probably as a result of
increased awareness of the risk of serious accidents involving
hazardous materials and also because of the apparently increasing
quantities of such movements and increasingly large shipments.
Turning to the consumption of energy in transportation, generally
speaking, the transportation system runs on petroleum products,
which provided 97.2% of all energy used in transportation in 1985
(Holcomb, 1987, xvii). In 1985 62.5% of all national petroleum
consumption was in transportation activities, up from 54.8% in 1975.
However, the vast majority of this is for person transport, 44.0% of all
oil consumed being used for automobile transportation alone. This can
be further broken down by mode, with 40.5% being used almost
exclusively for freight transportation by the rail, water, pipeline, and
truck modes (truck alone consuming 28.1 % out of the 40.5 %). Modal
energy intensities (consumption per unit of output) have been
declining, as shown in Table 9. Nevertheless, the dependence of the
transportation system on oil is obviously a source of long-term
concern.
 7

3. DEMAND

We now turn to a discussion of changes in the demand for freight

transportation and in shippers' preferences or requirements for
different features of transportation service. This is necessarily a
rather qualitative discussion because data rarely exists on the
preferences but rather only on the actual service purchased. The
latter of course reflects not only preferences but also the range of
alternatives offered in the market. We will first discuss changes in
the spatial distribution of freight transport demand and then turn to
features at a more microscopic level.
Recent years have seen a continuation of a trend dating from the
1950's (and perhaps earlier) of a shifting of manufacturing and
processing functions from a concentration in the northeast to a
distribution throughout the U.S. This, in part, reflects the growth of
population and hence of final demand of goods and services in the
south and west, a trend that has continued over at least two decades.
Predating this period, most manufacturing was concentrated in the
northeast, with raw material being brought there from other
locations and then manufactured goods being distributed from there,
resulting in relatively long transportation hauls. With the dispersal
of industry and warehousing throughout the nation, this pattern has
been replaced by a much more diffused pattern of movement and, at
least to some extent, a tendency toward shorter hauls. This dispersal of
industry to points closer to final demand undoubtedly was one of the
factors that led to the declining relative share of long distance modes
of transport such as rail and water and the growth of trucking.
Much has been made in recent years of the gradual shift from an
industrial-based economy to a service economy. Some of this
naturally represents a shift in the nature of final demand, but it also
reflects an increasing reliance on foreign production of goods. The
inroads of foreign producers into the markets for automobiles,
 8

consumer electronics, clothing, and other items is well documented.

This has resulted in a relative increase in reliance on imports of these
goods rather than home production, and an increase in traffic
through international ports to distribution centers and ultimately to
points of final demand. Traffic through major ports to points
throughout the nation have thus increased as a result. To a lesser
extent, exports have also increased, of both raw materials to foreign
industries and of finished products.
Another major change has been the adoption of just-in-time
production and distribution methodology. The basic idea of this is to
plan the entire production and distribution process so that items are
available essentially just when needed in the proper quantity and of
the desired quality -- for the next stage of the production or
distribution chain. This then reduces idle inventory and waste at each
stage. This concept gained considerable impetus as a result of the
high interest rates and carrying charges of the early 1980's and more
recently the intense competition for domestic as well as foreign
markets in recent years. It is a concept which extends well beyond
transportation, to encompass greater quality control in production
and closer coupling of production with sales and distribution.
However, the implications for transportation are substantial.
Just-in-time production and distribution obviously requires that
transportation be precisely planned and that the plan be adhered to
closely. Gone are large inventories of intermediate and final products
with which to cushion late vehicle arrivals and sloppy dispatching
schedules.
This very close coordination between transportation, production,
and distribution is obviously in principle easily carried out when the
transportation is accomplished by the shipper's own vehicle fleet. In
the case where separate transportation companies or for-hire
carriers are used, it requires very close working arrangements
between shippers and carriers. This has been greatly facilitated by
 9

the regulatory reform in transportation, which removed barriers to

contracting for specific services between shippers and carriers, and
to sharing of vital but generally confidential information, such as
production plans of shippers. This has enabled for-hire carriers to
participate fully in just-in-time transportation. This also requires
that carriers be very responsive to changing shipper needs, for
quantities of movement, sources of supply or destinations, and transit
time schedules.
Another trend is the increasing use of "hub" distribution centers
for many commodities. The basic idea is to concentrate flows at a large
center or hub, from which distribution of smaller lots to points of
final demand or later processing would be carried out. The high
volume movements between such centers enables the producer or
shipper to take advantage of lower rates for high volume movements,
and also may have advantages in terms of service quality and lower
inventory levels. However, by virtue of their size, these hubs are
necessarily farther from many receivers of the goods, and therefore
more rapid and more reliable transportation is usually required for
distribution.
All of these changes have led to a desire on the part of shippers to
have available to them a wide variety of transportation services
offering, between any pair of points, a range of transit times and
levels of reliability on the one hand and of cost on the other.
Naturally shippers should expect to pay more for higher quality
service. This has sparked considerable innovation on the part of
carriers to offer such a range of "price-service packages" in the
freight transport marketplace, and deregulation has cleared the way
for this. This is one of the major themes of the discussion of trends in
each of the modes, which follows.
 10

4. SUBSYSTEMS

Turning now to the supply of freight transportation services, the

most natural way of treating this subject at this time seems to be in
terms of modal subsystems, followed by a discussion of intermodal
service. The reason for a modal approach is simply that until very
recently the organization of almost all aspects of freight
transportation was in terms of modes. Ownership in the U.S. was
generally limited to a single mode, with limited use of other modes for
feeder service; data were gathered by mode; and there was little
intermodal integration. Even in Canada, where ownship of many
modes was permitted, each mode was in fact operated as a separate
business line, with little interaction. All this is not to say that this is
the most appropriate way to describe transportation services in
general, for there are many sound reasons why a more generic or
amodal approach would be preferred. Indeed, with the deregulation
has come the possibility of increased intermodal ownership and
integration of modes in a variety of ways, which is leading to
transportation companies which ultimately might become "one-stop"
sources of a variety of services using different modal combinations,
analogous to tha mail service or freight forwarders. However, that is
not the case now. We shall begin by discussion of the rail mode
mainly because of the widespread availability of data on this mode in
comparison to other modes, and this will provide a benchmark against
which to qualitatively compare other modes even when data are not
available.

4.1 Rail Freight System

The rail network primarily serves intercity freight transportation,

there being only a very limited amount of short-haul movement,
usually of a very specialized nature. Although the rail system carries
 11

passengers as well as freight, the amount of passenger traffic is

extremely small. Less than 1% of all intercity passenger travel in the
U.S. is by rail, and only a very small fraction of urban public transit
travel is on rail lines that carry freight (transit overall accounting
for less than 5% of urban person kilometers). Thus the U.S. rail
system is essentially an intercity freight system.

4.1.1 Components and Finance

The rail network of the continental U.S. has 254,976 route

kilometers, consisting of about 456,000 track kilometers. In 1985 there
were about 23,000 locomotives, almost all of which were diesel-electric
units. Virtually all mainline electrification for freight service has
been abandoned, primarily because of higher operating costs of
electric freight trains compared to diesels, high costs of electric
distribution system maintenance, and operating limitations (mainly
the inability to operate all freight trains when scheduled because of
limitations on power plant and trasmission system capacity). The
system also includes about 1.4 million freight cars, which are owned
by railroads, by car companies, and by shippers. The capacity of the
average rail car has gradually increased from approximately 53 tons
in 1950 to about 84 tons in 1985. In the same period the average
freight car load rose from 42 tons to 69 tons per car and the average
load per train from about 1200 tons to 2650 tons.
In 1985, there were 23 class I railroads (those with annual operating
revenues greater than 387.9 million -- the threshold is adjusted for
inflation annually) and 480 smaller companies. This compares with 58
class I and 435 other lines in 1975. In recent years, three distinct
types of railroads have emerged. One is the large, long intercity
systems, which typically are 15,000 kilometers or more in length. The
second is a relatively new type of railroad - regional railroads -
typically varying from about 700 to 10,000 kilometers in length. These
 12

usually operate lines sold to them by larger systems. Regional

railroads typically have much more favorable labor-management
agreements, operating trains with fewer crew members (usually two
instead of three or four) and with far less restrictive work rules (e.g.,
paying employees a day's pay for eight hours work rather than for
160 to 240 kilometers or 100 to 150 miles of travel). These companies
also tend to be very responsive to the needs of local shippers and of
the regional economy, and often serve as feeders to two or more
larger railroads with whom they may also compete for some traffic.
The third category is very small railroads, terminal operators, and
belt and switching lines serving industries in a particular area.
Financially the industry is in far better condition now than it has
been for the last three decades. Indeed, many Wall Street analysts
highly recommed investment in railroads stocks and bonds as a sound
long-term growth investment. This is in marked contrast to the
situation a decade or more ago when many railroads, representing
about 20% of line kilometers, were in bankruptcy, and many more
were in serious trouble. In the last three years, return on equity has
varied between 6.8 and 10.0%.
The railroad industry in the U.S. is essentially entirely a private
enterprise activity. Government investment and funding has been
very limited, and is decreasing. The only significant exception in the
freight domain is the federal government ownership and provision of
capital to Conrail. But Conrail has nevertheless been operated as a
for-profit business. It is now being made a private firm in form as
well as in fact through public sale of its stock. There are a few
railroads which remain government-owned, such as the federal
ownership of the Alaska Railroad and state ownership of the Long
Island Rail Road and Vermont Railroad, but this is uncommon.
One of the major factors in the turnaround of railroad finances has
undoubtedly been regulatory reform, the almost complete
deregulation of railroad rates and service, primarily through the
 13

Staggers Rail Act of 1980. This legislation called for gradual

elimination of most reglations on service and price. Within broad
limits, railroads can raise or lower rates at will, except in cases where
railroads exert "market dominance" (i.e., shippers are dependent on a
single railroad for service). Railroads can now enter into contracts
with individual shippers to provide specific service at a particular
rate. Also, the process for abandoning unprofitable lines was
accelerated. Thus railroads can basically determine for themselves
what markets they wish to serve, the nature of the product which
they wish to offer (quality of service and level of capacity), and the
pricing of that product. Also, and very importantly, the ICC may
require a particular railroad to give access along its tracks to another
railroad for purpose of serving a shipper who otherwise would be
captive to a particular railroad.

4.1.2 Traffic, Service and Rates

Although railroads carry a wide range of commodities, their traffic

is heavily concentrated in a few industries and commodity groups.
Several ecomic sectors -- coal mining, food and drugs, lumber and
lumber products, and agriculture -- account for slightly more than
half of all rail ton-kilometers and more than 37% of all revenues.
Eight economic sectors -- the previous four plus mining, chemical,
paper products, and stone/clay/glass products -- account for about
three quarters of total ton-kilometers and half of all revenues.
Railroads also naturally tend to serve relatively long-haul
movements. The average length of haul in 1985 was 1,016 kilometers.
There are several reasonable measures of transportation service
quality, two of the most important are total shipper to receiver transit
time and time reliability. Given the great variety of services provided
by railroads and the diversity of conditions under which service is
provided, a wide range can be anticipated in transit time and
 14

reliability of rail freight systems.

At one extreme, in terms of service quality, is the traditional rail
carload freight service, in which a freight car is loaded by a shipper
at the shipper's siding, picked up by a local freight train, transferred
at a classification yard to a line haul train, moved through additional
yards and on other line haul trains, and finally delivered to the
consignee or receiver's siding. This type of service is typically quite
slow, primarily because of intermediate yardings (which often can
take up to one day each), and the possibility of missing train
connections. It would not be uncommon under these circumstances
for a car travelling 600 kilometers to take five days, and one
travelling 1300 kilometers to take seven or nine days. It can be seen
that the overall operating plan, involving many transfers through
classification yards and mixing in with other traffic, rather than the
line haul speed, is the major determinant of total transit time and its
reliability.
At the other extreme are rail operations designed to achieve
minimum transit times and high reliability. One example of these
would be trains dedicated to particular services, such as intermodal
trailer-on-flat-car (TOPC) or container-on-flat-car (COPC) service. A
typical operation would be for truck trailers or containers to be
gathered at one terminal from its tributary area, placed (in a period
of a few hours) on the train, and that train running essentially
non-stop (except for servicing and crew changes) to a destination
city where the train would be unloaded quickly and trailers and
containers moved by truck to their destinations The average line
haul speed might be between 50 and 90 kilometers an hour, and
perhaps an additional day or two might be consumed in drayage at
each end. This service is also quite reliable, trailers rarely being left
because of insufficient capacity on the train. A similar type of service
is offered for other full trainload movements between shipper and
receiver, such as unit trains for coal and grain, which may run on a
 15

fixed schedule repeated weekly throughout the year, and also for
special purpose trains for particular shippers.
There has been considerable experimentation in recent years with
"mini trains" which carry a relatively small number of cars (perhaps
10 to 20) from shipper to receiver on a regular schedule, although
this requires special agreement with the labor unions to be
competitive with trucks. Regional railroads have been especially
aggressive in developing such services.
The average revenue of rail freight in the U.S. in 1985 was about
4.9¢ per ton kilometer. However, rates vary considerably around this
value, reflecting cost of service, degree of competition, and, in some
cases, government regulation. Generally speaking, commodities
which are dense and hence fully use the weight capacity of cars, such
as coal (usually 100 tons per car), have very low rates, while less
dense traffic, such as automobiles, would tend to have higher rates.
Naturally, specialized or expedited service will in some cases also
result in a higher rate, although the more rapid speed can also lower
the railroads' cost.

4.1.3 Problems

Despite the bettered position in the last few years, the rail freight
system at the present time still faces a number of problems. From the
standpoint of three primary perspectives, starting with the railroads
themeselves, these are:
1. It will be necessary to meet the increased demands of shippers
for faster, more reliable freight service, and to more fully
differentiate service by quality and price, so that rail can regain
some of the lost market share of manufactured products.
2. It is widely believed that TOFC and COFC traffic is only marginally
profitable, particularly problematic when that traffic is shifted
from regular carload service.
 16

3. Fierce competition continues, in price and service, from the

trucking industry, which currently suffers from considerable
overcapacity, and which enjoys, according to the railroads, use of
the highways at far less than its fair share of the cost. Similarly,
inland water carriers are favored by their use of government-
provided waterway facilities with minimal user charges.
4. The historical adversarial relationship between rail labor and
management continues to impede changes in work rules and
bases of pay, especially in the larger (class I) railroads.
5. Some shippers and other groups wish to reintroduce regulation,
notably some coal producers and some firms in other industries
which are heavily dependent on rail service.
6. Problems of inadequate capacity exist on some main lines,
particularly in areas that have experienced rapid increases in
coal traffic. When the economy rebounds and traffic grows, very
serious problems are expected on some lines.
7. There is a lack of a clear vision of how to integrate the services of
rail, truck, and water carriers which are now under common
railroad ownership.
From the shipper and community standpoint, problems are:
1. Despite improvements in many services, there remain serious
problems in many markets with slow and unreliable carload
service, with excessive loss and damage.
2. Many see inadequate rail competition in many markets, placing
the shipper at a disadvantage in terms of price and service
quality.
3. The shipment of hazardous materials through many communities
is considered to present an unacceptable threat, but there is little
consensus on how to deal effectively with this problem.
4. Many communities which are threatened with the loss of rail
lines still view this as a serious blow to their local economy.
5. On many lines where traffic has grown rapidly (e.g., coal lines),
 17

frequent passage of long trains divides towns and creates

environmental problems (noise, air pollution from dirt).

4.2 Highway Freight System

4.2.1 Components and Finance

The basic right of way of the highway freight system is the

ubiquitous 6.0 million kilometers of public roads, which are shared by
.trucks, buses, and automobiles, as well as bicycles and others. Of
primary importance for intercity truck freight is the almost 1.6
million kilometers of federal-aid highways, and in particular the
68,000 kilometer Interstate highway system, over 90% of which was
open to traffic at the end of 1986. Operating over this public road
system are about 25 million trucks, three-quarters of which are below
2,5 tons of gross vehicle weight. Only 8% of all trucks are in the two
heaviest weight classes (greater than 13 tons) that are significant in
intercity freight. Urban freight is carried by a combination of small
and large trucks, and no separate data are available on the number of
smaller trucks used primarily for freight transportation (as opposed
to repair trucks, recreational vehicles, etc.). Generally it is thought
that about one-third of all trucks are used in the carriage of freight.
Freight is carried over the highways by both "for-hire" carriers,
which carry other persons' cargo, and private trucks, which are
owned by the owner of the freight. Although there are no precise
data, most estimates are that approximately one-half of all highway
ton-kilometers were carried in each of these two categories of trucks.
The Interstate Commerce Commission regulates most of the carriage
by for-hire carriers (except agricultural commodities which are
unregulated), and until the Motor Carrier Act of 1980 it controlled all
basic elements of the business, including entry, exit, mergers, the
commodities that could be carried, the routes that could be followed
 18

and cities to be served, and rates. As a result of the 1980 legislation,

however, the ICC no longer regulates entry or exit, and carriers can
charge rates below the level set by the ICC (or by the rate bureaus
sanctioned by the ICC). Also, there are no longer any restrictions on
the cities, routes or commodities that a truck can carry. Thus the
degree of economic regulation of interstate trucking has diminished
considerably.
In addition to the Interstate Commerce Commission, there is also
state regulation of intra-state transportation, and the degree to which
states exercise their right to regulate intrastate movement varies
considerably from very little to quite extensive. Furthermore, there is
both state and federal regulation of vehicle sizes and weight, and
other safety-related regulations.
In addition to the regulatory reform, another major change occured
recently in highway freight transportation in the form of the
Surface Transportation Act of 1985. This act dealt with taxes (more
precisely, user charges on vehicles, fuel, etc., for road construction,
maintenance, and operation) and vehicle size and weight limits and
other features of highway use. This particular act increased the user
charges for highways but in return specified uniform national size
and weight limitations on vehicles. Individual states can exceed these
(i.e., allow larger vehicles), but this gives some order to what was a
highly restrictive and arbitrary patchwork of state regulations.
Specifically, the act increased the minimum weight limit to 40 tons,
and permitted tractor-trailer combinations of either one tractor plus
one trailer or one tractor plus two trailer up to 19.8 meters (65 feet) in
length. Previously many states had· prohibited two trailer units and
had lower weight limits. Many studies have indicated very substantial
reductions in cost per ton-km from using larger (longer) and heavier
trucks, typical savings ranging up to 30%, and as was expected,
truckers have responded rapidly by using larger vehicle units. In the
Surface Transportation Act of 1987, passed just recently, Congress is
 19

allowing states to specify speed limits greater than 88 km per hour (55
miles per hour), and state action on this is expected soon.

4.2.2 Traffic and Service

Trucks serve a much greater variety of commodities, shipment sizes,

and distances than rail. Of course, urban trucks are the virtual
exclusive movers of general cargo for short distances, and thus urban
areas are almost completely dependent upon trucks for delivery of all
goods except water, oil, and natural gas. In intercity transport, trucks
traditionally have been thought of as providing a higher quality of
service than rail but at a substantially higher cost. In particular, full
truck loads move rapidly from origin to destination, often averaging
60 to 70 kilometers per hour, and with a very high reliability, in
contrast to the most mail carload transport.
However, with the advent of the Interstate Highway System and
modern single- and double-trailer trucks, trucking costs declined
substantially and by the early 1970's truck freight rates for many
commodities were very nearly as low as rail. This was particularly
true where truckers could obtain a full load in both directions.
Although rail dominates trucking for intercity ton-kilometers, there
is a considerable amount of trucking over extremely long distances.
While increases in the cost of energy hurt trucking substantially
starting in the 1970's, increases in engine efficiency and reductions
in aerodynamic drag as well as limited reduction in vehicle weight
have kept trucking costs under control.
Another important factor in the relatively low growth of trucking
rates has been control of labor costs. While the regulated segment of
the trucking industry, and certain other segments, typically had very
high priced labor, with high wage rates, restrictive work rules, and
very liberal benefit packages (with these drivers unionized mainly
through the Teamsters Union), other segments of the industry
 20

typically had much lower labor costs. With the reduced regulation,
increases in energy costs, and more aggressive competition from
railroads, many truck lines have resisted wage and benefit increases.
Also, many large lines have contracted out the operation of trucks to
low cost, often non-union, operators. They are in effect acting as a
boker between the shipper and the actual truck operator who may be
an individual driver owning and driving his own truck, or a small
family business. All this has tended to control trucking costs.
In the urban arena, the major developments in trucking have been
primarily the development of interactive computerized methods for
the routing and scheduling of trucks engaged in pick-up and delivery
operations. Savings of the order of 10 to 15 percent in
vehicle-kilometers of operation and in direct labor hours are
commonly cited by managers as typical, although precise figures are
difficult to obtain. Given the widespread adoption of such methods,
and their tailoring to the specific needs of many different types of
trucking operations, their effectiveness is clear.

4.2.3 Problems

Despite its growth over the past two decades, there are many
problems in the trucking industry. From the standpoint of the truck
lines, some of the major problems are:
1. For intercity trucking especially, the now recently repealed
national speed limit of 55 miles per hour, is a major restricting
factor, as is the limitation on truck size and weight, where despite
more uniform legislation there still remain differences between
western states (which allow much larger units) and midwestern
and eastern states.
2. For urban truckers, continuing increases in urban congestion,
and particularly the spread of congestion to suburban areas
where most manufacturing and warehousing occurs, have
 21

increased costs and resulted in service problems.

3. Inadeguate maintenance and the poor condition of many
highways increases costs, delays service, increases accidents, and
results in increased cargo damage.
4. Many of the truckers who were formerly under full regulation
(mainly carriers of shipments smaller than a full truckload)
have been adversely affected by the deregulation, and would like
to see a return to a more regulated industry.
5. Truck safety has become an important public issue, and although
many of the larger carriers in particular operate very safe fleets,
the negative publicity has adversely affected them.
From the standpoint of shippers as a whole, there do not appear to be
any very serious long-term problems. However, many shippers and
communities do feel that there is inadequate service for small
shipments, low volume shippers, and geographically isolated
shippers.
From the overall community and national point of view, the more
important problems appear to be:
1. The environmental intrusion of trucks, especially noise and air
pollution, are serious problems along highways.
2. As mentioned earlier, safety is a serious problem, particularly it
is believed, with owner/operators. Also accidents involving the
larger truck combinations, in conjunction with smaller
automobiles, are more severe.
3. The continued dependence of trucking on oil as its only source of
fuel is worrisome for the future.

4.3 Marine Freight System

4.3.1 Domestic System

The domestic marine freight system is made up of three distinct

 22

parts: the inland waterways (primarly the Mississippi River and

tributaries), the Great Lakes, and the domestic ocean system. The
inland waterway system consists of about 40,000 kilometers of
navigable water along rivers and a few canals. The dominant mode of
operation on this part of the system is the towboat pushing a barge or
string of barges. These barges typically carry bulk cargo, in strings
of three to as many as fifteen barges (average capacity over 1200
tons). Of the approximately 2000 companies that operate on the inland
waterway system, about 85% are exempt from regulation, regulation
being limited to carriers of certain types of cargo and routes. Since
the early 19th century, the U.S. Army Corps of Engineers, which has
responsibility for planning, improving, and maintaining the nation's
waterways, has invested approximately $10 billion in the domestic
marine system. This agency also constructs and operates the
numerous locks which are used to route vessels around waterfalls or
other unnavigable sections.
The Great Lakes-St. Lawrence Seaway system operates east from Lake
Superior to the Atlantic Ocean and is about 3700 navigable kilometers
in length. This sytem is of course used for both domestic transport and
international transport. The typical boats on the Great Lakes system
are large vessels for carrying bulk cargo and liquid cargo. In
addition, a few barges and tugs operate on the Great Lakes.
The domestic ocean system serves the eastern and Gulf coasts on the
one hand and the west coast on the other. The coastal fleet consists of
about 200 vessels, of which wbout 150 are tankers. Detailed commodity
information on domestic freight is generally unavailable, but in 1974
it was estimated that about 75% of this cargo was petroleum, 6% was
non-petroleum fluid cargo, and 17% was dry cargo.
Generally water transport is very inexpensive compared to rail, and
indeed all other modes except pipeline. But it is very slow, vessels
often operating at cruise speeds of less than ten kilometers per hour.
And given the large size of vessels, departures tend to be infrequent,
 23

resulting in substantial delays. Thus total logistics cost considerations

limit cargo to low value items, mainly bulk cargo and some
intermediate products.
Although domestic water transport has been subject to Interstate
Commerce Commission regulation, exceptions applied to perhaps 90%
of all movements, making it effectively unregulated. The exceptions
applied to (1) all movements in vessels regularly inspected by the
Coast Guard and (2) other vessels (a single boat or a tow boat plus
barges) that simultaneously are carrying at least two but not more
than three bulk commodities. Recently this exemption was extended to
all bulk commodity movements.

4.3.2 International System

International cargo moves primarily through a few major seaports

on both the east coast and the west coast. This cargo is typically of two
types, either bulk cargo, liquid or dry, and general freight moved in
containers. The only other significant category of cargo is general
freight which moves in such large quantities that specialized vessels
and transfer devices are used to carry it, such as the movement of
automobiles to the U.S. from Europe and Japan.

4.3.3 Problems

A number of problems face various sectors of the marine freight

system. From the carriers' standpoint:
1. Ports tend to be controlled by government authorities, and
coordination, particularly in terms of capacity expansion and
adaption of new technology, between the ports, steamship
companies, and shippers or receivers of freight often is lacking
or slow.
2. Ports are very highly unionized, and this has the effect of either
 24

limiting the use of new technology, or requiring the payment of

monies to special funds for displaced workers -- often well
beyond what would seem reasonable.
3. Environmental and weather problems, particularly in the St.
Lawrence-Great Lakes system, result in seasonal closing of
waterways and ports.
4. The possibility of future imposition of higher user charges on
the inland waterway system, increasing the costs of water
transport, will reduce competitiveness with rail.
5. Domestic barge traffic has been declining for many years,
mainly as a result of more aggressive rail competition.
From the shipper's standpoint, the domestic water transport system
seems to function quite well. It tends to serve a very specialized
market, and be the lowest cost carrier, so this perhaps is not
surprising. For international movements, shippers tend to have a
number of complaints, such as:
1. The paperwork and bureaucracy associated with international
movements is very costly and excessive.
2. Small shippers have great difficulty in international trade, since
they can not get the attention and care of major shipping
companies.
From the community and national point of view a number of
problems with the marine system include:
1. There is a real potential of very serious accidents resulting from
hazardous materials shipments, particularly in and out of
congested waterways and in densely populated areas. Liquified
natural gas tankers have been referred to as travelling "time
bombs".
2. Environmental problems of water pollution remain serious.
3. Subsidization of marine transport, especially ports and the inland
water system, by the general public, creates financing problems
for the governments invol ved, and can lead to inefficient
 25

allocation of freight among modes, ports and routes.

4.4 Air Freight System

4.4.1 Components and Finance

There are about 16,318 airports in the United States, 700 of which are
served regularly by certified air carriers and about 500 of which
have Federal Aviation Administration (FAA) control towers. These are
the airports through which most air traffic, both freight and
passenger, is operated. Virtually all of these larger airports are
publically owned, although private ownership is significant in the
smaller airports.
Air freight is carried by a combination of (1) airlines which are
primarily passenger but which carry freight in the bellies of
passenger airplanes, and (2) carriers which operate exclusively
freight service. The competitive position of passenger air carriers
changed markedly as a result of Airline Deregulation Act of 1978. That
deregulation led to virtually complete freedom of entry and exit,
service quality, capacity, and pricing of air passenger service. As a
result, many new carriers entered, there was considerable
experimentation with new pricing and service quality features, and
many airlines have had considerable difficulty in surviving under
the competitive conditions. However, this has not seemed to have had
a great impact upon air freight, even though airlines are generally
in a very weak financial state at this time.

4.4.2 Traffic and Service

Air cargo tends to be highly differentiated in terms of speed and

price. At the one extreme, there are services which guarantee
delivery of cargo overnight, anywhere in the U.S., but for a very
 26

high charge. This type of service is used primarily for small parcels
of very high value, and extremely time sensitive larger items. Each of
the major freight carriers typically offers somewhat slower but still
guaranteed delivery services but at a correspondingly lower rate. And
there are less expensive services that have no explicit delivery
guarantee. Since virtually no production or final consumption
activity occurs at airports, air freight is virtually always integrated
with trucking at both ends. Individual air freight carriers seem to try
to carve out a specific market niche for themeselves, which often is
highly profitable initially, but where these high profits utlimately
attract other carriers, resulting in lowered revenue and profitably.

4.4.3 Problems

Major problems of concern in the air freight industry are:

1. Industry financial performance, especially of combined
passenger and freight carriers, is generally extremely poor, and
it is expected that many years will pass before the situation
changes.
2. Airport congestion and resulting delays have been increasing
substantially recently, and could adversely affect air freight if
these trends continue. Being generally less time sensitive than
passenger traffic, and operating primarily at night, problems for
freight have been minimal to date.
3. The system is completely dependent upon oil-based fuel, and
future supply interruptions or cost increases could create serious
problems for the industry.
4. Environmental pollution, particularly noise, can be a very
serious problem with air freight, particularly because their
operations are concentrated at night.
From the standpoint of shippers, air freight service, like marine
freight, provides a very specialized product to meet the needs of
 27

particular shippers. For shippers willing to pay the relatively high

rates, air freight meets these needs very well, and no widely felt
problems have been identified.
From the standpoint of the community and the nation as a whole, the
primary problems are those related to environmental pollution and
the dependence of the system on oil as its source of energy, as already
identified above.

4.5 Intercity Pipeline System

4.5.1 Components and Finance

The intercity pipeline system of the V.S. consists of three types of

pipelines. These are networks for the movement of (1) natural gas, (2)
crude petroleum, petroleum products, and chemicals, and (3) solid
commodities in a slurry (water medium). The Interstate Commerce
Commission regulates the interstate common pipeline carriers of oil
and other commodities except those that carry water and natural gas.
There are about 275,000 kilometers of line. This represents about 80%
of the total length of liquid pipeline existing in the V.S. for intercity
movement, thus excluding urban water and gas pipelines.
The natural gas pipeline system is regulated by the Federal Power
Commission, and it carriers large amounts of natural gas within the
producing regions in the southwest, and moves large amounts of gas
from those states to the midwest and northeast. The only slurry
pipelines in operation recently have carried only coal. It is believed
that there is now only one such line operating, a 434 kilometer, 457
millimeter (18 inch) diameter line in Arizona, built in 1970. Others
are discussed often but plans are very exploratory in nature.
 28

4.5.2 Service and Cost

The cost of transporting commodities via pipelines is extremely low.

This basically reflects the fact that the cost is primarily composed of
the fixed cost of construction and maintenance, and typically
pipelines only exist in areas where they are utilized by high volumes
of traffic.
This economy is further reinforced by the substantially economies
with respect to pipeline diameters and the concentration of pipeline
on high volume corridors. Pipeline rates tend to be lower than those
of any other mode.

4.5.3 Problems

The pipeline system is very stable, and in general seems to have few
problems associated with it. The main issues related to pipelines in
recent years have been construction of new coal slurry pipelines.
One issue has been access to water, and the difficulty of obtaining
water in areas where coal production is increasing, such as Wyoming
and Utah, has been one factor in preventing the construction of such
lines. Another factor has been the unwillingness of railroads to grant
essements on their right-of-way, although if the advantages of slurry
pipelines were really compelling the right of eminent domain could
be granted by the federal government.

4.6 Intermodal Service

There are basically two reasons for intermodal transportation. One

is, of course, the unavailability of anyone mode over the entire
distance from origin to destination, e.g., transport from Chicago to
Milan. The other is where a particular mode is especially attractive in
terms of meeting the service quality and price requirements of a
 29

shipment, but where that mode is not available at the origin of the
shipment, its destination, or both. In such a case the preferred mode
is used for most of the distance, referred to as the line haul mode, and
another mode is used to gain access at one or both ends. Although in
principle any combination of modes could be used for transportation
from origin to destination, only certain combinations are actually
found in practice. This is because some modes are so different in
service and price characteristics that to combine them would result in
a service that probably is not well suited to the needs of any
shipments.
The most typical combinations of modes are as follows. Water
transport is, of course, often used for part of a journey, with rail or
truck movement at one or both ends. For oil, other liquids, and gas,
pipeline transport in conjunction with water is also quite common.
Rail as a line haul mode is commonly used with by truck access at one
or both ends. Rail is also used in connection with pipeline transport,
although to a very limited extent. Pipeline line haul service in
conjunction with truck as an access mode is quite common. While
other combinations are possible and used, they are relatively rare,
mainly for the reasons indicated above.
Intermodal shipments have been increasing steadily in recent
years. Even setting aside those situations such as trans-ocean trade
where intermodal movment is a physical necessity, intermodal traffic
has still been increasing rapidly. This is illustrated by data on
intermodal movements via rail, specifically the carriage of
containers and truck trailers on rail cars. While some of this traffic is
undoubtedly international and thus is inherently multimodal, the vast
majority of such traffic undoubtedly is cargo which could move from
origin to destination entirely by truck, and in many cases via rail
carload as well. Table 10 presents recent data on total rail car loadings
of truck trailers and containers. Growth in recent years has been
very dramatic; it has doubled in the past seven years, and now
 30

represents a very substantial fraction of total rail carloads. (Note that

while total rail car loadings have gone down, total rail traffic
measured in ton-kilometers has still increased, indicating greater
loadings per car.) And, of course, these data reflect only one type of
rail line haul intermodal movement -- container/trailer movement
not the total amount of intermodal movement.

4.6.1 Recent Developments in Technology and Service

There are basically four technologies available for intermodal

traffic, all but one of which are very widely used. One of course is to
carry the cargo in a container, of which there are now standardized
sizes and shapes. The container facilitates transfer from one mode to
another lowering terminal costs, at some expense in terms of
increasing the tare weight of the shipment. Containers are widely
used in all modes of transportation for intermodal shipments. The
second type is to use a truck trailer or other vehicle as a container,
simply carrying this on the vehicle of the other mode. This is of
course very common in rail inter modal service and also is used for
some domestic and international water cargo. The advantage is less
elaborate terminal facilities (since the truck can be driven· into the
other vehicle, as opposed to requiring a specialized loading crane or
other device), but the disadvantage is that the extra weight of the
truck wheels or chassis must be carried with the load. A third
variation is to take advantage of the ease with which some
commodities, primarily bulk commodities, can be trasnferred from
one container (or vehicle) to another. Liquids, gases, and loose solids
such as coal, cement, and grain can be rapidly, safety, and easily
transferred with relatively modest equipment from a rail car body to
a truck body, etc. The fourth is, of course, to transfer cargo manually,
or with simple equipment, from one vehicle to another. For all but
bulk commodities this is very expensive. Although used widely before
 31

the advent of containers, it has now all but disappeared.

The three forms of intermodal service now in common usage bear
some discussion of recent developments. Turning first to the carriage
of containers or vehicles of one mode on other modes, this was first
deployed on a large scale beginning in the 1930's, with the carriage
of truck trailers on railroad cars. This is termed "piggyback" or TOPC
(for trailer-on-flat- car) and it is well developed. The 1950's saw the
development of skeleton flatcars designed specifically for carrying
truck trailers, and the late 1970's and early 1980's have seen advances
in such cars to reduce the tare weight substantially, mainly by taking
advantage of side loading with cranes rather than end loading and
use of articulated designs which reduce the number of axles per unit
of train capacity. Reductions in tare weight reduce the power
requirements and energy consumption, and make higher speeds more
practical. Until recently all North American rail cars for this purpose
were conventional large two-truck (or bogie) cars, but in recent
years the use of two-axle cars has expanded their use being facilitated
by improved track quality (resulting in a reduction of the probability
of derailment) and encouraged by reduced weight and operating
costs. The same cars can be used for carrying containers, and such
use is increasing.
Another development has been the "double stack" container car
which carries two containers, one above the other, resting in a well
(between the cars trucks of bogies) which is just a few centimeters
above the rail. This type of car, like the piggyback car, is
increasingly of the articulated variety to reduce weight. The reduced
weight and power requirements, as well as other advantages of these
cars, are widely seen in the railroad and trucking industries as
substantially reducing line haul costs. As a consequence many
railroads feel that the profit margins of double stacks are much
greater than TOPC.
Another recent development has been the dual-mode truck trailer,
 32

termed the Roadrailer. This concept, originated by the Chesapeake

and Ohio Railroad and British Railways in the 1950's, is essentially to
equip a truck trailer with rubber tires for road operation and a single
axle for rail operation. With a rail truck (bogie) under the front
trailer, trains of thees vehicles can be operated. While yet to fully
prove itself in commercial application, experimental operations with
trains of such trailers have demonstrated its technical soundness. It
now awaits finding the right market.
Many advances have been made in the transfer of bulk cargoes
between vehicles. The most significant are transfer techniques that
eliminate the need for special terminal facilities, thus permitting
trsnfer anywhere that vehicles of the two modes can be brought
together. This has been especially significant for rail-truck
combinations, because it permits such intermodal service to be
provided even with low traffic volumes, and hence service can be
widely available, rather than limited, as in the case of intermodal
container service, to a few high volume terminal locations. Generally
the techniques involve devices which can be permanent parts of the
rail car, or truck, or both. Commodities to which such rapid loading
devices have been applied include cement, grain, sugar, and of course
a variety of fluids.
Another important stream of technological developments in
intermodal transportation has been the refinement of intermodal
container terminals. This has mainly taken the form of advances in
loading and unloading devices, which speed the process, reducing the
cost of operation, and also reduce the land required for these
terminals. These take the form of free-wheeled cranes, widely used
for rail-truck interchange, or cranes on fixed rails, used for both
ship and rail loading. Some cranes are also designed to stack
containers in terminal storage yards.
There have been many changes in the organization of multimodal
services as well. As a result of the substantially reduced regulatory
 33

restrictions on intermodal ownership, many single mode

transportation companies have purchased carriers of other modes.
Some of this has been simply an effort at diversification, to provide a
cushion against downturns in the business of one mode. Other
purchases, however, have been with the intent of expanding the
range of transportation services offered (in the quality and price
sense), or expanding into new territory, or both. One of the more
graphic examples of this has been the purchase of the Overnight
truck line by the Union Pacific Railroad. Figure 11 presents a map of
the rail system and the location of overnight truck terminals. It is
quite evident from this map the purchase of this truck line will
enable the railroad to extend service to the eastern half of the U.S.
where it has no rail lines. Thus a truly national transportation
company is created by such purchase or mergers. It is not clear
exactly how the Union Pacific will take adantage of this purchase, but
mny other railroads have extended their service up to 500 miles by
such purchases of truck lines or by development of alliances with
friendly truck lines.
Another example of an important institutional change has been in
conjunction with container movement in international trade. Many
international steamship companies are now contracting with
railroads to operate special trains for the carriage of international
containers between ports and inland destinations and in some cases
on to ports on the other coast of the U.S., creating so-called "land
bridges". The shipper still deals solely with the steamship company in
arranging for transportation, and the railroad's only role in many
cases is to provide locomotives and operate the train for the steamship
company. As a result of deregulation, steamship lines can now sell
space on these containers between inland points, in an effort to fill
the containers in the direction of lower international cargo volume.
In this service, railroads take on the role of a wholesaler rather than
a retailer of transportation, with the shipper's only contact being
 34

with the steamship line. For such a scheme to work in the present
deregulated environment, there has to be a clear understanding
between the various companies involved as to which traffic each will
attempt to attract to its own vehicles or containers. Such aggrements,
or alliances, seem to have been formed with relative ease, and no
serious problems of infraction have appeared.
Another important feature of intermodal service is the key role that
terminals play in the entire process. This has become particularly
apparent in truck-rail, water-rail, and water-truck services. In order
to attract transportation carriers to offer frequent (high quality,
reasonably priced) high capacity intermodal service between a pair
of cities, many conditions must be met. Those cities must have modern
terminal facilities that can sustain rapid, reliable intermodal
exchange of the containers or trailers, that can be operated at a
reasonably low cost, and that can be reached easily from main traffic
lanes of the various modes. And, in order to interest a carrier in
providing this service, there has to be prospect of a relatively high
volume of traffic. All this has meant that some metropolitan areas
have become major intermodal hubs, while other areas lacking one or
more of these features have not been so chosen and are gradually
losing intermodal traffic. This is particularly graphic in the case of
international container traffic, which tends to be concentrated at a
few ports that offer high quality facilities, high cargo volume, and
good access. The same patterns are emerging for rail-truck
intermodal service. These considerations are so important that many
municipalities and state governments have provided funds for the
improvement of intermodal facilities within their juridictions in
order to attract this type of service and traffic. And, of course, areas
which have good intermodal service are likely to be more attractive
for future industrial development, as well.
 35

4.6.2 Problems

The rapid development of intermodal service has not been without

problems. From the standpoint of transportation carriers providing
this service, the following seem to be among the more important:
1. The rapid changes in technology, such as the increase in trailer
(or container) length from 12,2 to 13,7 meters (40 to 45 ft.) and
recently to 14,6 meters (48 ft.), with increases in width from 96 to
102 inches have raised the fear of technological obsolescence of
equipment.
2. The initial investment required to initiate (or substantially
upgrade) intermodal service is very large, and often government
must share the cost. This must be justified by the expectation of
benefits to the regional economy.
From the standpoint of shippers and communities the main
problems seem to be:
1. Intermodal terminals for containers and trailers are being
improved primarily at large volume locations, and thus the
advances in such intermodal service are increasingly
unavailable to many smaller communities.
2. Some government agencies that control ports and highways seem
very reluctant to work cooperatively with one another and with
private transportation companies to provide good intermodal
service.

5. FUTURE PROSPECTS AND OPPORTUNITIES

Predicting what will happen in transportation in the future is of

course extremely difficult and fraught with danger. However, a
number of promising innovations in technology, service, and
organizational structure are appearing. Many of these hold the
 36

potential for substantially improving transportation and alleviating

many of the current or emerging problems. Some of the more
dramatic of these are identified below:
1. Multimodal ownership holds the promise of moving from simply
diversified holdings of distinct modes that are operated as
separate companies to truly "one-stop shopping" for freight
transportation service. Many carriers and shippers feel that the
time for such service has come. The essential argument is that
shippers really do not care what particular technology of
transportation is used to carry the shipment, but rather simply
want to know how much the shipment will cost, when it will
arrive at its destination, and other important quality features
such as packaging requirements and the likelihood of loss
damage.
2. The use of advanced telecomunications and computer technology
in monitoring and controlling transportation operations is likely
to expand considerably and reduce costs as well as improve
service quality and capacity utilization. The capability now exists
to identify the location of any vehicle or shipment (except in
unusual circumstances, e.g., in a tunnel) through the use of
simple electronic devices and trilateration from satellites. Mobile
Satellite Service promises to provide communication service with
vehicles for digital as well as voice messages at low cost, enabling
real time information and control of vehicle operations. Such
devices CQuld be enhanced to indicate the condition of the
shipment (especially important for perishable and hazardous
materials) and to trace cargo involved in pilferage and theft.
On-board computers can be used to monitor vehicle operation and
send and receive messages to central control centers, benefiting
operations and maintenance. For situations where route
conditions or traffic demands change rapidly, as in the case of
road travel, such devices can provide real time information on
 37

routes to be used. Implementation of pilot small scale systems is

expected in the very near future.
3. A fundamental problem in transportation is its dependence upon
oil, a resource that will be depleted unless means can be found to
economically yeld oil from low-quality deposits or from other
more plentiful materials. A variety of research directions. are
being pursued to wean transportation away from its dependence
on oil, including battery storage systems (primarily for road
vehicles), hydrogen as a fuel, solar energy for vehicles of all
types, and electrification of highways so that non-oil fuels could
propel such vehicles. One obvious means of electrifying
highways would be to use essentially the same technology as is
used for railways and trolley buses in cities, but this obviously
limits the freedom of the vehicles to maneuver. Alternative less
maneuverability-restricting technologies are also being pursued.
Potentially important in transportation is the development of
superconductive materials, which reduce substantially line losses
in providing electric power.
4. Pipeline technology has often been described as a "sleeper" in
transportation, and methods for carrying solids and general
merchandise (as opposed to just liquids and gases) are being
pursued vigorously. Capsules carrying general freight on any
type can be passed through a pipeline in a liquid or pneumatic
medium. The simplicity of this system, absence of environmental
intrusion, and ease of automation make such a system very
appealing. Such systems have been proposed for high-volume
urban transportation situations, but none have been deployed. It
is conceivable that many of the features of this technology could
be combined with railroads to result in a more evolutinary
intercity technology which does not require building a complete
new system.
5. There is also considerable interest in using two technologies
 38

which have existed for decades but which have never been used
extensively for freight transport. These are submarine and
lighter-than-air flying craft.
Thus there are many exciting possibilities for freight
transportation, spanning technology, service, and institutional
changes. The challenge is to identify those which have the greatest
payoff to society and to pursue them vigorously.

REFERENCES

Association of American Railroads (1986), Railroad facts and figures.

Washington, DC.
Bonsall P., Bell M. (eds) (1987), Information technology applications
in transport. Topics in Transportation Series. VNU Science
Press Utrech.
Bruce H.J. (1987), America's new railroads, Progressive Railroading
(January).
Committee on Transportation, Assembly of Engineering, National
Research Council (1979), A review of the U.S. freight system,
phase I report: possibilities for the future. National Academy
of Sciences, Washington, DC.
Delaney R.V. (1986), Managerial and financial challenges facing
transport leaders, Transportation Quarterly XL, 1: 29-53.
Ettorre J.J. (1987), New intermodalism: joint ventures or mega-
carriers, Handling and Shipping Management 28, 4: 22-26.
Feldman J. (1987), Trucking update, Handling and Shipping
Management, 28, 4: TI-TIO.
Holcomb M.C., Floyd S.D., Cagle S.L .(1987), Transportation energy data
book: edition 9. Oak Ridge National Laboratory Oak Ridge TN.
Interstate Commerce Commission (1986), Transport statistics in the
United States. Government Printing Office, Washington DC.
Mahoney J.H. (1985), Intermodal freight transportation. Eno
Foundation Inc. Westport CT.
Morlok E.K., Warner J.A. (1979), The existing intercity freight system,
Appendix A, and Possible technological alternatives and
innovations, Appendix B, in Committee on Transportation, A
review of the U.S. freight system, National Academy of
Sciences Washington DC, 51-110.
National Transportation Policy Study Commission (1979), National
transportation policies through the year 2000. U.S.
Government Printing Office Washington DC.
 39

Transportation Policy Associates (1984), Transportation facts and

trends. Washington DC.
U.S. Bureau of the Census (1987), Statistical abstract of the U.S., 1986
U.S. Government Printing Office Washington, DC.
U.S. Department of Transportation (1985), Summary of national
transportation statistics. Washington DC.
 40

Table 1. Transport and the U.S. National Economy, 1960-85.

Gross National Transportation

Year Product ($Billion)a Bill ($Billion)b Percent of GNP

1960 515.3 105.6 20.49

1965 705.1 141.0 20.00

1970 1.015.5 195.6 19.20

1975 1.598.4 297.8 18.58

1980 2.732.0 540.1 19.77

1985 3.988.5 747.0c 18.73

a Source: U.S. Bureau of Census (1987), 417.

b Source: U.S. Bureau of Census (1987), 577.
c Estimated
 41

Table 2. Freight Transport and the U.S. National Economy,

1960-85.

Gross National Product Population

Year $Billiona Ratio to 1960 Million Ratio to 1960

1960 1.625 1.00 180.671 1.00

1965 2.184 1.34 194.303 1.08

1970 2.416 1.49 205.052 1.14

1975 2.695 1.66 215.973 1.20

1980 3.187 1.96 227.757 1.26

1985 3.585 2.20 239.283 1.32

a Constant 1982 dollars.

Source: U.S. Bureau of the Census (1987).

Domestic Intercity Freight International Freight a

Year Billion ton-km Ratio to 1960 Billion ton-km Ratio to 1960

1960 2114.23 1.00 646.6 1.00

1965 2635.54 1.08 1078.9 1.67

1970 3115.02 1.47 1393.8 2.16

1980 4001.58 1.89 1778.6 2.75

1985 3884.13 1.84 1582.2b 2.45

a Air and water only.

b 1984 value.

Source: U.S. Bureau of the Census (1987).

 42

Table 3. Breakdown of the Total Transportation Bill of the

u.s. in 1975.

$ Billion
Urban Intercity International

Freight 48.0 72.5 6.5

(14.8%)a (22.4%) (2.0%)

Passenger 92.5 95.4 3.8

(28.6%) (29.5%) (1.2%)

a Percentage of total bill of $322.9 billion, which includes $4.2 billion

(1.3%) listed as miscellaneous and unassigned to the categories
above.

Source: National Transportation Policy Study Commission (1979), 209.

 43

Table 4. Volume of U.S. Domestic Intercity Freight Traffic,

1960-85.

(a) Billions of Ton-Kilometers

Year Rail Road Water Pipeline Air Total

1960 931.61 458.56 353.98 368.46 1.45 2114.23

1965 1140.78 577.63 421.56 492.35 3.06 2635.54

1970 1240.54 662.91 513.27 693.48 5.31 3115.02

1975 1221.23 730.49 550.28 815.76 5.95 3324.19

1980 1499.59 893.0 654.86 946.09 7.72 4001.58

1985 1444.88 965.4 559.93 904.26 10.28 3884.75

(b) Percent Distribution

Year Rail Road Water Pipeline Air Total

1960 44.06 21.69 16.74 17.43 .07 100

1965 43.28 21.92 16.00 18.68 .12 100

1970 39.82 21.28 16.48 22.26 .17 100

1975 36.74 21.97 16.55 24.54 .19 100

1980 37.47 22.32 16.37 23.64 .19 100

1985 37.19 24.86 14.41 23.28 .26 100

Source: U.S. Bureau of the Census (1986), 591, for 1960-1984; and
Association of American Railroads (1986) for 1985.
 44

Table 5. Average Freight Revenue per ton-km ofV.S.

Intercity Freight Modes, 1960-84.

a) Cents per ton-km

Motor Carrier
Rail (Class I & II) Inland Oil
Year (Class I) Common Contract Waterway Pipeline Air

1960 0.87 NA NA NA 0.21 15.36

1965 0.79 4.01 4.76 NA 0.17 12.72

1970 0.89 4.64 4.26 0.27 0.17 13.62

1975 1.27 5.70 4.88 0.32 0.23 17.54

1980 1.77 8.02 7.32 0.48 0.62 28.77

1984 1.92 8.47 7.18 0.51 0.79 28.03

b) Cents per ton-km index converted for inflation using Producer

Price Index (1967=100)

Motor Carrier
Rail (Class I & II) Inland Oil
Year (Class /) Common Contract Waterway Pipeline Air

1960 117.4 NA NA NA 138.7 132.3

1965 104.5 101.3 109.0 NA 110 107.7

1970 102.7 102.0 84.8 103.6 94.5 100.0

1975 98.8 84.7 65.6 84.1 87.l 87.1

1980 90.7 87.8 64.8 82.2 155.9 94.3

1984 83.4 70.5 54.0 74.2 167.7 78.0

NA indicates not available.

Source: U.S. Dept. of Transportation (annual).
 45

Table 6. Operating Revenues of Selected U.S. Domestic

Freight Modes, 1970-83.

Class I Class I and II Inland and Pipeline

Rail Intercity Truck Coastal Water Oil Gas Air

1970 11.992 11.137 372 1.188 5.928 677

1975 16.402 16.164 946 2.220 11.898 949

1980 28.103 30.338 937 7.062 41.604 2.112

1983 26.729 33.899 1.020 8.302 53.577 2.119

1984 29.453 35.820 1.067 8.693 53.319 2.250

Source: U.S. Bureau of the Census (1987), 578, except air (which
includes freight and mail), 602.
 46

Table 7. U.S. International Air and Water Freight Traffic,

by Mode, 1960-84.

(a) Exports
Quantity Originated Value Originated
(Billion tons) ($ Billion)
Water Air Water Air

1960 248.5 NA 13.1 NA

1970 480.5 0.9 24.6 6.1

1975 538.5 1.4 63.4 15.2

1980 801.8 2.3 120.9 46.1

1984 750.0 2.2 102.0 53.4

(b) Imports

1960 398.1 NA 11.1 NA

1970 598.4 0.6 24.8 3.4

1975 855.3 1.1 63.5 8.9
1980 976.8 1.3 165.1 28.0

1984 832.2 3.1 193.0 52.3

NA indicates data not available.

Source: U.S. Bureau of the Census (1986). 623
 47

Table 8. Transportation Accidents and Resulting Deaths and

Injuries in the U.S., 1970-84.

Accidents Involving
All Accidents (Thousands) Hazardous Materials
Number Deaths Injuries Number Deaths Injuries

1970 16.013 54.8 2.024 NA NA NA

1975 16.523 48.2 1.858 10.951 27 648
1980 17.924 54.5 2.066 15.737 19 627
1984 NA 46.7 1.639 5.512 7 242

NA indicates data not available

Source: U.S. Bureau of the Census (1986), 592.

Table 9. Historical Energy Intensities of U.S. Freight Modes,

1970-84.

Class I
Trucks Freight Domestic
Btu/vehicle-mile Railroads Water

Btu/revenue Btu!
Year Single Unit Combination All Trucks ton-mile ton-mile

1970 12.350 28.840 15.440 650 540

1975 12.490 24.370 14.890 680 550
1980 11.260 25.220 13.440 590 360
1981 10.550 25.220 12.590 570 360
1982 10.590 25.220 12.890 550 310
1983 9.940 26.420 12.820 520 290
1984 9.740 26.570 12.650 510 NA

NA indicates not available

Source: Holcomb et al. (1987), 1-34.
 48

Table 10. Intermodal Containers and Highway Trailer Share

of U.S. Class I Railroad Traffic, 1960-85.

Total Total Container and

Carloads Container and Trailer Trailer
Year Originated Carloads Originated Percent of Total

1960 30.441 554 1.8

1965 29.248 1.077 3.7

1970 27.160 1.450 5.3

1975 23.217 1.308 5.6

1980 22.598 1.687 7.5

1985 19.418 2.863 14.7

Source: Association of American Railroads (1986).

 .J>,.
(0

The Union Pacific's rail system shown

superimposed on Overnite's terminal
network. Only 11 of Overnite's more - Union Pacific Railroad
than 50 terminals are located west of
the Mississippi River. * Overnite terminals

Figure 1. Extension of a railroad's market area through purchase of a

truck line and intennodal service.

Source: Handling and Shipping Management (1987) 28, 4:24

 THE MATCHING OF TRANSPORT DEMAND WITH SUPPLY IN
ITALY

Antonio Bartolucci, Maria Silvestrelli

Progetto Finalizzato Trasporti Consiglio Nazionale delle Ricerche

Roma, Viale dell'Universita 11 Italy

The problem of matching demand with supply becomes particularly

engaging in the case of transportation, for the actual difficulties in
adapting a scarcely flexible system to a continuously evolving demand. In
fact, the capability of adequating the production of services to the market
requirements varies considerably in relation to the complexity of the
structures involved in the process. As a consequence the situations and
the problems peculiar to each transport modal sectors result definitely
different. The unbalance in the transport system can be overcome through
advanced planning and management methods and the development of
information systems.
This paper analyses the changes occurred in Italy both in transport
demand and in modal sectors in the 1971-1981 decade and from 1974 to
1984. It also describes some research initiatives included in the
Transport Research Project of the Italian Research Council, aimed at
improving the matching of transport demand with supply and, at the same
time, the efficiency of freight services.

1. INTRODUCTION

The continuous progress in the industrial productions and the

subsequent changes in logistic systems have considerably
transformed the qualitative and quantitative aspects of transport
demand.
The transport industry is, therefore, continuously engaged in
adapting its structure to match new market requirements.
In this process, the role of information is of vital importance both
in planning structural modifications (often implying public
intervention) and in improving the quality and the efficiency of
services in accordance with the demand evolution.
 51

This paper describes the changes in some significant aspects of the

demand occurred in Italy from 1971 to 1981, and the impact, on
preheminent modal sectors, registered in the 1974-1984 decade. In
fact, in Chapter 2 are examined the variations registered in the
manufacturing industry with respect both to the distribution and
dimensions of productive plants, and the quantity-quality of outputs.
The same chapter contains also some indications about the changes in
the population distribution and family consumptions.
The modifications in preheminent modal sectors (in terms of tons
carried), subsequent to demand evolution, are described in Chapter 3.
These analyses, though limited by information availability, point
clearly out how modal sectors have reacted to the changes of demand
and the problems, still unsolved, connected with an unsatisfactory
matching of transport demand with supply.
In Chapter 4, besides some considerations on the results of the
previous analyses, proposals for the solution of the above problems
are discussed. A substantial help is espected from innovative
management methods, which normally imply a massive resort to
information systems. On this aspect, the paper presents some specific
research programs, included in the Transport Research Project
(Progetto Finalizzato Trasporti -PFT) of the National Research Council
(Consiglio Nazionale delle Ricerche -CNR), aimed at improving the
productivity and efficiency of transportation through the diffusion
of advanced information systems.
The evolutive aspects and problems described in this paper, though
limited to the Italian situation, might still be useful for comparative
analyses on other national contexts.

2. THE EVOLUTION OF FREIGHT TRANSPORT DEMAND.

The content of this chapter represents an attempt to outline the

 52

c=J DF<O

fmIiI DF E (0,0.08)

~ DF E (0.08,0.18)

DF> 0.18

Figure 1 Difference between 1981 and 1971 Florence's indices.

 53

evol ution of transport demand in a decade (1971-1981) through the

examination of the changes occurred in some factors which can
influence this process.
Most of the analyses are based on information collected and
published by the Italian Census Bureau (Istituto Centrale di Statistica-
1STAT) on the occasion of the 1971 and 1981 censuses.

2.1 Modifications in the Manufacturing Industry.

The analysis of spatial distribution and dimensional aspect of

industrial plants has demonstrated that substantial changes have
·occurred in the decade.
In fact, the 1981 situation shows a more distributed location
attributable both to the decentralisation of productions and the
formation of new industrial firms. At the same time the average
dimension of firms (in terms of employees) has sensibly reduced, in
accordance with the evolutive trends in productive systems. The
figure 1 shows how, in the various regions, the concentration of
employees in the manufacturing industry from 1971 to 1981 has
changed. The white areas indicate a reduction of concentration while
the colors show different increase rates.
This situation, obtained through the difference between 1981 and
1971 regional indices of Florence 1 , is confirmed by other studies,
based on different methods (CSST (1985», in which it is pointed out
the "migration" of industrial firms from high concentration zones
(Piemonte, Lombardia) to north-east regions and the contemporary
industrial development of central Italy.
As for dimensional aspects, table 1 indicates the numerical
variations in productive units and employees by dimensional class

(1) Florence's index is defined by: (E/En:P w;lP wn)' where Ei is the number of
the employees in the manufacturing industries in the region i, En is the
national number of employees in the manufacturing industry, P wi is the
working population in region i and P w n is the national working population.
 54

of units (in terms of employees). The total increases are,

respectively, of 21 % and 12.6% for productive units and employees.

Table 1 Distribution of plants and employees in the manufacturing industry

per dimensional classes.
perc. employees perc.
~imensiona plants
classes 1 ~I/ 1 1'111
variation PIll 1'111
variation

1 1 249154 282851 13.5 249154 282851 13.5

2 2 95443 108539 13.7 190886 217078 13.7
3 3-5 93679 117917 25.8 347294 442090 27.3
4 6-9 39685 58318 46.9 286296 422730 47.6
5 10-19 32848 53132 61.7 439969 703827 59.9
6 20-49 21892 26086 19.1 666851 780723 17.1
7 50-99 7977 8385 5.1 550685 575992 4.5
8 100-199 3859 4195 8.7 535272 578633 8.1
9 200-499 2175 2144 -1.4 653941 640417 -2.1
10 500-999 560 579 3.4 387683 392867 l.3
11 1000- 326 308 -5;5 827053 744874 -9.9

total 547598 662454 20.97 5135084 5782082 12.6

Source: ISTAT, Censuses of industry 1971,1981; in (Barca, 1985).

The difference in percentage variations means that the average

dimension of plants has diminished.
In fact, the dimensional classes which have registered increases
above the average rate are 3,4,5 with regard to productive units and
from 1 to 6 for the number of employees (fig.2), with a peak, in both
cases, in class 5 (10-19 employees). Table 2 provides, for each
dimensional class, the average number of employees in 1971 and 1981
and the percentage variations, which show limited increases only in
classes 3 and 4 and reductions in all the other classes, with a maximum
in class 11 (over 1000 employees).
 55

59.9

12.6

1 2 3 4 5
-9.9

Figure 2 1971-1981 percentage variation

per dimensional class.

Table 2 Average number of employees per class.

~imensiona
classes 1971 1981 %

1 1 1 1 -
2 2 2 2 -
3 3-5 3.70 3.74 1.1
4 6-9 7.21 7.24 0.4
5 10-19 13.39 13.24 -1.4
6 20-49 30.46 29.92 -1.7
7 50-99 69.03 68.69 -0.4
8 100-199 138.7 137.9 -0.5
9 200-499 300.6 298.7 -0.6
10 500-999 692.29 678.5 -1.9
11 1000- 2536.9 2418.4 -4.6

The observed development of small factories has its origins in

economic events which have called for an ever increasing flexibility
in the productive processes. As a consequence, the method of splitting
complex productions into specific operation cycles to be carried out
by small-medium industrial factories has been widely adopted, so that
they become a decisive factor for the productive system development.
 56

Table 3 Neutral and effective distribution of plants and relative deviation.

dimensional 1971 1981

classes neutral effective deviation neutral effective deviation

1 1 49.77 45.50 -8.57 50.71 42.70 -15.81

2 2 16.65 17.43 4.66 16.70 16.38 -1.92
3 3-5 16.71 17.11 2.36 16.52 17.80 7.72
4 6-9 6.71 7.25 7.96 6.53 8.80 34.92
5 10-19 5.05 6.0 18.68 4.83 8.02 65.89
6 20-49 3.05 4.0 31.13 2.85 3.94 37.95
7 50-99 1.02 1.46 42.53 0.94 1.27 35.34
8 100-199 0.62 0.70 14.32 0.55 0.63 14.68
9 200-499 0.21 0.40 92.21 0.18 0.32 78.91
10 500-999 0.10 0.10 -1.48 0.09 0.09 -1.97
11 1000- 0.10 0.06 -43.19 0.09 0.05 -46.34
Source: Barca, 1985

This phenomenon, analysed by many authors (Brusco, 1974;

Brusco-Sabel, 1981; Sabel, 1982; Barca, 1985), should be regarded,
according to the "Flexible Specialization Model" (FSM)2, as a
permanent modification in the structure of the industrial system,
consequential to the changes in the organization of labour.
In order to verify the fitting of the FSM to the Italian situation, in
table 3 (Barca, 1985) the effective distribution of plants by dimensio-
nal classes, and the neutral one 3 , built under the hypothesis that
there were no systematic factors favouring the concentration of
plants in small-medium classes, are compared.

(2) The FSM has been formulated by C. Sabel, S. Brusco and other authors.
(3) The estimated function is IgF(i)=-qlgi, where F(i)=C q is the cumulative
function and indicates the relative frequency of units of size greater or
equal to i, q is a transform of natality rate, and the density function is
f(i)=qr(1+q) named Pareto 1 (Barca (1985».
 57

92.21
--- 1971
1981

1 II? .II
.. 10 11 I
I 3 4 5 67 8 9"

-46.34

Figure 3 Deviation between neutral and effective

distribution of plants.

The percentage differences between effective and estimated values,

pertaining to the eleven dimensional classes, indicate different
evolutive trends. A negative tendency is observed in classes 1 and 2
(small artisan firms), 10 and 11 (large firms) while a general
expansion involves all the other classes, with a peak, for the
small-medium dimensions, on class 5 and maximum values in class 9
(92% in 1971 and 79% in 1981) (fig.3).
This last aspect demonstrates that class 9 maintains its predominance
in the sector of medium-large firms.
With regards to the industrial outputs, in the 1971-1981 period,
notable differences in the evolution of specific sectors can also be
observed. Figure 4 shows, through 198111971 output indexes, the
general increase (138.6%) and the changes related to the industrial
 58

sectors identified after the census c1assification4 . The positive and

1971 =100

218. ~
138. 6

82. ~
100
Total 2 3 4 5 6 7 8
t
9 industrial
sectors
Figure 4 Indexes 198111971 of manufacturing
industry output.

141.

99.6

71 81
Figure 5 General index evolution.
1970 = 100

negative peaks are registered, respectively, in furniture and oil

by-products sectors.
In figure 5 it is also reported the evolution of tile general index for
the same decade; the trend is generally positive with the exception of
the 1975 fall and the 1981 slight decline.
(4 ) The industrial sectors reported in figure 4 are: 1 Food, 2 Textiles, 3
Furniture, 4 Metallurgic, 5 Mechanic, 6 Vehicles, 7 Non metallurgic
minerals, 8 Chemicals, 9 Oil and by-products.
 59

2.2 Changes in Final Consumptions of Families.

The spatial distribution of the population, the quantity and type of

goods and services consumed by families are factors of noticeable
importance with respect to the organization of commodities supply. In
fact, these factors can affect both the structure of goods distribution
networks and the qualitative-quantitative aspects of services.
As for the population distribution, the 1971 and 1981 censuses
indicate that, while the total population has increased of 4.4%, the
percentage growth in capitals of provinces and in other minor
municipalities is, respectevely, of 0.26% and 6.6% (tab.4, fig.6).

6.6

Table 4 Population distribution

4.4
population 1971 1981

urban
other
total 0.26

total other urban

Figure 6 Percentage variations

This means that the movement of population towards town,

registered from 1961 to 1971, has inverted its direction. As a
consequence, the concentration level of transport demand, connected
with this type of consumptions, has proportionally diminished.
With regard to the amount of consumptions, the total increase is of
41.6%. Through available information it is possible to carry out a
detailed analysis of qualitative evolution of consumptions but,
considering the objective of this paper, only the increases in food
consumption (18.8%) and in other goods and services (54.7%) have
been evaluated.
 60

3. MODIFICATIONS IN THE MODAL SECTORS.

The changes occurred in a decade (1971-1981) in the industrial and

social contexts, have obviously required the adaptation of the
transport system to the subsequent evolution of the demand. The
following description of some aspects of transportation (fleets,
traffic) is intended to show how the modal sectors have reacted to the
variations of the market. The data on transportation are intentionally
referred to the decade 1974-1984 considering that the objective is to
observe the effects of preceding events. The information source is the
National Transport Account year 1984 (Conto Nazionale dei Trasporti
1984) published by the Ministry of Transport.

3.1 Railway.

The global fleet of freight' cars has reduced of 11. 7 % from 1974 to
1984; generally, the reduction is registered in every type of cars with
the exception of flat cars (normal and special) which have increased
of 26.4% (fig.7).
The expansion of the flat cars stock is mostly attributable to the
development of the containers traffic which, in the same period, has
increased globally (domestic and international) of 114.5% in terms of
tons carried and of 110.8% in terms of units (loaded and empty)
(fig.S).
Also the road-rail combined transport (semitrailers and swap bodies)
has sensibly increased, especially in international connections,
where, to a global traffic increase of 17% corresponds a 501%
expansion of combined transport (fig.9). On the contrary, the global
traffic is almost steady through all the decade: about 18,000 mill. tons-
km, 55-60 million tons, with an average length of trips of 300-320 km
(fig.l0).
 61

number %
of cars 114 .51

-
119414 110.8
c::J other
105481 flat cars

20188
15972

1974 1984 tons units

Figure 7 Railway: fleet of freight cars Figure 8 Percentage vanatIOn (1984/1974)

of containers traffic.

This means that, on the basis of available estimates, the railway

share of freight traffic has reduced from 15.3% to 9.4% of the total.
The same estimates indicate, for the same period, an increase of road
traffic from 50% to 70%.
The traffic split by type of goods, after the ten classes of the
Statistical Nomenclature of Traffic (N.S.T.)5, shows a general
reduction of tons carried (particularly of agricoltural and food
industry products) with the exception of vehicles, machines and
other manufactured goods (+ 113%) which have compensated other
traffic losses (fig. 11 ).

(5) The items of the NST classification are: 0 Agricoltural products and live
stock, 1 Food industry products and forage, 2 Coal, 3 Oil and by-products,
4 Metallurgic minerals, 5 Metallurgic products, 6 Other minerals and
building materials, 7 Fertilizers, 8 Chemicals, 9 Vehicles, machines, other
manufactured goods.
 62

millions '

[::::::I total 55833

'·:,1.""". combined transport
tons

42666

19038
15759
v-- ,.-....,---..,~ tons-km

Figure 9 Railway: international

and combined transport
evolution (1984-1974)

74 84
Figure 10 Railway: global traffic evolution.
%
+113 .8

o Agricolturalproducts and live stock

1 Food industry products and forage
2 Coal
3 Oil and by-products
4 Metallurgic minerals
5 Metallurgic products
6 Other minerals and building materials
7 Fertilizers
8 Chemicals
9 Vehicles, machines, other manufactured
goods
1
I
5.
I .9
Ii
type of goods
(NST')

-36 .7

Figure 11 Railway: 1974-1984 percentage

traffic variation by type of goods.
 63

3.2 Road.

The considerable increase of road freight traffic is confirmed by the

growth of the park and the vehicle-km travelled on highways and
motorways.
In fact, the average increase of the park is of 56%; the maximum
expansion (96%) is in the tractors and semitrailer tractors. Also the
trailer and semitrailer park has more than doubled (130%) (fig. 12).
As for the traffic on highways and motorways, the average increase
of the total vehicle-km is of about 38% (fig. 13).
In this case too, the tractor-semitrailer traffic registers the
maximum growth (49.5%). The lack of sistematic surveys on road
transport does not allow to evaluate the evolution of traffic in terms
of tons carried by type of goods, type of vehicles, origin-destination
etc. Some largely approximated estimates indicate only the growth of
125% of tons-km from 1974 to 1984.
Some initiatives in this direction, taken in 1972 and 1974 by the
Ministry of Transport, have produced appreciable results which,
unfortunately, cannot be compared with the ones attainable from a
vast survey on road freight transport in 1986, promoted and funded
by PFT, for the different methods adopted.
Some partial results of the PFT survey (which is in the completion
phase) include a disaggregation of tons carried by type of goods, after
the N.S.T. classification (tab. 5).
The figures show that a considerable percentage of the total traffic
pertains to goods which, though apt to be carried by rail, have
sensibly diminished their railway traffic share from 1974 to 1984.
These commodities include: agricoltural products and live stock, food
industry products and forage (25.7%), metallurgic products (10.7%),
minerals, building materials (16.7%).
 64

%
130.5 1 trucks
- I tractors
c:::::J1 trailers and
"
t::::I semltral 1ers

Figure 12 Road: Percentage variation of

fleet by type of vehicles

%
49.5
47 .8
37.8

28.~
a trucks <3 tons
b trucks >3 tons
c trailer-trucks
d semitrailer-tractors
T total

abc d T
Figure 13' 1974-1984 percentage variation
of traffic per type of vehicles

As in the railways, it is also preheminent the transport of vehicles,

machines and other manufactured goods (26. 1%).
The average length of trips is about 122 km while the incidence of
unloaded runs is approximately 35% of the total.
These figures, as mentioned before, are not definitive but,
nevertheless, should not be subject to considerable variations.
 65

Table 5 Road: Tons carried per type

of goods in six months of
1986.
type tons %
of goods
0 17246903 12.0
1 19704566 13.7
2 1479383 1.0
3 13290169 9.2
4 1456402 1.0
5 15433245 10.7
6 24064235 16.7
7 3267675 2.3
8 10495886 7.3
9 37581974 26.1
Total 144020438 100.0
Source: CSST, Partial results of PFr
Road Freight Traffic Survey

3.3 Sea.

The merchant fleet has sensibly decreased its dimension in the

1975-1984 period. In particular, the tanker fleet has reduced of 19%
the number of ships and of 15% the total gross tonnage. The average
tonnage results, therefore, slightly increased from 11,500 to 12,000
tons.
As for the other categories of ships, the total number is decreased of
13.3% but the gross tonnage is almost unva,ried. This is the result of
different evolutions within the fleet. In fact, the general cargo ships
have sensibly reduced both their number (22.7%) and gross tonnage
(40.6%). The bulk carriers have also reduced their number of 24.7%
but have maintained their global gross tonnage for the growth of the
ships average capacity (from about 20,000 to 27,000 tons) (fig. 14).
Only ferries and containerships show sensible increases in their
number (respectively 51% and 184%) and global gross tonnage
(respectively 158% and 182%). For the ferries, the figures indicate a
 66

%
185.0
§s
181.0
§
§ units
158.3
§
s §
§ §
§ §
§ §
§ §
§ §
§ §
§
§
§
§
§ §
§ §
§ §
§ §
§ § a general cargo
§ § b bulk
§ §
§ § c refrigerator ship
§ §
§ § d ferries
§ § especial
§ §
§ § f containership
51.4 § § g tankers
§§ §
§
§ §
§§ §8
§ lilt
§ §
a c § e ,§ g
1.7 ... "'-

§~ ~ s~ S d I'i~ f §~
§ lit s \l
§ lit §
s l ilit t ss
s
o
§ §
;S §
§
-54.4 §

Figure 14 Sea: Units and gross tonnage percentage variations per type of ships
(198411975)

sensible growth of the average gross tonnage while for the

containerships this dimension is almost unchanged.
With respect to the maritime traffic in the Italian ports, the
available data provide a picture of disembarked and embarked goods
 67

%
81.9 disembarked % embarked
77.9

o Agricoltural products and live stock

1 Food industry products and forage
2 Coal
3 Oil and by-products
4 Metallurgic minerals
ST 5 Metallurgic products
...................,.~"'~ 6 Other minerals and building materials
7 Fertilizers
8 Chemicals
9 Vehicles, machines, other
-23. manufactured goods

-60.

Figure 15 Sea:1984!l974 percentage variation

of traffic in Italian seaports (NST classes)

after the N.S.T. classification.

In the total, the disembarked goods have reduced of 11.4% as a
consequence of positive and negative variations registered in the
various types of goods (fig.1S).
In fact the reduction is attributable to the oil and by-products
imports which have largely exceeded the growth in other imports
(16%). A similar situation emerges from the data related to the
embarked goods. The global reduction of 3.8% is due to the oil and
by-products decrease of 29.6%; which has largely compensated the
34.3% growth in other commodities movement.
 68

disembarked
thous
tons
.................... embarked

29333
23878

10330... ..' ....................... , .......... ,_ ..... ..

'", ~"
7600

74 84
Figure 16 Sea: Traffic in Italian seaports

The amount of disembarked goods (in tons) largely exceeds the total
of embarked goods (fig. 16); the figures, referred to 1984, show a 2.8:1
ratio due, mainly, to import-export gaps in oil, coal, ore, agricoltural
products and live stock, food and forage; on the contrary, the export
of manufactured products exceeds largely the imports. Of course this
situation reflects clearly some structural aspects of the Italian
economy.

4. MATCHING TRANSPORT DEMAND WITH SUPPLY.

In paragraph 4.1 of this chapter the interactions between

socio-economical aspects and freight transport previously observed
are discussed.
Some initiatives for improving, at the various operative levels, the
matching of transport demand with supply are described in
paragraph 4.2.
 69

4.1 The Evolutive Aspects of Demand.

The decentralisation of manufacturing industries, which has

brought abotu the progressive reduction (both in size and number) of
large plants, accompanied with the spontaneous growth of small
concerns (with 10 to 19 employees), have obviously given rise to a
widespread transport demand. But these phenomena have not only
modified the origin-destination of raw materials, semifinished and
finished products, but also yelded the improvement of services for
meeting the requirements of productive and logistic systems.
Other modifications of the transport demand are attributable to the
changes registered in the export-import and in the products of
manufacturing industry.
As for the demand generated by the consumptions of the families,
the figures show that have changed both the distribution of the
population and the quantity of goods and services.
Finally the remarkable inflation and interest rates (fig. 17), which
have been a peculiarity of the decade, have haevily affected the
decisions related to the location and dimension of inventories.

4.2 The Impact on the Transport System.

The statistic data, reported in Chapter 3, though limited to some

aspects of freight transport, have nevertheless allowed to evaluate
the reactions of the considered modal sectors to the demand evolution.
The analysis has been focused on fleets and traffic, whose
modifications clearly reflect medium-short term changes in transport
demand. The infrastructural situation has not been intentionally
analysed, because substantial, long term interventions on this area
are normally defined after complex political trade-offs and not simply
on the basis of transport demand requirements.
 70

21.1

19.5

10.4

5.0

71 81
Figure 17 Inflation rate.

4.2.1 Road

The analysis of some aspects of the modal sectors has demonstrated

that only the road transport has been in a favourable condition in
coping with a varied and increased demand. In fact, through
considerable investments in vehicles, the truck industry has been
able to match the evolution of road haulage demand and, at the same
time, to capture segments of railway traffic.
The huge development of road transport is essentially due to the fact
that transport demand needs higher quality services because of the
changes in the production and distribution methods, as described in
Chapter 2.
 71

These changes have brought about different traffic flows which

only the road transport, thanks to its flexible structure, could easily
acquire. Moreover, in the same period, other important elements have
concurred to the road transport development like the existence of a
motorway network which had not yet reached the present degrees of
saturation and partial congestion. Of course, the role of the motor
industry has been of vital importance in providing the type and
number of vehicles required by the market. Besides, the structure of
the truck industry has allowed the maximum flexibility because it has
included a growing number of small companies, mostly owning a
single vehicle which, in 1984, represented about the 58% of the total.
Finally the unemployment caused by the recession in some economic
sectors has also concurred to the expansion of the truck industry. This
phenomenon, which still characterises the Italian labour situation,
has brought about the present excess in road transport capacity.
In short, the factors which have chiefly determined the growth of
the road freight transport are: a favourable demand evolution, an
adequate infrastructural network, the availability of new vehicles, the
flexible structure of the truck industry, the scarce competitiveness of
railway.

4.2.2 Railway

The figures reported in Chapter 3 show a general reduction of

railway traffic, with some exceptions for a few type of goods. The
inadequacy of the railway in competing with the road transport
depends mainly on the market situation but also on the peculiarity of
the organizative structure.
In fact, the widespread demand, subsequent to the diffusion and
decentralization of industrial plants, has brought about the reduction
of loads and trips length and the contemporary need for more
efficient door to door transport of increasing quantities of
 72

semifinished and finished products.

About the organizative structure, the Italian State Railways, as a State
owned corporation, has ever since suffered from bureaucratic
constraints which have restricted and hindered managerial decisions.
These limitations, which produce negative effects also in a· steady
market situation, become intolerable whenever substantial and
frequent changes in the demand require a well timed adaptation
process. The recent modification of the State Railways juridical status
should bring about improvements in authonomy and management
efficiency.
With regard to the 1974-1984 decade, the positive changes observed
in the railway sector are chiefly pertaining to the development of
containers and intermodal traffic.
This policy should allow the railways to regain profitable long
distance traffic on the condition that innovative methods and
techniques are used. A research support, aimed at fostering the
intermodal transport, has been provided to the State Railways by the
Transport Research Project (Progetto Finalizzato Trasporti-PFT) of the
Italian National Research Council (Consiglio Nazionale delle Ricerche-
CNR).

4.2.3 Sea

With regard to the maritime sector, the factors which have

influenced the evolution of fleet and traffic are similar to the ones
observed in the railways.
In fact, also in this case, some traffic losses (and subsequent
modifications in the fleet) are strictly connected to the variations in
industrial and commercial situations. The impact of the reduction of
import-export of oil and by-products on the total of seaports traffic (in
tons) and on the dimension of the tanker fleet (both in number and
total gross tonnage) is particularly significant.
 73

Another aspect, common to maritime and railway sectors, is the

development of containers and intermodal transports which has
produced considerable increases in the gross tonnage of both
containerships ( 182 %) and ferries (158 %).
Furthermore, seriuos problems exist also in the port management
because, as in the railways, bureaucratic constraints, heavy political
and trade-union interferences have prevented the achievement of
adequate productivity standards.
This situation has brought about the loss of international traffic for
the competitiveness of northern Europe and other mediterranean
seaports as some specific analyses clearly indicate.

4.3 The Role of Information.

The principal descriptive elements of a shipment, generally, include:

1) Type of goods
2) Type of packing
3) Quantity
4) Withdrawal place
5) Delivery place
6) Time from withdrawal to delivery
7) Tariff
8) Eventual special services.
Shipment contracts are normally drawn up on the basis of these
elements (and other specifications). In fact, the choice of the carrier
and modal techniques depends mainly on the elements 6,7,8 above and
also on the distance between the location of withdrawal and delivery
points.
Other important elements are the reliability of the service and the
incidence of tariffs on goods value. As for the type of vehicles and
their total load capacity, they are defined after the elements 1,2,3.
The availability of these information is obviously of essential
 74

importance for immediate shipper-carrier contacts but, at the same

time, if properly collected and processed, they can provide a picture of
freight traffic by origin-destination and categories of carriers, goods,
services, etc.
This picture is indispensable for defining strategies aimed at
improving the matching of demand with supply on the medium-long
term.
The different response of the modal sector to the evolution of the
demand, previously observed and commented, is principally due to
technical and managerial aspects which can sensibly delay the
innovative process.
Of course, the improvement of management efficiency can help
overcoming the problem but a decisive contribution can be provided
by information and forecasting systems. This objective implies the
realisation of a traffic monitoring system which, in the case of road
freight transport, represents quite a challenging task.
On the other hand, the matching of transport demand with supply
often provides, (as in railway and maritime sectors), infrastructural
modifications which, because of the long execution time, require a
properly advanced planning.

4.4 CNR Research Initiatives

The importance of information in the improvement of productivity

and efficiency of the transport system, has induced PFr to develop an
enganging research program on this area.
In fact, a prototype for a National Transport Information System
(SINT) has been realised which is, basically, made of:
- a Data Base containing information relevant to demand generating
factors;
- a Data Base in which are stored transportation data.
SINT, which utilises advanced computer science appliances, allows
 75

on-line connections with heterogeneous EDP Systems (for the direct

access to D.B.) and Personal Computers (for specific data processing);
besides, user friendly procedures are envisaged for the interrogation
and the up-dating of the system.
In the framework of the same program, a Bank of mathematical
models (for simulation, forecasting, optimization) has been created
and a thorough survey (as previously mentioned) on road freight
transport carried out.
This program will be completed, like all the other PFT activities, by
the end of 1987.
The priority given to the improvement of planning and management
procedures through the research on information and methodologies
(as the PFT program demonstrates) does not mean that the problem of
realising an interactive shipper-carrier communication system was
not perceived. This problem is particularly serious for the presence,
in the road freight market, of thousands of carriers (mostly owning a
single vehicle) and, on the side of the demand, of a large number of
small companies.
In fact, the small dimensions of the firms involved in transport
transactions imply the absence of company marketing structures. In
this situation, the role of forwarders is of essential importance for the
matching of transport demand with supply, particularly in the case of
intermodal and international haulage, for the complexity of connected
organizative and operative problems. Of course the resort, on a large
scale, to forwarders services brings about additional transport costs
and hence increases in commodities prices.
The recent development of computer-telecommunications systems
represents an incentive to study the possible uses of these new
technologies in the transport area.
This objective has been assigned to a research program which is
included in the feasibility study for a second PFT.
The most significant result expected from this program is a prototype
 76

for a computer-telecommunication system for the exchange of

information on freight and available transport capacities.
The system should increase the productivity in transport operations
through the reduction of incomplete loads, empty return runs,
brokerage costs.
Another PFT 2 project, aimed at adequating the efficiency of services
to the new logistic requirements, provides the study of advanced
methods for the management of multimodal networks and terminals;
also in this case prototypal realisations of computer-telecommunica-
tions systems are envisaged.

S. CONCLUSIONS.

The observed fluctuations in the economic situation has given rise to

both quantitative and qualitative changes in freight transport
demand.
The distribution of industrial production, at the national and
international levels, has considerably reduced the traffic flow of raw
materials and, at the same time, increased the transport of high value
added commodities.
Strong international competition of manufacturing industries has
imposed organizative efforts aimed at reducing logistic costs:
transport, storage, handling etc.
The resulting demand calls for faster, more reliable and available
services and shows a reduced attention for transport prices.
The impact on freight transport has brought about traffic and
vehicles reductions in specific transport areas and the general
increase of road freight, container and combined transports.
Improvements in matching transport demand with supply require a
vast and rational use of information and telecommunication systems in
order to:
 77

- provide information support for the medium-long term planning of

modifications in transport structures as required by demand
evolution;
- adequate the quality and the efficiency of services to the demand
standards through advanced management systems;
- improve the shipper-carrier contacts through the exchange of
information on freight and available load capacity.
Research efforts have already provided a substantial support to the
solution of the problems connected with the first task, while the other
two objectives should be pursued in the framework of a future project
(PFT 2) which is, at present, in the definition and approval stage.
Of course, research initiatives must be followed by a serious
commitment on the part of public bodies and industries in developing
both information and innovative management systems.

REFERENCES

Balestrieri Terrosi M. (1981), I fattori di localizzazione dell'industria

manifatturiera in Italia, Studi Economici, n.13.
Barbini S., Capra L., Casini C., Trimarchi F. (1986), Le modifiche
strutturali dell'industria manifatturiera lombarda nel periodo
1971-1981, Temi di discussione del Servizio Studi, n.71, Banca
d'Italia.
Barca F. (1985), Tendenze nella struttura dimensionale dell'industria
italiana: una verifica empirica del "modello di specializzazione
flessibile", Politica Economica, 1, Aprile.
Bianchini G. ed altri (1974), Dibattito suI decentramento produttivo,
Economia Politica Industriale, n. 7 -8.
Brusco S. (1974), Ruolo delle piccole ipmrese nell'economia
capitalistica, in AA.VV., Occupazione, lavoro precario, piccola
e media impresa, Roma, Coines Edizioni.
Brusco S., Sabel C.F. (1981), Artisan Production and Economic Growth,
in Wilkinson, F. The Dynamics of Labour Market
Segmentation, Academy Press.
Contini B. (1984), Dimensioni di impresa, divisione del lavoro e
ampiezza del mercato, Moneta e Credito, vo1.37.
CSST-Centro Studi sui Sistemi di Trasporto, (1985), La distribuzione
territoriale dell'occupazione industriale 1961 1971 1981,
 78

Quaderno 21, Marzo.

De Caprariis G., Rosa G. (1984), Struttura ed evoluzione dell'industria
italiana: analisi dei risultati censuari (1971-1981), Rivista di
Politica Economica, Maggio.
Frey L. (1974), La problematic a del decentramento produttivo,
Economia e Politica Industriale, n.6.
Fua' G. (1975), Occupazione e capacita produttive: la realta italiana, II
Mulino.
Fua' G. (1983), Industrializzazione senza fratture, II Mulino, Bologna.
Graziani A. (1975), Crisi e ristrutturazione dell'economia italiana,
Torino, Einaudi.
Ministero dei Trasporti, Direzione Generale P.O.C., Conto Nazionale dei
Trasporti 1984, Roma.
Momigliano F. (1984), Metodologie per la formazione di ipotesi di
scenari, parte II: economia, CNR,PFT.
Nash C.A. (1982), Economics of Public Transport, Longman.
Omobono S. (1986), Un'analisi nel tempo dell'offerta ferroviaria al
servizio merci, Archivio di Studi Urbani e Regionali, n. 25.
Pennacchi L. (1980), Decentramento Produttivo 0 divisione del
lavoro?, Politica ed Economia, n.2.
Sabel C.F. (1982), Work and Politics-The Division of Labour in
Industry, Cambridge, Cambridge University Press.
Sargant Florence P. (1962), Post-war investments location and size
of plant, Cambridge University Press.
Soro B. (1975), Decentramento produttivo e flessibilita del lavoro: un
tentativo di verifica, Rivista di Economia e politica
Industriale, n.12.
Tassinari F. (1982), Cambiamenti strutturali dell'industria italiana:
ipotesi di verifica in base ai risultati censuari, Note
Economiche, nn. 5 e 6.
 USING INPUT -OUTPUT TO FORECAST FREIGHT TRANSPORT
DEMAND

Paolo Costa

Dipartimento di Scienze Economiche - Universita di Venezia -

Ca' Foscari - 30123 Venezia

A methodology used to forecast freight transport demand, based on the

use of Input-Output models, is presented. The methodology has been
developped in the framework of a study carried out in Italy in order to
evaluate alternative transportation policies. After a short discussion of
the issue of freight transport in Italy, this paper reviews the fundamental
hypotheses of the study, the models utilized, the simulation procedures
and some of the preliminary results already obtained.

1. INTRODUCTION

This paper describes the methodology and some preliminary results

of a study carried out using a set of input-output models to estimate
future levels of demand for freight transportation in Italy or, more
broadly, to evaluate alternative
transportation policies for Italy
within given macroeconomic scenarios 1.
As in the case of every other policy-oriented study, this one had to
go from the issue definition to the formulation of a relevant theory (a
set of assumptions devised to explain the behavior of the system) to be
translated into a mod e 1, whose features were constrained by the
available accounting basis.

1 Those presented in this paper are some preliminary results obtained in a

study carried out for the Technical Secretariat of the Italian General
Transportation Plan by a research group directed by professor Wassily
Leontief and the Author. The construction of the' two -- dynamic and
multiregional -- submodels used in this study has been partly financed by
the Italian National Research Council (CNR. Progetto finalizzato "Struttura ed
evoluzione dell'economia italiana"; sottoprogetto I.01.B2).
The author gratefully acknowledges the intelligent assistance of Mara
Manente, Silvio Pancheri, Dino Rizzi, Roberto Roson, Antonio Tallon and
Mario Volpe.
 80

The rest of the paper is subdivided into five paragraphs. Paragraph

2. is devoted to a brief presentation of the Italian "transportation
problem" , topic of the study; paragraph 3. describes the set of
assumptions devised to explain the interdependencies between
transportation and the rest of the economy; paragraph 4. is dedicated
to a discussion of the system of loosely integrated models used to
represent - the theory set forth in paragraph 3.; current limits of
official input-output accounting for transportation and some
improvements reached as a part of this study are discussed in
paragraph 5.; finally paragraph 6. gives a detailed description of the
dynamic and multiregional submodels actually used together with
some preliminary results.

2. FREIGHT TRANSPORTATION AS AN ISSUE IN ITALY

Assuming that the Italian gross national product will grow up to the
year 2000 at a yearly average rate of 2.5% (consistent with a 4.5%
annual rate of growth in the Italian export, that would mean a
decrease in the share of the international trade served by Italy),
demand for freight transportation in Italy will double the 1980 level
by the· end of the century.
Should the yearly average rate of growth of the GNP be kept around
a 3.5% level (5.8% in the yearly rate of growth of export) during the
same period, the demand for freight transportation in the year 2000
would trip lethe 1980 level (Leontief and Costa, 1986) 2.
Both these forecasts are perfectly in line with those made at the
beginning of the eighties for the whole EEC (lPO Institut, 1981).

2 Forecasts obtained with a static input-output model that keeps constant the
modal split prevailing in the year 1978; the order of magnitude of total
freight transportation demand is anyhow consistent with the results
obtained with the dynamic and multiregional version of the model described
in this paper.
 81

According to the more recent data on the modal split characterizing

the Italian demand for freight transport (Ministero dei trasporti,
1986), in the year 1984 more than 70% of all Italian freight (in
tonnxkm terms) was transported by road; in the same year, competing
modes such as rail and sea only served 9.4% and 15.4% of the same
traffic, respectively.
This situation is the result of a long term tendency towards a change
in relative demand for various transportation modes that, if it will
continue up to the year 2000, could lead to a 84% share of freight
served by road at the end of the century versus mere 5.4% and 8.6%
served by railroad and water transportations 3.
Even this one is not a very surprising trend. A lot of worldwide
evidence has been gathered on the evenly-paced tendency towards
the use of direct and fast modes (truck and air transport) at the
expense of the slow and indirect ones (sea and rail transport) in
servicing both passenger and freight transportation demand 4.
A third feature characterizing the Italian situation is given by the
fact that 52% of total 1980 freight transportation was operated (Le. it
has had its origin and its destination) within Northern Italy.
If we combine the forecasted trend in total demand for freight
transport with its regional concentration and the tendency in modal
change towards road transportation, we can get a first idea of the
quality and size of the Italian "transportation problem" in incoming
years.

3 Following the rough assumption of extrapolating the composition trend

experienced in the period 1956-1984.
4 It is worthwile noting, for instance, that relative modal choice of Swedish
(Andersson, 1986) and Italian (Ministero dei trasporti, 1986) imports
(excluding oil products) by percent of total value were in the mid-eighties
pretty similar, in spite of the economic and geographical structural
differences between the two countries. Fast modes, such as truck and air
transportation, accounted for 59% -- truck 52% and air 7% -- in the year
1983 in Sweden and for 68% -- 61% trucks and 7% air -- in the year 1985 in
Italy.
 82

It is quite difficult to imagine that road transportation supply will be

able to catch up with the forecasted trends in demand for freight:
economic and environmental costs would be unbearable.
Some "against-the-trend" shifts towards rail and sea transportation
have to be envisaged even if this will imply tremendous
improvements in rail network, port infrastructure and both modes
efficiency: a policy that would become more effective if accompanied
by measures encouraging a relocation of both economic activities and
population away from the Po valley.
Financial consequences on the government budget are also to be
considered; since all modes are, in Italy, heavily subsidized, but in
different ways -- some modes, like road transportation, are subsidized
mostly indirectly through the provision of infrastructure services,
while local (passenger), rail and sea transportations have also their
own operating costs partly financed by current account subsidies --,
different supply adjustments to the forecasted increase in freight
demand would have different impacts on both capital account and
current account public expenditure.
Without deep changes and/or exogenous interventions, it is quite
likely that, starting from a certain point in time between now and the
end of the century, the rate of growth of the Italian economy would
be slowed down by lack of adequate transportation supply.
In order to avoid the appearance of such a bottleneck, a wide range
of interventions has been designed by the government with its
"Piano Generale dei Trasporti (PGT)" (Piano generale dei trasporti,
1986).
The set of models described in the following pages has been built in
order to provide the PGT with a consistent procedure for evaluating
these governmental decisions in terms of their consequences.
Since transportation demand can be met by different modes, (such
as road, rail, sea, air, pipeline, etc.), since each industry has its own
preferences regarding the best mode and route mix of transport
 83

services, and since demand and supply for transport can be different
in different areas of the country, models have to be multisectoral,
multimodal and multiregional.
If, as in the Italian case, there is a urgent necessity to adjust level
and modal composition of transportation supply, that calls for a huge
investment plan to be carried out in the next 10-15 years, a dynamic
dimension has to be added to the modeling effort.
But models must, first of all, have a sound theoretical basis. A clear
cut description of the assumptions thought of controlling the
interdependencies between transportation and the rest of the
economy must be set at the forefront.

3. THE INTERACTION BETWEEN TRANSPORTATION AND THE

REST OF THE ECONOMY

Transportation is a highly integrated system per se that from an

economic point of view can be seen as an industry interacting with
all other industries and sectors of an economy.
Demand for transport, especially demand for freight transport with
which we are here mainly concerned, is a derived one that comes
from the rest of the economy. Any variation in the structure,
behaviour or level of operation of any part of the economic system
will affect level, modal split and routing of demand for transport. If
the level or the modal and routing composition of the transport
supply does not match the level and composition of demand at any
point in time, bottlenecks will appear and affect the overall
efficiency of the productive system and/or the welfare of the whole
community.
 84

3.1 Transportation Feedbacks on the Economic Activity

Since transportation is a basic good which enters the production

function of almost every commodity and the utility function of almost
every individual, any reduction (increase) in the costs of transport
supply, due to infrastructure, vehicles or organizational
improvements (worsenings), will produce:
- an "income effect"
- a "price effect"
- a "market share (location) effect"
- a "system-wide effect"
across the whole economy.
Income effect
Any increase (decrease) in the efficiency of transportation
production, i.e. any reduction (increase) in the quantity of
intermediate or primary inputs required by the production of a given
level of transport, will induce a negative (positive) multiplier effect
that will lower (raise) the level of production of many industries and
then their value added.
Of course, an "income effect" is also to be expected by any variation
in the level of investment in transportation infrastructure, facilities,
vehicles, etc. and by any change in the production technology of
these capital goods.
Price effect
The "price effect" corresponds to the type of impact on an economy
which is normally attributed to the altering of transport fares or
delivery charges. Any change in transport production costs can
affect transport prices and then the cost structure of all industries,
their value added andlor their prices, and the choices of final
consumers.
The emergence of a price reduction due, for example, to an increase
in transport productivity is not always guaranteed: transportation
 85

services often lie in the public domain where the government may
choose instead to boost endogenous value added 5 and the same choice
can be made by any other transport-using industry operating in
non-competitive markets.
No direct price effect will, of course, be produced by any
improvement in the transportation infrastructure (such as, e.g., the
road network) in those institutional environments where its building
and maintenance is accomplished by central and/or local
governments that sell infrastructure services to carriers at zero
price.
Market share (location) effect
The "market share (location) effect" is the modification of the
regional distribution of supply and demand of any commodity due to a
change in the generalized transport cost as perceived by the shipper;
the final modification is the combined result of boundary changes in
market areas of existing firms and of (re )location of firms and
households in geographical space.
This effect will appear even though the out-of-pocket
transportation cost will not change tremendously (e.g. the building of
a bridge that reduces more significantly travel-time than operating
costs over a link).
System-wide effect
Freight transport and passenger transport use the same multimodal
network whose links and nodes form a strongly interactive system.
Any attempt to reduce congestion (a negative system-wide effect) or
to increase relaxation (a positive system-wide effect) over a link or
through a node may affect positively or negatively other links or
nodes.

5 Also meaning a reduction in some negative components of the value added of

a transportation industry. If, as in the case of the Italian railway system,
transport services are rendered at a price (tariff) lower than the actual
production cost, an increase in productivity could result into a reduction of
the subsidy that account for the difference between cost and price.
 86

A compact view of the interdependencies between a transportation

system and its national economy can be visualized in terms of the
feedback configuration shown in Figure 1.

3.2 Demand for Freight Transport and Input-Output Models

Ideally, the analysis of the interdependencies between freight

transportation and the rest of a national economy involves:

SUPPLY OF
...... TRANSPORTATION
SERVICES AND
INFRASTRUCfURE

INCOME SYSTEM-
EfFECf -WIDE
EfFECf
PRICE
EfFECf
DEMANDR)R
TRANSPORTATION MARKET
SERVICES SHARE
(LOCATION)
EfFECT
.....
THE REST OF THE ...
EOONOMY
.....
...

Figure 1. The Interdependencies between Transportation and the

National Economy
 87

a) modelling changes in the demand for freight transportation

services in the nation;
b) modelling the supply-side adjustment process of transportation
services and network infrastructure to meet these freight
demand trends;
c) modelling the reactions of the rest of the economy (in terms of
income effects, price effects, market share effects and system-
wide effects) to the evolution of the transportation system
with consequent modification to a).
It is quite clear that such an exercise calls for the interaction of two
submodels: one describing the macroeconomic system and the other
modelling the freight transportation system. All existing predictive
freight models could be easily classified according to the relative
emphasis reserved to the refinement of the two component
submodels.
The exercise described in this paper, being mainly aimed at
forecasting freight transport demand, belongs to the category that
privileges the economic submodel.
But, even just talking about economic submodels, many options
remain open: econometric models, spatial equilibrium models or
input-output models can be alternatively used, with different pros
and cons in different situations 6
In our case the purpose of:
- analizing the implications of "against-the-trend" modal shifts from
road towards rail and sea transportation;
- measuring the impact on the macroeconomic performances of the
whole system of the investment plan designed by the General
Transportation Plan;
- identifying those interregional links where excess demand for
freight transport is most likely to appear in incoming years
has made almost mandatory the use of a dynamic and multi-regional

6 For a discussion see, e.g., Liew and Liew, 1984.

 88

input-output approach.

4. DEMAND FOR FREIGHT TRANSPORT: A DYNAMIC

MULTIREGIONAL INPUT-OUTPUT MODEL

Every classic input-output model will allow us to measure different

levels of modal demand for freight contingent on different final bills
of goods and then on sectoral outputs calculated by the model.
With the most simple static input-output model, demand for
transportation mode T 1 at a given future time (H n) will be given
coeteris paribus by:

X (t+n)n = (/ - A· (t»-ln Y (t+n) [1]

where:
X(t+n)n is the total requirement for transportation mode T1
necessary to meet the final bill of goods Y (t+ n )
A• is a technical input-output matrix modified, in the way
described in paragraph 5, in order to become able to give a
meaningful representation of transportation activities 7
Y = (C + / + E - M) is the final demand vector whose components are
consumption, investment, exports and imports that have
been separately projected to the year (Hn).
This very naive formulation can be ameliorated in many ways.
One mandatory improvement comes from the fact that we want to
measure the impact on the economy -- and then on the derived
demand for transportation -- of the investment program designed by
the national transportation masterplan 8, whose implementation is

7 Something that cannot be taken for granted from A matrices derived from
input-output data currently available (for details see para 5).
8 This investment program will, of course, first of all affect the transportation
system and then its ability to respond to demand for transport, these effects
should be captured by a transportation submodel whose construction goes
beyond the limits of this study.
 89

due over next 10-15 years.

This fact calls for a dynamic version of the model, that is for an
endogenous representation of the accumulation process capable of
being modified by exogenously determined transportation-oriented
investments.
Investment in transportation services and infrastructure are
determined by means of a planning model, the so called Leontief
dynamic inverse, constrained by the investment time profile derived
from the national transportation masterplan.
This improvement has been made possible by the calculation of a
capital stock matrix for the year 1980 (Santeusanio, 1987) from which
a capital coefficients matrix, B, and a matrix of capital replacement
requirements per unit of output, R, have been estimated.
The dynamic block of the model is presented in paragraph 6.1.
A second area of possible improvements lies in the periodical
updating of A, B, and R matrices up to the time horizons chosen for
freight forecasts.
This can be done by mechanical procedures (e.g. the rAs method) or
by the collection of engineering information.
But our forecasts will be particularly sensitive to changes in (row)
coefficients of the A matrix belonging to the transportation sectors.
These coefficients measure transportation modal requirements per
unit of (national) output of every given industry; they will
consequently vary according to:
- variations in transportation technologies
- variations in transportation relative prices that control modal mix
- variations in the interregional mismatching between supply and
demand for each commodity.
The straightforward way to modeling these coefficient changes
would call for the building of a full "transportation submodel"
interfaced with our "macroeconomic submodel", as it was done in the
seminal Harvard-Brooking model originally applied to Colombia for
 90

assessing investment alternatives in the transport system (Roberts,

Kresge and Meyer, 1968; Roberts and Kresge, 1968) and in many more
recents studies.
As a second best solution, we can assess the effects of variations in
transportation relative prices or of variations in interregional
redistribution of production (or demand) using two separate side
models.
As far as price effects are concerned we can use a standard "dual"
input-output price model.
With this model, making exogenous assumptions about prevailing
sectoral technologies and price policies (mainly transportation price
policies) we can derive alternative price vectors, whose elements,
representing new prices for different transportation modes, can be
used to define exogenous variations in transportation demand
coefficients of matrix A.
Prices coming from the "dual" solution are production prices that
can be used to measure social preferences between different
transportation modes only if price equations pertaining to each
transportation mode to include all infrastructure costs: a fact not
always guarantied by existing input-output accounting system.
In order to impute infrastructure costs to using sectors we had to
estimate the value at 1980 prices of all Italian stocks of transportation
infrastructure as a part of this study (see para 5).
The appraisal of those effects attributable to variations in the
regional distribution of production and/or consumption has been
carried out by means of a multiregional input-output model.
It is always possible to derive the interregional trade flows implicit
in each multiregional solution. A close analysis of this commodity
flows pattern will allow us to derive possible variations in demand for
transport coefficients to be introduced in matrix A.
The introduction of a multiregional dimension into our study has
been made possible by the availability of an interregional trade flow
 91

matrix for the year 1980 (Sistemi Operativi, 1987) built on a

three-mode interregional commodity flows data base assembled by
Sotecni s.p.a.
A first application of the multiregional model is presented in
paragraph 6.2.

4.1 A Loosely Integrated Model System

Figure 2, depicting our loosely integrated system of models,

summarizes our research strategy.
It should be clear' that our system of models belongs to the category
which looks for consistency between different submodels through
iteration, that is through an heuristic device with no rigorous
convergence properties 9.
In our system two interdependent loops can be followed.
The upper loop focuses on investments and technological changes
in the transportation system.
The investment vector for transportation purposes is distinguished
from investment by the rest of the economy through an exogenous
determination; it will anyhow interact with the solution of the
dynamic model, that is used to assess the aspatial impacts of all
investments.
Price effects would emerge from the dual version of the same
dynamic input-output model. With this information about relative
prices and sectoral technologies, a new set of prices will be generated
for each transport mode and will affect the existing modal split.
The bottom loop in Figure 2 will focus on spatial interdependencies
in the form of an interregional input-output model.
The key link between the transportation demand and the spatial

9 We can say that this is a transportation exercise where we have to rely on an

iterative solution already within the macroeconomic submodel and not only
between the economic and the network blocks (see Friesz and Harker, 1985).
 92

PLANNING DETERMINATION DYNAMIC

~
OF INVESTMENTS
IN TRANSPORTATION .. INPUT - OUTPUT
MODEL OF THE
SERVICES ECONOMY
AND INFRASTRUCTURE

,Ir

DEMAND FOR ... RELATIVE

TRANSPORTATION PRICES OF
SERVICES BY TRANSPORT MODES + ____ r
MODE AND LOCATION

INTERREGIONAL
INPUT - OUTPUT
MODEL OF THE
FroNOMY

Figure 2. An Integrated System of Models to Evaluate Demand for

Transportation
 93

input-output model is given by a trade share matrix, T, a la

Chenery-Moses, that subdivides Italy into 10 macroregions and that
has been derived from the interregional commodity flow matrix
estimated for the year 1980.
Trade flows associated with each solution of the interregional model
are assigned to the transportation network connecting the 10
macroregions, thus identifying those links most affected by regional
variations in demand for transport.
The dynamic and interregional input-output models are linked in
the sense that outputs from the two models are used to constrain each
other solution.
The model system depicted in Figure 2 is unable to fully analyse non
linear "system-wide effects", such as congestion; anyhow, an
exogenous assignment of passenger traffic to each link of our
transportation network allows us to define the capacity of each link
available for freight transportation: a measure of capacity to be
compared to freight demand estimated for each link by our model
system.
The implementation of the system of models outlined in Figure 2 has
been, for the time beeing, only partially fulfilled. Up to this time,
major efforts have been concentrated upon building the dynamic and
the interregional submodels in their "quantity" versions.
No price effect has yet been measured and introduced in the model.
All implementations have been heavily constrained by the
availability of meaningful data and by some accounting rules
followed in their collection.
No assessment of a model performance can skip the evaluation of its
accounting framework.
 94

5. INPUT-OUTPUT ACCOUTING FOR TRANSPORTATION

INDUSTRIES

Good models can only stem from good data.

The importance of a sound statistical basis is particularly true for
models, such as the input-output ones, that derive their own
functional relationships directly fom observed structural features
prevailing in the system at one point in time.

5.1 Major Inconveniences in Input-Output Accounting for

Transportation

Unfortunately, a good statistical basis for the creation of an

input-output model useful for describing the interdependencies
between transportation industries and the rest of the economy is not
guaranteed by currently available national accounts.
This, at least in the Italian case, is partly due to the quality of data
and to the poor modal disaggregation of transportation industries; but,
more generally, this is also due to some accounting principles adopted
by the methodology of constructing input-output tables that Italy
shares at least with all other EEC countries.
Reliability of transport margins
Transportation is a very special industry from an input-output point
of view. Transportation output interferes with the valuation of input-
output transactions and then with the price system used in the input-
output table.
Demand for transportation can be seen as a sum of margins that
account, sector by sector, for the differences between transactions
valued at delivered prices and transactions valued at producers'
p ric e s . The measurement and the treatment of these margins
(together with those representing the distributive process) cause a lot
of input-output accounting problems not yet fully settled (see, e.g.,
 95

Skolka, 1982).
In the construction of Italian input-output tables at producers'
prices (ex fabric a prices in the wording of the European accounting
system), gross outputs of transportation industries valued at
producers' prices are allocated as margins to each cell of the table
(for being deducted from the corresponding transactions, valued at
delivered prices, and summed up in a row describing sectoral
transport demand) following loose criteria that have not been
(re )assessed since many years.
This is a fact that makes Italian transport margins not fully reliable,
with consequences on the measurement of sectoral demand for
freight transport and the representation of the intersectoral
transmission of price variations.
Sectoral Disaggregation of Transportation Industries
Italian input-output tables are "square" 10 and disaggregated into no
more than 92 productive sectors 11.
As far as transportation industries are concerned, a distinction is
made between rail, road, inland waterway, sea and air transportation
and an industry describing all auxiliary transport services 12 (but the
railroad auxiliary ones) 13.
Major drawbacks of this classification scheme, from the point of
view of the analysis of the Italian transportation system, are:
- the lack of distrinction between domestic and international sea
transportation;

10 I.e. they do not make a distinction between "commodities" and "industries"

and the number of selling sectors is equal to the number of buying sectors.
11 This is the most detailed disaggregation scheme used by the Italian central
bureau of statistics (1ST AT) for building the most recent available 1980
input-output table.
12 An industry responsible, among other activities, for the building and
maintenance of most transportation infrastructure (highways, harbour
facilities, canals, warehouses, etc.).
13 In Italy most railroad auxiliary services are produced by the same agency
that supplies railroad services; that is the reason why they are not
recorded separately.
 96

the joint consideration, into the same industry, of pipeline

transportation, passenger road transportation and freight road
transportation.
The low reliability of cell-specific transport margins and the need
for a more detailed input-output representation of transportation
industries are Italian specific problems. But the construction of a
transportation-oriented input-output model raises some more general
questions. Two of these questions are those connected with:
self production of transportation services
governmental provision of some infrastructure services at zero
price.
Ordinary input-output tables are unable to handle properly both
these questions as a consequence of their being built on the
cornerstone principle that national accounts only record those
economic phenomena that are valued by market prices. National
accounts are ready to trade some underestimation of actual economic
activity for the objectivity of its measurement.
This undisputable principle shows all its limits when, as in the case
of transportation, we are facing huge phenomena of self-production
(transportation services supplied by industries whose primary source
of revenues, primary product, is not transportation) and
self-consumption (mainly purchase and operation of private cars)
and when some transportation production costs are borne by the
public sector (e.g. costs of infrastructure services) and passed to users
at zero price.
Self-produced transportation services
Self-transport practices, that is the practice of collecting their own
inputs and distributing their own output made by non-transportation
production units which, in doing that, use their own vehicles and
personnel, have become of increasing importance in the modern
economies.
It has been estimated that 56% of the freight transported by road in
 97

Italy in 1984 has to be classified as self-produced transportation 14

Self-produced sea and pipeline transportations are also very
important in this country.
But in Italian accounting framework, as in most national accounting
systems, self-produced transportation services are treated as a kind
of" secondary product" whose level of output and its constituent inputs
are not separated from output and inputs belonging to the "primary
product" .
This is an accounting rule that produces two negative consequences:
- 1) input-output coefficients describing the production
technology of those industries whose establishments add a
relevant self-transportation activity to their own primary
production are not meaningful and cannot be assumed to be
stable; this is the reason why now the Japanese input-output
accounting system comprises two new set of supporting tables,
(and its ordinary transaction table shows two "dummy"
sectors) representing passenger self-transport and freight
self-transport, respectively (Administrative Management
Agency, 1984);
- 2) the level of transportation output recorded by an ordinary
input-output accounting system is only a fraction, the
percentage corresponding to transportation services sold on
the market, of the actual total level.
When, as in our case, self-transport is more important than the
marketed one, ordinary input-output accounts are of almost no use in
forecasting future levels of demand for freight transportation.
Some procedure for reallocating self-produced transportation output
to a convenient "dummy" sector must be devised in order to obtain an
estimation of this hidden "secondary activity" and then getting the

14 A proportion that is very similar to the Japanese one: 57% of freight road
transportation in Japan was self-produced by non-transportation
producing units in the year 1980. (Administrative Management Agency,
1984).
 98

possibility of estimating the actual total transportation level.

The use of transportation infrastructure and its cost
A second important fact concealed by an ordinary input- output
accounting system is the (social) cost-price relationship between
transportation and its phisical infrastructure.
Most capital and current costs of producing and maintaining
transportation infrastructure, such as railway, road and canals
networks, harbor and airport facilities, pipelines, etc., are
substantially borne by the government that finance them with its
own tax revenues.
From an input-output accounting point of view the maintenance of
a national road is recorded in terms of an intermediate input sold
from the construction industry to a non market services (Public
administration) sector; a recording that does not affect the cost
structure of road transportation services.
If it is true that road users do not pay for road maintenance 15, and
consequently its cost must not enter the users' cost structure, it is also
true that a definition of the social cost of road transportation must
include these infrastructure costs too.
Problems of optimal allocation of freight to different transportation
modes can only be solved starting from a determination of the total
modal cost of producing a unit of transportation.

5.2 Improving Input-Output Accounting for Transportation

Not . all drawback described in previous paragraphs can be easily

removed in order to get an accounting basis more suitable for
building a transportation oriented input-output model.
Transportation margins, for instance, can become more reliable
only through more accurate surveys that may yield better raw data.

15 They do not pay as road users but they will share the burden of road
maintenance with all taxpayers.
 99

In this exercise, starting from the most recent available Italian

input-output table, the one built for the year 1980, we have
dis aggregated transportation activities into 15 industries (instead of
the six-industry description of the official table), created a dummy
sector descri bing self-produced freight road transportation, taken
into account sea and pipeline self-transport and devised a way of
making explicit tha indirect subsidy represented by infrastructure
services passed to users at zero price.
Self-produced transportation
Table 1 lists sectoral values of gross 1980 output at producers' (or ex
fabrica) and basic (or factor cost) prices of our 15 transportation
industries.
It is worthwile noting that, in value terms, road freight
transportation -- both self-produced and bought on the market
accounted for 60% of all transportation services produced in Italy.
Self-transport of freight by road per se accounted for 35% of all
transportation services: a quantity that could not be disregarded and
treated just as an implicit secondary product, as official accounts do.
In order to make this phenomenon explicitly recorded, a dummy
sector has been introduced in the input-output classification scheme
(see table 1).
Transportation services produced by non-transportation industries
have been estimated starting from sectoral data on trucks ownership,
fuel consumed for transportation purposes and number of employees
carrying out transportation duties.
The value of fuel consumed for transportation purposes in each
industry has been used to calculate, according to the cost structure of
marketed road freight transportation, all other intermediate costs that
each non-transportation industry has incurred in self-producing
road transport.
 100

Table 1. Italy 1980. Gross output of transportation industries

(billion lire)

Transportation Gross output Net indirect Gross output

industries at basic taxes at producers'
prices prices

RAILWAY (*)
(primary network) 4473 -2652 1821
RAILWAY
(secondary network) 357 -319 38
ROAD (pASSENGER) 3043 -1802 1240
ROAD (FREIGHT) 12769 446 13215
ROAD (FREIGHT)
(Self-produced)(* *) 19153 19153
PIPELINE (***) 706 91 797
CANAL & RIVER 161 -20 141
SEA (***)
(international) 3652 -132 3620
SEA (***)
(domestic) 1468 -141 1327
AIR 1661 53 1714
AUXILIARY SERVICES
(Land) (****) 1390 25 1415
AUXILIARY SERVICES
(Inland water) 38 38
AUXILIARY SERVICES
(Sea) (*****) 553 -2 551
AUXILIARY SERVICES
(Air) 235 1 236
OTHER AUXILIARY SERVo 3274 74 3348

Totals 52933 -4379 48554

(*) railway primary network is that one actually competing with roads and
highways for interregional and international freight
(**) preliminary estimate
(***) self-transport services not yet included
(****) services jointly rendered to all land transportations
(*****) services jointly rendered to both international and domestic sea
transportations

Source: Sistemi operativi, 1987

 101

Number of trucks owned by each industry and number of employees

meeting transportation-related duties in each non-transportation
industry have been used for estimating sectoral primary costs
attributable to self-transport.
Starting from these data, a table of intermediate costs of self-
produced transport has been obtained, whose row totals represent
column elements of the dummy sector. In this way, making allowance
for the fraction of these costs met by imports, all primary and
intermediate costs of transport self-produced by each non-
transportation industry as a secondary product have been
conveniently reallocated.
The sum of intermediate and primary costs imputed to self-produced
transportation measures the value of this secondary output in each
industry.
Making the assumption that each industry charges its self-produced
transport to its customers proportionally to the quantity of its
primary product sold to each customer industry or final user, a table
of self-transport margins has been created.
This self-transport margin table has been substracted (element by
element) from the domestic (intermediate and final) input-output
table, while its column totals have been inserted into the input-output
table as row elements of the self-transport dummy industry.
In a more formal way, this procedure of reallocating self-transport
costs and deliveries to a dummy industry can be outlined as follows.
Assuming, for sake of simplicity, that we are dealing with a closed
economy (an assumption that allows us to skip the distinction between
domestic and imported products) our economy can be represented by
the following input-output table (at producers' prices):

1 X 1 y 1
1------- 1------- 1 [a]
1 V 1 0 1
 102

where X ia a (nxn) matrix of intermediate costs

Y is a (nxm) matrix of final demand components
V is a (hxn) matrix of primary costs.
Making room for a (n+l) productive sector imputed to self-produced
transportation matrix, formulation lal has to become:

1 X 1 0 1 Y 1
1--------1--------1--------1
1 0 1 0 1 0 1 [a bis]
1--------1--------1--------1
1 V 1 0 1 0 1

where the new zero blocks are ready for receiving the cost (column)
and delivery (row) structures of the dummy sector.
If we define XS, a (nxn) matrix of intermediate costs attributable to
self-transport secondary production in each industry, and V s, a
matrix of primary costs imputable to the same self-transport
production, we can calculate:

xi S X S i (where i is an appropriate unitary vector) a (nxl) column

=

vector of intermediate costs of the dummy sector

vS V S i, a (hx 1) column vector of primary costs of the dummy

=

sector and

1 xs 1
1--------1
x S = i' 1 0 1 total gross output of the dummy sector
1--------1
1 VS 1

If furthermore we define

M S = 1M S x 1M S y 1 a nx(n+m) partitioned matrix of self-transport

margins delivered by each industry to its intermediate and final
customers (jointly with deliveries of each industry primary
product), we can calculate:

mS x = i' M S x, a (lxn) row vector of intermediate deliveries of

 103

self-transport services and

mS Y = i' M S Y a (lxm) row vector of final deliveries of self-trasport

services

with m S S = input of self-transport input into the production of

self-produced transport.

The new input-output table enlarged for the inclusion of the

self-transport dummy sector will then be given by:

1 X - X S - M S x 1 Xi s l Y - M S Y 1
1-----------------1--------1-------------1
1 mS x 1 mS sims Y 1
1-----------------1--------1-------------1
1 V - VS 1 lis 1 0 I

This procedure 16 has been fully applied to self-produced freight

transportation by road. In the case of sea and pipeline self-transport
the procedure has been followed without creating any new dummy
sector. Pipeline and sea transportation industries do represent both
marketed and self-produced transportation services.
Maintenance and repair of transportation infrastructure
Most of transportation auxiliary services listed in table 1 come from
the use of transportation infrastructure.
The detailed input-output table dis aggregated for this study
describes current account costs borne for running transportation
networks and facilities and market values paid for their use by
different industries and final users.
As already said, most infrastructure are built and maintained by
governmental agencies and passed to users at zero price or at a price
well below the cost level. Most costs for maintenance and repair of

16 Further details can be found in Leontief and Costa, 1986; the procedure is
similar to that one followed by the Japanese Administrative Management
Agency (1984) in building its 1980 input-output table: major differences
come from the fact that in the Japanese case only intermediate costs have
been reallocated.
 104

transportation infrastructure are recorded as public sector costs and

not imputed to the transportation mode responsible for its wear and
tear.
In order to impute correct costs to each user of a given piece of
infrastructure, regardless of whether each user actually pays for that
cost or is subsidized by the tax-payers, stocks of transportation
infrastructure used by each mode have been calculated 17 and their
annual deterioration attributable to different transportation activities
estimated according to engineering informations.
Cost of maintenance and repair of transportation infrastructure
used by each mode, e.g. roads and highways maintened by "Auxiliary
transportation services (land)" and used by "Road transportation
(passenger)", "Road transportation (marketed freight services)" and
"Road transportation (self-produced freight services), have been
imputed to each modal user according to engineering estimated
coefficients describing unitary requirements of maintenance and
repair.
Maintenance and repair costs due to deterioration caused by bad
weather conditions, passing of time, household traffic, etc., have been
imputed to final users.
In algebraic terms, the total value of road and highways
maintenance and repair, X m' has been allocated to road users
(different transportation industries), according to their requirements
per unit of output, a mj' and to final users for deterioration not
connected with transportation production, Y m :

Once that maintenance and repair costs have been made explicit for
all subsets of transportation infrastructure it becomes possible, with

17 Stocks have been first measured in quantities and then valued at 1980
replacement costs suggested by sectoral experts.
 105

every "dual" price model, to measure the impact of these costs on the
production price of each transportation mode and then to assess the
effects of different subsidy policies aimed at establishing a selling
price lower than the production one.

5.3 The Capital Matrix and the Interregional Trade Flows

Matrix

If even the most simple input-output model could not be applied to

forecast demand for freight transportation without manipulating the
A matrix in the ways described in previous paragraphs, a dynamic
and multiregional input-output model is more data demanding.
At least one capital coefficient matrix, B, and a trade share matrix, T,
have to be available in order to make possible the implementation of
the model.
Since the current Italian accounting system does not supply neither
the B matrix nor the T one, these matrices have been estimated as a
part of this project.
Matrix B, a matrix of capital requirements for expansion of each
industry's capacity, and matrix R, a matrix of capital replacement
requirements per unit of output, have both been derived (see Costa,
1987) from a matrix of 1980 capital stocks calculated from sectoral
1961-1983 investment series valued at 1980 constant prices
manipulated according to the "perpetual inventory method"
(Santeusanio, 1987).
As for the T matrix, it has been derived for the year 1980 from an
interregional trade flows matrix calculated commodity by commodity,
reconciling with a rA s procedure regional demands (regional
intermediate and final demand plus demand for regional export
towards foreign countries) and regional supplies (regional
production plus regional import from abroad) with a point (1980)
estimate of the intraregional and interregional freight
 106

transportation flows made available by Sotecni s.p.a.

6. DEMAND FOR FREIGHT TRANSPORT: SIMULATIONS WITH A

DYNAMIC MULTIREGIONAL INPUT-OUTPUT MODEL

The integrated system of models depicted in figure 2 has not yet

been fully inplemented. Up to now only the dynamic and the
interregional blocks have been made satisfactorily operational. Their
main features and some preliminary results obtained from their use
are discussed in the rest of this paper.

6.1 The Dynamic Multisectoral Model

The multi sectoral dynamic model used in this study is, with a slight
variant, that one applied by Leontief e Duchin (1986) and fully
described in Duchin and Szyld (1985) 18.
It belongs to the following family of models introduced by Leontief:

x (t) - A (t) X (t) - B (t+l) (X (t+l) - X (t» = Y (t) [2]

where
(t) = 1,2,3, ... ,n,
X(t) is a vector of sectoral output at time (t),
A (t) is a matrix of current input coefficients at time (t),
B (t+ 1) is a matrix of capital coefficients required for capacity
expansion from time (t) to time (t+ 1),
yet) is a vector of non-investment final bill of goods at time (t).

The Leontief-Duchin-Szyld (LDS) model, however, does not suffer

from this model family many drawbacks. It is carachterized by:

18 A more general version of this model, that is a version not strictly oriented
to analyze transportation problems, has already been applied to the Italian
economy (see Costa, 1987).
 107

the distinction between actual sectoral outputs, X (t), and sectoral

normal capacity outputs, C(t); for few time periods elements of
vector X (t) can be greater than their corresponding elements of
vector C (t): the economy can temporarely run in a state of
overcapacity;
the fact that once capacity is in place, it need not to be fully
utilized and is not reversible;
the microeconomic assumption that entreprenuers make their
own capacity expansion decisions based on recent past growth
rates;
the introduction of a time lag between investment decisions and
actual addition to capital stock of new capital goods;
the introduction of constraints on annual rate of capacity output
expansions;
the explicit distinction between expansion and replacement
investment.
The model can be represented by four equations.
Levels of actual sectoral outputs will be given in each time (t) by:

X (t) = (I - A (t) - R (t»-1 = (It (t) + I (t) + Y (t» [3]

where, beyond those matrices and vectors already defined in footnote

(18), we have I, identity matrix, R, matrix of capital replacement per
unit of output, It (t), the exogenously determined vector of
transportation-oriented investment, and I (t), vector of investments
for expansion of each non transportation sector's capacity.
Net investments for capacity expansion are defined as:

I (t) = B L't 9=1 S (H6) [4]

where S (H 6) is a vector of sectoral increases in productive capacity

between periods (H6-1) and (H6) and 't is the maximum time lag
between the period when a capital item is produced by sector i and the
period in which it effectively adds to the capacity of sector j.
 108

Each entry of vector S(1+8) will be given by:

[5]

where c1 (1+ 8) measures the desired capacity output for sector i in

period (1+ e); this equation assures the non-reversibility of capital
stock, because, if capacity output desired at time (1+ 8) is lesser than
that one desired at time (1+ 8 -1), capacity increase is set equal to zero.
Productive capacity desired for sector i at time (1+ 8) is finally given
by:

[6]

where 0 i is the maximum admissible annual rate of expansion of

capacity for sector i; C i (t) is the capacity in place for sector i at time
(t) and

Xi (t - 1) + Xi (t - 2)
<Xi = -----------------------
Xi (t - 2) + Xi (t - 3)

equation [6] gives operational for m to the assumption that future

capacity requirements are determined by recent past changes in
sectoral output and potentially constrained by the system ability to
respond to demand for capacity increase.
Given the coefficient sets such as A, B, and R matrices and 't and 0
vectors, the vectors of exogenously forecasted non-investment final
demand y(t), y{1+ 1), ... ,y(1+n), the vectors of exogenously determined
transportation-oriented investments It (t), It (1+ 1), ... It (t+ n), and
initial values for C(t), X(t-I), X(t-2), and X(t-3), the model can be
recursively solved for X(t), X(t+ 1), ... X(t+n).
Given each industry's modal transportation requirements per unit
of output, demand for freight transport, D, addressed to each mode, t,
 109

will be given by the matrix product:

Dt = At (t) X (t)

This model has been calibrated for the year 1980 and solved
annually up to year 2010 (see Costa, 1987).
Figures 3 and 4 give an idea of the model output in terms of all sector
annual total output from 1985 to 2010 and of total degree of capacity
utilization for the same time period. These results that already look
like quite reasonable are undergoing a set of sensitivity analysis tests
for final refinement.

6.2 The Multiregional Model

The model described in the previous paragraphs is dynamic because

of the intertemporal links operating between levels of output in
period (t-l), (t-2), and (t-3) and capacity output desired for period
(t+ 9) (equation [6]), and because of those, going in the opposite
direction, between capacity desired for period (t+ 9), investments in
capacity expansion (equation [5]) and actual output in period (t)
(equation [3]). But, in each time period (t), the solution vector X(t) is
finally determined by the "static" model represented by equation [3].
If the final demand vector Y (t) and the exogenous vector of
transportation-oriented investment It (t) of equation [3] can be
subdivided into m regional subvectors, if it is possible to calculate m
matrices of technical coefficients A, each one describing the input-
output technology of a region of the country and if it is possible to
estimate a trade coefficient table T that describes the regional
distribution of each industry supply, it becomes possible to solve a
model of the type:

X (t) = (I - T (t) (A A (t) + R A (t»r 1 T(t) (It (t) + I (t) +Y (t» [3bis]
 110

1.4~ ______________________________________ ~

1.0

1981 1991 2001

Figure 3. Italian Gross Output (all Sectors) Forecasted by the Dynamic

Model
125 %
~--------------------------------------~

100 %

85 %

1981 1991 2001

Figure 4. Italy. Total Degree of Capacity Utilisation as Forecasted by

the Dynamic Model
 111

where
all sector have n-sector x m-region entries
A 1\ (t) and R 1\ (t) are block-diagonal matrices, with each block
describing current input and replacement requirements in each
region andT (t) is a (mxn x mxn) matrix partitioned into mxm blocks
of nxn diagonal vectors of coefficients each one describing the
share of demand for commodity i in region s supplied by region r ,tis .
Substituting equation [3bis] for equation [3], we can place each
dynamic solution into a multiregional setting, derive its associate
interregional trade flows, and consequently estimate demand for
freight transportation within each region and between each pair of
them.
The lack of data for estimating matrix T(t) has been until recently
the main obstacle to the building of such a multiregional model for
Italy 20.
A matrix describing 1980 interregional flows of 23 commodities
between 10 Italian macroregions has been estimated as a part of this
study (see paragraph 5.3).
The situation resulting from the 1980 Italian O-D matrix for freight
transportation is depicted by Figure 5 showing the relative
importance within each macroregion (and between macroregions) of
intraregional and interregional trade flows.
Associating to our 10 macroregions a network of 18 links over which
each pair of regions is connected by a unique route (see Figure 6),
each solution of our dynamic and multiregional model can be
translated into tons of annual freight transportated over each link.
It should be clear that the existence of the network described in

20 This lack of crucial data had pushed ahead experiments aiming at

bypassing the problem with the use of "most likely" interregional trade
flows (see. for instance, Martellato and Scandola, 1986, and Costa and
Martellato, 1987).
 112

9000

4500

2000

0
PLY LOM VTF Er1R TUL CB CS HAM PUG SAR
MAC R 0 REG I 0 N S

IllJ Intraregional

~ Interregional (incoming)

D Interregional (outcoming)

Figure 5. Italy 1980. Total Regional Transportation Flows (Freight:

000' Tons)
 113

Figure 6. Italy. Macroregions Nodes and Links of the Transportation

Network
 114

Figure 6 does not convert our model into a true network model; we
remain at the level of a macroeconomic driver where demand for
freight is specified by 23 sectors, 3 modes (road, rail and sea), 10
regions and 18 network links, but that is still waiting for a more
detailed network submodel in order to build up a full transportation
model.

6.3 Simulating with the Multiregional Model: an example

In order to give an example of possible uses of the multiregional

model, a shift of a 10% share of all Italian economic activities from
northern and central macroregions to the Mezzogiorno has been
simulated, coeteris paribus, for the year 1980 (the calibration time
period).
The idea is that of measuring how a reduction in the Italian
North-South structural economic imbalance would affect the
interregional distribution of demand for freight, thus identifying
links of potential bottleneck in the transportation network.
Operationally, the simulation has been obtained modifying the
coefficients of the t matrix; sector by sector, coefficients pertaining
to the Center-North macroregions (regions no. 1, 2, 3, 4, 5 and 8 of
Figure 6) have been reduced by 10% and the resulting total
percentage reduction has been proportionally added to coefficients
belonging to the Southern macroregions (regions no. 6, 7, 9, and 10).
In this way the system has been forced to serve with more southern
supply an unchanged (in level and regional distribution) final
demand.
The results of this simulation are summarized in Figure 7, where
each region actual 1980 total output is compared with the simulated
one.
As we could expect all northern and central regions would decrease
their own output levels contrasted by an increase in the southern
 115

region ones.
Not all sectors would, of course, shift output from Center-North to
South in the same proportion; in few cases, construction industry and
paper and printing industry, we would have some slight output
increase also in some northern and central regions: this is due to the
fact that, because of the simulated shift in production "location", total
Italian gross output would increase by 6% 21.
Starting from the (230x I) solution vector of sector-region output, X,
it is possible to derive a matrix

F = T A" X" + T (Y" + E")

where all matrices and vectors are those defined in equation /3bis/
(but here vectors X", Y" and E" are diagonalized) and whose row sums
for each regional block

F r s l. = I..} F r s l..}

measure the value of each commodity i flow with origin in region r

and destination in region s.
Premultiplying matrix F by the inverse of a diagonal vector of
sectoral prices 22 we get the O-D matrix

whose elements measure sectoral flows of each commodity i between

each pair of regions in quantity (tonn. per year) terms.
Assigning flows from matrix F· to their pertinent links of the
transportation network (see Figure 6) we get an estimation, detailed
for each link, of annual freight flows consistent with our macro-

2 1 Since the final demand vector has not been changed the increase in the
national gross output is a consequence of an increase in intermediate
production due to lesser efficiency shown by southern technology
incomparison with the northern and central ones.
22 That have been assumed to be the same across all regions.
 116

150
r-

-
~ 100
Il. ~
E-<
~ r-
o
rr. en
imj
.
I
(/) C
o
r- J.i
0 r-

r
0::: ....
t.:l ....
.... I r---
....:! .....
III,. II: Ii
I,
«~

o
H
z~
II,
r-
I
I
r--- il m
c:; I
II'
I ~: '
~ '1 I ::
0:::
o II

PLY LO~l VTF D1R TUL CB CS f1AM PUG SAR

MAC R 0 REG ION S

c:J actual values nrrrn simulated values

Figure 7.ltaZy 1980. Simulating a Relocation of Production from

Center-North to South
120

Ul
C
o
.....
.....
.....

c d e f g h m nopqr stu v

o actual values Gmm simulated values

Figure 8.ltaZy 1980. Actual and Simulated Annual Freight Flows over
each Link of the Transportation Network
 117

economic simulation.
A comparison between simulated (all sectors) values and actual ones
is presented in table 2 and Figure 8 23.

Table 2. Italy 1980. Simulating a relocation of 10% of all sector

productions from Center-North to South
Variations in annula freight flows over each network link
(both directions; all modes; million tonn.)

LINK CALmRATION SIMULATION ABS.VAR PERC.VAR

c LOM-EMR 42728 57859 15131 35.4

d VTF-EMR 37030 57550 20520 55.4
e VTF-LOM 16362 17650 1288 7.9
f LOM-PLV 67149 54868 -12281 -18.3
g PLV-TUL 16795 29680 12885 76.7
h EMR-MAM 26349 64036 37687 143.0
i EMR-TUL 43666 89924 46258 105.9
I TUL-SAR 5093 8522 3429 67.3
m PLV-SAR 2962 11467 8505 287.1
n SAR-CB 1367 2001 635 46.4
0 TUL-CB 35489 117406 81917 230.8
p MAM-PUG 14257 59671 45414 318.5
q MAM-CB 2621 4958 2337 89.2
r CB-PUG 10851 14172 3321 30.6
s CS-CB 22346 55337 32991 147.6
t CS-SAR 1784 2485 701 39.3
u TUL-MAM 9210 10733 1523 16.5
v PLV-EMR 11042 21992 10950 99.2

Source: Sistemi Operativi (1987)

Demand for freight transportation would decrease only on the link

connecting macroregion l.PLV (Piemonte - Liguria - Val d'Aosta) to

23 Both calibration and simulation values measure freight in both directions

and do not comprise export flows from each Italian macroregion to the
national border (port or alpine pass).
 118

Actual 1980
Flow Composition

Agr. 12.9%

c.p.g.l. 18.5%

Tessili 2.6% Energ. 21. 9%

Alim. 5.4%

Chimica 8.4%

Simulated 1980
Flow Composition

Agr. 5.2%

10.9%
flHn.ferr. 2.9%
Min.non ferro 5.5%

Tessili 2.4% Chimica 11. 7%

Alim. 3.8%

Hezzi tr.

Figure 9. Italy 1980. Actual and Simulated Commodity Composition of

Freight Flow over Link "0" (between Region 5. TUL and Region 6.CB).
 119

macroregion 2.LOM (Lombardi a), while there would be huge increases

in freight demand on links connecting Central Italy to the
Mezzogiorno (link 0 between Toscana-Umbria-Lazio and Campania-
Basilicata and link p between Marche-Abruzzi-Molise and Puglia) and
on those connecting Central Italy to Northern Italy.
A shift in production location from North to South would reduce
traffic congestion along the Po valley but would probably increase it
in Central Italy.
Figure 9., finally, shows the deep change in sectoral composition of
commodities transported over link 0 (the one between Toscana-
Umbria-Lazio and Campania-Basilicata which is the most affected by
our simulation); these results will be better understood as soon as they
will be splitted according to transport mode: a refinement of this
model that will be reached pretty soon.

REFERENCES

Administrative Management Agency (1984), 1980 Input-Output Tables

(English Summary), Tokio, Government of Japan.
Andersson A. (1986), The Four Logistical Revolutions, Paper of the
Regional Science Association, vo1.59: 1-12.
Costa P. (1987), Prospettive a lungo termine dell'economia italiana.
Esplorazioni con un modello multisettoriale dinamico, CNR.
Progetto finalizzato Economia, working paper, CUOA, Altavilla
Vicentina (VI).
Costa P. and Martellato D. (1987), Intereg: un modello multisettoriale
multiregionale per l'Italia in Ricerche quantitative e basi
statistiche per la politic a economica, Roma, Banca d'Italia:
1-47.
Duchin F. and Szyld D. (1985), A Dynamic Input-Output Model with
Assured Positive Outputs, Metroeconomica, vol. 47: 269-282.
Friesz T. and Harker P. (1985), Freight network equilibrium: a review
of the state of the art, in Daughety A. F. (ed.) Analytical
studies in transport economics, Cambridge, Cambridge
University Press.
IFO Institut (1981), Europa-Transport. Analyse und Ausschiften. Erste
Jahres Bericht, Muenchen.
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Leontief W. (1953), Dynamic Analysis in Leontief W. Studies in the

Structure of the American Economy, White Plains, N.Y., IASP.
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Workers, New York, Oxford University Press.
Leontief W. and Costa P. (1986), Trasporti ed economia italiana oltre il
2000: un approccio input-output, 3a Conferenza Nazionale dei
Trasporti. Roma (mimeo).
Liew C.K. and Liew C.J. (1984), Measuring the Development Impact of
a Proposed Transportation System Regional Science and
Urban Economics, vol. 14: 175-198.
Martellato D. and Scandola M. (1986), Grado di apertura ed attivazione
in un modello interregionale per l'Italia, Ricerche
Economiche, vol. XL: 328-359.
Ministero dei Trasporti (1986), Conto nazionale dei trasporti (anno
1984), Roma, Istituto poligrafico e Zecca dello Stato.
Ministero dei Trasporti (1986), Il mercato dei trasporti nei
traffici con l'estero, Roma (mimeo).
Piano Generale dei Trasporti (1986), D.P.C.M. 10 April 1986, Gazzetta
Ufficiale, n. 36, 15 May 1987.
Roberts P. and Kresge D. (1968), Transport for Economic and Social
Development. Simulation of Transport Policy Alternatives for
Colombia, American Economics Review, Papers and
Proceedings: 341-359.
Roberts P., Kresge D. and Meyer J. (1968), An Analysis of Investment
Alternatives in the Colombian Transport System, Harvard
University, Cambridge Mass (mimeo).
Santeusanio A. (1987), La matrice del capitale. Un tentativo di stima
per l'Italia al 1980, paper delivered to the Seminar on "Stime
dis aggregate dello stock di capitale e modelli dinamici
applicati", CUOA, Altavilla Vicentina (VI).
Sistemi Operativi (1987), Scenari di interazione tra i trasporti ed i1
resto dell'economia italiana. Gli effetti degli investimenti,
Venezia (mimeo).
Skolka J. (ed.) (1982), Compilation of Input-output Tables, Lecture
Notes in Economics and Mathematical Systems, n. 208, Berlin,
Springer-Verlag.
 MODE CHOICE: A TOTAL DISTRIBUTION COST APPROACH

C.A. Nash
Institute for Transport Studies - University of Leeds - Leeds LS2 9JT -
England

A.E. Whiteing
Department of Economics and Marketing - Huddersfield Polytechnic -
Huddersfield HDI 3DH - England

There are many problems with the orthodox discrete choice model of
freight mode choice. In the first place, freight mode choice decisions are
usually part of the general distribution strategy of the firm, rather than
being taken on a consignment-by-consignment basis. Charges and quality
of service are a matter of negotiation, rather than being exogenously
determined. Particularly in Britain, use of rail frequently requires
susbstantial investment by the firm in terminals and equipment, which
needs to be evaluated over the lifetime of the project.
This suggests that choice of mode should be regarded as an investment
decision, to be evaluated by comparing total distribution costs over the
lifetime of the assets involved. Such an approach is described, and
applied to a number of case studies of actual flows. The importance of the
cost and availability of equipment to the final decision is amply
illustrated by these case studies, whilst for manufactured goods the
implications for stockholding cost of the use of rail also turn out to be
very important.

1. INTRODUCTION

The theme of this paper is that mode choice decisions cannot

normally be treated as one-off decisions made on a consignment-by-
consignment basis, as is assumed in much of freight mode choice
literature. Rather, they must be seen as part of the general
distribution strategy of the firm, in which crucial decisions about
investment need to be made, involving trade-offs of cost, flexibility
and quality of service. This is especially true of a country such as
Great Britain, where the freight market is totally deregulated (except
for "quality" licensing on safety grounds) and where rail plays a very
specialist role concentrating on bulk movements.
In Section 2 we discuss some of the problems with established
 122

freight mode-choice modelling techniques. Section 3 considers the

main features of the collection of sub-modes offered by rail transport.
Section 4 outlines the total distribution cost approach to the mode
choice issue, and Section 5 discusses the quantification of total
distribution cost in a simple cost model. Section 6 presents a number
of case studies of the approach· applied to different sectors of the
potential rail freight market, and Section 7 presents our conclusions
on the exercises as a whole.

2. SOME PROBLEMS IN MODELLING FREIGHT MODE CHOICE

Techniques of modelling freight mode choice decisions have tended

to follow developments in passenger transport. Early studies used an
aggregate approach but dis aggregate proabilistic models based on
individual consignments wre estimated in both Britain and North
America by the early 1970's (e.g. Bayliss and Edwards, 1970; Watson,
Hartwig and Linton, 1974). To some extent , this move to a more
dis aggregate level was even more necessary for freight than
passenger, given the variety of forms that a particular shipment
even of a given commodity could take, in terms of packing,
consignment size and service characteristics (Winston, 1985). Use of a
random utility model in this field has been justified on the basis that
there is uncertainty regarding the quality of service characteristics
offered by alternative modes, and - because of the need to allow for
variation in taste parameters between shippers - the pro bit model has
been preferred to the logit (Winston, 1981).
The latter study is worth considering in some detail for two reasons.
Firstly, it represents an excellent 'state-of-the-art' application of
freight mode choice modelling. Decisions between rail and road modes
for a sample of individual consignments are explained in terms of
shipment size, commodity value, road and rail freight charges, mean
 123

transit time, the standard deviation of transit time, the miles between
the shipper and the nearest rail siding and the shipper's level of
sales. The most noticeable feature of the results is the wide variation
in the price and service level elasticities obtained according to the
commodity being transported, with low-value non-perishable
commodities having the highest price and lowest service level
elasticities and vice versa.
Secondly, the paper gives a useful and very open account of the
problems involved in applying this type of model to the freight
sector. To begin with, the model regards the shipper as taking
decisions consignment by consignment on an individual basis, even
though "The likely case is that a firm has some routine production
plan with a mode choice decision occuring for a set of shipments over
a certain time horizon". Furthermore, it assumes that the average
daily amount received from a shipper and the average shipment size
are exogenous to the physical distribution manager, even though
these decisions are at the heart of the design of distribution systems.
Moreover, the analysis is essentially a short-run one, in which the
locations of the supplier and customer are assumed fixed. Again, these
may actually be determined as part of the general distribution policy
of the firm, especially where one or other of the establishments is a
distribution depot or warehouse.
In addition to these points, some further difficulties - which are
becoming more acute in the context of increased deregulation of the
freight market - may be pointed out. The model assumes that rail
freight charges are determined exogenously. Even for the United
States, Winston comments on the fact that most of the competition for
rail operators has come from unregulated full load road carriers. Thus
he has no rate information; rather he uses a cost model to estimate the
charge faced for sending the consignment by road, presumably
relying on competitive pressures to lead to a close alignment between
road haulage costs and prices.
 124

For rail, he uses the published regulated rate. However, where rail
rates are not regulated and published - as is true of the majority of
rail traffic in most Western European countries, which is carried
under individually negotiated contracts hetween that railway and its
customer - there is a difficulty in determining the appropriate
charge for traffic not currently on rail. Whilst a model of the
marginal cost of carrying the traffic by rail may - if suitable data can
be obtained - be constructed, even this only provides a 'floor" to the
estimated rate, since rail systems rely on pricing-up according to
what the market will bear in order in order to cover their high level
of overheads (Joy, 1971). Moreover, the latter point implies that even
if rail rate information is available for existing rail traffic (and
problems of commercial confidentiality make this doubtful) it is not
determined exogenously but by negotiation between railway and
customer, as part of a package typically including level of service,
shipment size and volume. As a result, the more captive the customer,
the higher the rate he is charged. Generally anything which
changes the competitive position of rail for a particular flow, will also
change the rail charges. Unless this feedback is also modelled, the
mode choice model will be useless for forecasting.
Finally, it needs to be noted that rail is not a single homogenous
mode of transport, but in fact comprises a set of submodes, some with
very different characteristics to others. Most mode choice models
refer implicity to traditional rail wagonload services, where rail is
simply seen as an alternative public haulier. But this is only one form
of rail freight service, and one that British Rail has almost completely
abandoned as unprofitable. The majority of rail freight in Britain
moves as full train loads or in containers. Train load, and what
remains of the wagon-load business, moves largely between privately
owned sidings, and to a considerable extent in privately owned
wagons. Since these involve investment by the customer (or entering
into leasing arrangements in the case of wagons) they involve loss of
 125

flexibility for him, leading to a sharp divergence between short-run

and long-run marginal costs. Obviously, he will only surrender this
flexibility in return for a reduced freight rate, guaranteed by a
medium or long term contract. In these circumstances, typical of
existing rail freight in Britain, the decision to use rail is very much
an investment decision (Whiteing, 1982), weighing loss of flexibility
against cost and service quality for the entire set of flows that can
make use of the assets in question.
Thus, in examining mode-choice decisions in Britain, we are pushed
towards the strategic models of distribution systems of the physical
distribution management literature. This approach is considered in
more detail in Section 4. But first we discuss more fully the types of
freight service a railway may offer, in terms of costs and service
characteristics.

3. TYPES OF RAIL SERVICE

Rail service types may be characteristised as falling into four broad

groups - less than wagonload, wagonload, trainload and intermodal. Of
course, each of these groupings covers a wide range of services, and
there are intermediate service types that incorporate features of
more than one category. Nevertheless, we consider it useful to discuss
the characteristics of each of these four service groups in turn.
'Less than wagonload' services range from parcels conveyed by
passenger train (which can be very profitable) to grouped
consignments conveyed by freight train (which on most railways are
the biggest loss-maker). In fact, British Rail no longer offers the
latter form of service, but since it dominates this type of traffic on
most railways, it is nevertheless considered here. Broadly, its features
are similar to those of wagonload traffic discussed below, but several
further features make its cost and quality of service problemmatic.
 126

Firstly, it typically requires increased sorting and handling compared

with unit load traffic, even where the latter has to be transhipped.
Secondly, the rail way typically has a difficult choice between
delaying traffic until a wagon can be filled for a particular
destination, sending partly loaded wagons, or mixing loads for more
than one destination in a single wagon, thus requiring further
transhipment.
Wagonload traffic consists of consignments which fill one or more
wagons, but which are not large enough to justify provision of a
dedicated train. As a result, it involves trip working between the
terminal and yard and marshalling into a train, possibly intermediate
marshalling, and the same procedure in reverse at the destination
end of the journey. Where private terminals are not available,
transhipment and road collection and delivery are also needed.
Traditionally, this method of handling has the reputation of leading to
slow and irregular transits with poor information and problems of
loss and damage (see Young, Richardson and Kinnear, 1982, for a
recent study in which all these factors emerge as problems for rail in
comparison with road). With computerised freight wagon-tracking
and reservation systems, guaranteed connections and modern rolling
stock, these problems are much diminished. But it remains the case
that where traffic volumes permit of only infrequent services it is
difficult to achieve good wagon utilisation (for instance, even if a
siding is served daily then a wagon will be held for at least 24 hours
each time it is loaded or unloaded) and any failure to maintain
planned connections will lead to a substantial extension of transit
time.
Trainload traffic, as narrowly defined, consists of a dedicated block
train running from one terminal to another. Many systems would,
however, still regard as trainload working a train which, for
instance, was divided into portions for more than one destination en
route, provided that no remarshalling was necessary. Obviously,
 127

trainload movement should be able to offer high service standards in

terms of transit time and reliability, and low costs because of the
absence of marshalling. Its main problem lies in frequency of
service, except where traffic flows are very large.
Intermodal traffic can take on a wide variety of forms: container,
demountable, trailer on flatcar, 'rolling motorway' (where the entire
lorry is driven on to the train) and road/rail hybrid vehicles (such as
the 'roadrailer'). Containers obviously involve container provision
and terminal costs (usually being lifted by gantry cranes), but low
trunk haulage costs. The alternative forms of intermodal service
progressively reduce terminal costs, but typically at some penalty in
terms of trunk haulage costs. Thus one would expect them to be more
competitive at shorter distances.
In summary, then, rail is more competitive the larger the
consignment size and the longer the distance it is going. But the
situation is a little more complicated than is sometimes realised. If
volumes are large enough, rail can give good service at low cost even
over short distances provided that private sidings are available and
that wagons can be turned round quickly (the mean length of haul of
British Rail's coal traffic - widely recognised as its most profitable
traffic - is only 63 kms.) However, this situation is clearly confined to
bulk traffics. For general merchandise, moving in smaller quantities,
generally a much longer length of haul will be needed to offset the
additional terminal and marshalling costs of using rail. The necessary
length of haul will be particularly long for wagonload traffic and
where volumes are insufficient to justify private sidings. (See also
Pike, 1982 for evidence of this.) The degree of specialisation of British
Rail, 87% of traffic being accounted for by just 4 commodity groups -
coal and coke, metals, construction and oil and petroleum - is shown
in Table 1. This is associated with a heavy concentration on trainload
traffic (Table 2).
 128

4. A TOTAL DISTRIBUTION COST APPROACH

The essence of a total distribution cost approach is that it considers

the entire logistics of obtaining inputs and distributing outputs as a
single system. The aim of the distribution manager is to optimise the
performance of the entire system rather than to optimise any
indi vidual component such as transport, warehousing or
stockholding. To do this, he must exploit the scope for 'distribution
trade-offs', whereby incurring higher expenditure in one aspect of
distribution may lead to greater savings elsewhere (Christopher 1971,
Christopher 1985). The importance of such trade-offs from the
transport viewpoint is that the firm will not necessarily opt for the
cheapest mode of transport, if its use leads to increased costs
elsewhere in the distribution system. The following decisions are
important amongst those required for distribution system
optimisation:
(i) Location of Plant
Obviously, this is a long term decision, revision of which is costly.
Much modern industry is 'footloose', seeking a skilled workforce
and a pleasant environment rather than being concerned with
freight transport costs; where the latter does matter, it is access to
the motorway network that is the top priority. But for the heavy
industries which still provide rail with the bulk of its traffic,
access to a rail line remains an important consideration in
location decisions.
(ii) Direct Distribution versus Use of Depots
Clearly this decision varies enormously with the product under
consideration. Use of depots will be more likely where distances
are greater than can be covered in a single road driver's shift,
where many small customers are to be served and where access to
the customer by trunking vehicles is difficult. In general, use of
depots favours the rail mode, by concentrating flows; sometimes
 129

(e.g. the example below) the choice is between direct delivery by

road or distribution through depots by rail.
Increasing road speeds, which permit direct delivery of bulk
loads over distances of up to 300 km, and the growing use of
regional distribution centres by the major retailers - where the
manufacturer delivers to these rather than to his own depot -
have been damaging the position of rail in these respects.
(iii) Number, Size and Location of Depots Where Used
Increasing road speeds have led to a reduction in the number of
depots in most distribution systems, and - by concentrating flows
- this helps the position of rail. For bulk commodities, which are
cheap to store, a combination of a small number of rail-connected
depots with an infrequent service of large consignments leading
to very low-cost rail trunk haulage may be an attractive
proposition. But for manufactured goods, high interest rates and
recognition of the costs of holding stock has led to the increased
use of high frequency deliveries on the 'just-in-time' principle.
In this field, compensating for the costs of holding additional
stocks by reduced trunking costs is difficult, especially when
low-frequency service means that buffer stocks are needed to
compensate for any unreliability, as well as to bridge the gap
between supply and demand.
(iv) Choice of Mode (including the choice between public
haulage subcontracting and own fleet)
The tendency here has been towards maintaining flexibility by
minimising investment and using public hauliers or
subcontracted fleets and indeed subcontracted depots. By contrast,
the rail trainload or wagonload solution tends to require
investment in a rail-connected depot system, and very often also
in specialised loading/unloading equipment and railway rolling
stock (although these can be leased, sometimes for short periods).
Clearly, these investments will only be undertaken where a
 130

company is confident about its future needs over, say, a ten-year

time horizon.
The implication of the above discussion is that the decision to use
rail is typically part of a set of long term investment decisions
involving the overall distribution strategy of the company
concerned. In terms of speed, reliability and price, there is no
good reason why - for appropriate traffic - rail should not be
competitive with road. The major drawbacks with rail concern its
flexibility and frequency of service. Intermodal services may
permit rail to come closer to the service quality offered by road
on these characteristics, but the terminal costs involved limit the
cost-competitiveness of intermodal rail services to longer hauls
in the majority of circumstances. Moreover some of the
technologies impose significant loss of flexibility and weight
penalties.
Given the considerations discussed in this section, it is very
difficult to see how to formulate the freight mode choice decision
in a discrete choice model. Obviously, the model would need to be
a joint choice model, addressing simultaneously destination,
shipment size and mode (Roberts, 1977). Relevant attributes of the
alternative would be total distribution cost and quality of service
(including flexibility). The data requirements to calibrate such a
model in terms of the actual alternatives facing companies would
be enormous. We are currently engaged in a project which is
exploring the possibility of obtaining such data by interviews,
using modern stated preference techniques to address the quality
of service aspects. But at the present time, we can do no more
than illustrate the application of the total distribution cost
approach to mode choice issues through a series of case studies.
These were mainly undertaken as part of a study of the impact of
the change in maximum gross vehicle weight of lorries from 32
to 38 tonnes in 1983 (Whiteing and Tweddle, 1984) and are
 131

discussed in Section 6. But first, we describe the methods used to

estimate total distribution cost by mode for the case studies.

5. THE COST MODEL

One early model that based the mode choice decision on distribution
costs rather than purely on transport costs was that put forward by
Baumol and Vinod (1970). Their inventory theoretic model
represented an important advance, in that it included not simply
direct transport costs, but also in-transit carrying costs, warehousing
costs, costs of holding buffer stocks and the costs of order processing.
The main shortcomings of this approach must however be pointed
out. Firstly the model bases the mode choice decision on the total
variable cost of handling freight, thus not explicitly considering any
constraints imposed as a result of past investment in transport and
distribution facilities by the consignor, nor the need to obtain an
adequate rate of return on such investments. Secondly, the lack of
suitable data prevented the use of the model for estimating market
shares for transport modes.
Nevertheless, considerable academic effort has been expended
across the Atlantic to expand and refine such mode choice models on a
disaggregate basis. The more notable examples have been mentioned
previously (Roberts 1977, Winston 1981). Such models represent a
major step forward in mode choice research but they can be criticised
in that generally they assume that the specific costs incurred by each
individual consignment can be identified unambiguously. There is no
allowance for the effects of company policies that provide for
facilities for particular transport modes, and it is not clear how the
historic costs of investment in such facilities might enter into the
calculation of total distribution costs, nor how any allowance for the
costs of their replacement might be made. Given that the cost
 132

structures incurred by 'own account' transport modes may differ

substantially from those faced by users of professional transport
services, it is difficult to see how such choices could be examined
using models of this kind. These problems are especially relevant to
the choice between road and rail alternatives in the unique British
context.
A clue to the way ahead is provided in the literature on physical
distribution management. Christopher (1971) stresses the need for
distribution system optimisation (which potentially involves
suboptimisation of the specific transport function) and points out
that" ... total distribution costing is .. dynamic, in that it emphasises the
specific time-phasing of system costs. Thus if one system involves a
small outlay now, and an additional outlay in five years time to meet
increased demand, whereas a second system involves a sizeable outlay
now, and no foreseeable further expenditure over the next ten years,
these time-related costs are brought into perspective usually
through a method of discounted cash flow accounting" .
Christopher'S work concentrates on concepts of management
theory, and he does not attempt to operationalise his approach into
any more formal method of transport mode choice. Indeed, it is
noteworthy that more progress seems to have been made in the
distribution literature towards identifying cost savings through
better inventory control than through attention to transport
decision-making. The significance for transport modes involving
high investment costs is however clear. They will only be able to
compete with alternatives having lower start-up costs under certain
circumstances. Either they must be significantly cheaper to use on a
day-to-day basis, perhaps because of efficiency in handling large
throughputs or over long hauls, or they must be expected to remain
operational and viable well into the future, to recoup their set-up
costs gradually, or else they must offer widespread scope for
considerable savings elsewhere in the distribution system. Correct
 133

specification of a model based on total distribution costs, but

concentrating on the mode choice decision, will allow such
considerations to be quantified.
Total distribution cost models developed at Leeds University examine
mode choice by means of a multi-stage approach. Although the
general framework used by these models can be described, it must be
realised that they are designed to take into consideration the unique
nature of many freight users' requirements. Hence once developed
for the needs of a particular case study, application to different cases
will normally call for modification to the detailed structure of the
model.
In the first stage, viable distribution system alternatives to cater for
a particular requirement are constructed, with regard to traffic
requirements, desired levels of service etc. This is essentially a
practical design stage. In the second stage, all cost centres and cost
categories are identified for each of the system alternatives under
investigation. Costs are categorised under the headings of capital
expenditures on transport vehicles or on any fixed distribution
facilities required, recurring operating expenses in such areas, any
maintenance expenditures, any managerial or administrative costs
attributable to transport and distribution (such as order processing
costs) and finally the capital costs of inventory tied up in the
distribution system. All costs are considered over a number of years
ahead, to take the time-phasing of expenditure into account.
The third stage involves estimation of costs for all of the categories
identified, for each year and for each of the alternative systems
under consideration. This estimation may be done on a variety of
bases. Actual known values may be input to the calculations where
appropriate, or else costs can be modelled, particularly where they
may be subject to variation or to relationships with the quantity of
throughput, distance moved or other system variables. It is important
at this stage to pay attention to tax allowances and liabilities, which
 134

may significantly affect the outcome of this exercise.

In the fourth stage, a check for equality of service levels is
undertaken for each alternative. If service levels provided are not
identical, variations in the amount of safety stock may be required,
and these will have to be estimated and costed.
Annual costs are discounted at an appropriate cost of capital in the
fifth stage. The resulting discounted values are then summed up for
each alternative system under consideration. The transport mode
chosen will be that consistent with providing the desired level of
service at the lowest total distribution cost. As a final stage, sensitivity
tests are carried out to test the robustness of the outcome to various
parameters involved, especially where costs may not be known with
certainty.
To illustrate these principles, consider as an example some of the
possibilities for supplying aggregates from a quarry, in lorryload
deliveries to customers dispersed around an urban region. Let us
concentrate on two systems based exclusively on direct deliveries by
road - one using public hauliers and one utilising an 'own account'
vehicle fleet - and a third system with a major private investment in a
rail-served distribution depot, from which customers are serviced by
road using an 'own account' delivery fleet. The cost categories that
each of these options incurs are set out in Table 3.
Cost for the various items of capital expenditure required have been
estimated from those incurred in actual examples of investment of
this type. Recurring operating costs and maintenance costs of
vehicles and equipment are assumed to vary according to estimates of
fleet sizes required, annual mileage run and the volume of material
moved. Stockholding costs are estimated on the basis of the average
stock level and the cost of carrying stock.
The results from this example identify situations in which each of
the three options may be preferred. For short-term transport
requirements, use of public hauliers, avoiding any significant user
 135

involvement in vehicles or other facilities, is cheaper than use of

transport operated on 'own account'. But for situations where the
need for transport is expected to continue more than a few years
ahead, the relevant choice is usually between direct delivery by road
on 'own account' and the rail-based depot delivery system (Whiteing,
1982).
In broad terms, the rail-based system is competitive when large
annual tonnages are involved, or when the trunk haul distance is
relatively long. The rail option also tends to be favoured if the length
of the appraisal period is relatively long, to allow its high investment
costs to be spread over a large amount of traffic. The scope for rail is
also increased if the high initial investment costs can be reduced by
substantial assistance in the form of investment grants or tax relief.
The actual scope for rail in practice depends on which of the many
possible combinations of these factors applies. Table 4 illustrates the
tonnages required for the rail option to be cost competitive under a
wide range of possible situations, and also shows how changes in road
vehicle operating costs may affect the competitive balance between
modes.

6. CASE STUDIES

A number of case studies were undertaken in 1983/4, specifically to

evaluate the effects of increases in maximum UK lorry weights from
32 to 38 tonnes on existing rail traffic.
When this framework is used for the examination of different case
studies, it becomes apparent that modifications are required to take
the particular circumstances of each case into account. In the
following cases investigated, the various aspects of the overall
logistics system receive a different emphasis, depending on the
situations involved.
 136

The important differences in circumstances to be taken into account

may include the extent to which there are regular, routine ongms
and destinations for the freight in question, and whether investment
in facilities for each mode has already taken place, or is still required
to permit the use of any particular mode; whether large tonnages of
homogeneous materials are involved; whether transport facility costs
can be shared between different freight flows; whether desired
customer service levels are a strong influence on transport costs and
hence on mode choice; and whether stockholding costs are a
significant component of total distribution costs.
i) Trainload traffic - limestone to steelworks
This case study examined intermodal competition in the
movement of substantial tonnages of limestone and burnt lime
from a quarry in Cumbria to steelworks in Scotland (185 km) and
on Teesside (142 km by road, 225 km by rail). Approximately 0.2
million tonnes of materials was moved by rail to Scotland each
year from the quarry sidings, slightly more than half of this
tonnage being limestone rock. In addition, 0.1 million tonnes of
burnt lime was moved each year to a Teesside steelworks, also by
rail.
Certain aspects of this case study simplified the decision
procedure. To begin with, the rail terminal infrastructures
required for bulk trainload handling were well established and
were not due for any substantial capital expenditure. Though past
investment had been considerable, the large annual throughput
ensured that the cost per tonne was only small. Furthermore, the
low value of the material significantly reduced the importance of
stockholding costs in this example. The critical features in this
case were found to be the relative costs of trunk haulage by road
and rail and the costs of vehicle provision.
The Scottish limestone traffic utilised a fleet of privately owned
hopper wagons. These had originally been provided for an
 137

entirely different freight flow. Hence the capital costs to be

recovered from the limestone traffic were relatively low. The
burnt lime traffic was handled in wagons leased from a specialist
provider. Due to the depression in the steel industry, this fleet
had considerable spare capacity which was adding to the cost per
tonne at the time of the study.
By identifying the vehicle and terminal provision costs and the
necessary stockholding costs associated with each viable mode, it
was possible to determine the maximum rates which would permit
British Rail to offer a total distribution cost lower than that of
road transport.
Generally, the existing rail rates were found to be below the
critical values at which road transport would become the cheaper
option, but road transport offered much stronger competition for
the Teesside traffic than for the Scottish traffic. Partly this was
due to the circuitous rail route to Teesside, which added to rail
trunk haul costs. In addition, the exclusive use of leased rail
wagons added to the total costs of rail transport on this route.
Furthermore, Teesside road haulage firms could offer low
transport rates for this traffic, as they had many suitable tipper
lorries returning empty to the area. Road rates based on
relatively low marginal costs could be offered for the Teesside
traffic, therefore, but not for the Scottish traffic. For this reason,
professional road haulage posed the strongest challenge to rail
on the Teesside route, whereas 'own account' road operation
would have offered the main challenge for the Scottish traffic.
Also, the competitive position meant that the rail rate charged for
the Teesside traffic was substantially below that for the traffic to
Scotland.
This case study confirmed that rail can compete successfully for
freight in trainload quantities between eX1stmg private sidings
even over relatively short distances (of the order of 150 km.),
 138

unless special circumstances allow particularly severe road

haulage competition. However, the costs of the rail equipment
borne by the customer had to be considered in setting a rail rate,
and the reduction in road haulage charges brought about by the
38 tonne lorry meant a more than proportionate reduction in rail
freight charges to compensate.
ii) Traffic in wagonload quantities - 'Maglime'
'Maglime' is lime with a high magnesium content, suitable for
spreading on farmland. A significant amount of this material has
for many years been moved from North East England to Scotland
(some 350-400 km) by rail. Demand for this lime is highly
seasonal, but there are logistical advantages in storage close to
demand, and in any event transhipment to smaller vehicles for
delivery to farms would often be necessary. Hence rail wagonload
freight services are used to supply depots with the baseload
traffic, though road hauliers carry some of the seasonal peak
direct to farms.
At the time of the study, modernisation of the rail wagonload
system was taking place. The quarries supplying the lime had
been rail-served for many years and required no significant
investment. The suppliers, however, had to find alternative
means of rail wagon provision, to replace the out-dated British
Rail mineral wagons traditionally used. The solution - short-term
wagon leasing - led to relatively high wagon provision costs, a
problem exacerbated by poor wagon utilisation. Shorter round
trip times, if possible, would have reduced the fleet size required,
but this called for investment in improved terminal facilities in
Scotland to provide faster unloading.
Despite these problems, and flows too small to justify trainload
movement, the study showed that relatively high rail rates were
able to compete against road haulage. The length of haul,
favoured rail, and road hauliers were generally unlikely to
 139

secure return traffic. A change to maximum weight, higher

capacity lorries would undoubtedly have forced rail rates lower
(had the cost savings been passed on in lower rates), and would
have provided a greater impetus for better productivity in the
use of rail equipment. Any such road cost savings, however,
would have only affected trunk haulage costs, as depot storage
and transhipment to smaller spreading vehicles would still have
been required, whether road or rail was used for trunking.
iii) Traffic in wagonload quantities - grain
A further study examined intermodal competition for grain
moved from Cambridgeshire to mills on Merseyside (some 300
kilometres). This traffic formed part of the 'Grainflow' services
marketed by a private company on behalf of British Rail. The
traffic concerned yielded a low rate per tonne kilometre but,
because of the way in which it integrated with grain traffic on
other routes, it promoted better overall utilisation of handling
equipment and rail wagons, and thus has a reasonably low
marginal cost.
For the freight in question, a substantial part of the total costs of
using rail consisted of the handling equipment - which for grain
traffic on rail are high - and of the various means available for
rail wagon provision. British Rail owns no specialised grain
wagons, so that potential users face a choice between obtaining
their own privately-owned vehicles (contracting directly with
British Rail for haulage), wagon hiring or leasing (again dealing
with British Rail for haulage), or securing all facilities through a
service package such as 'Grainflow'. The study showed that the
relative economics of these options depended critically on the
time horizon under consideration. For short-time needs, a service
package offers cost savings. The longer the traffic is expected to
continue, however, the stronger is the case for increased user
involvement and investment in the system.
 140

Rail faced strong competition from road haulage for this grain
traffic, especially after the introduction of 38 tonne lorries
(though their use may have required investment in improved
receiving facilities). This competition resulted in low rail rates
for the customer, and provided a spur for greater efficiency in
rail operation, to keep wagon fleet requirements low. Fortunately
for the rail operator, it is convenient to store grain locally and to
supply the mill as needed, so the rail flow is regular throughout
the year despite the seasonal nature of production.
iv) Consumer products
In the studies of bulk materials described so far, the stockholding
cost implications of using different modes of transport may be
relatively insignificant, as the value of the material is normally
low. Stockholding costs become a more important consideration
in mode choice decisions when higher value commodities are
involved or when customer service requirements become
paramount. Products of consumer-related industries tend to fall
into both of these categories.
This case study examined the distribution of confectionary from a
factory in East Anglia to distribution depots in various parts of
Britain. At the time of the study the manufacturer operated a fleet
of 32 tonne lorries on 'own account' to handle this palletised
traffic.
Alternati ve arrangements under consideration, however,
included switching to 38 tonne lorries once they became legal, or
possibly transfering some traffic to British Rail 'Speedlink'
wagonload services.
The factory was not rail-connected, though six of the depots had
rail facilities, used for receipt of goods from factories elsewhere
in Britain. A factory rail connection being prohibitively
expensive, any switching of freight to rail would have
necessitated a road transfer to the nearest 'Speedlink' terminal.
 141

The cost of this road transfer and transhipment would then erode
the rate that British Rail could charge for this traffic, if rail was
to offer a competitive service.
In addition, rail's large consignment size meant that more stock
would be held in transit in a rail-based system - a stockholding
cost penalty that was relatively severe given the high intrinsic
value of commodity, and one that would be compounded if rail
reliability failed to match road service levels, thus calling for
additional buffer stocks to be held. This penalty was
proportionately greater for shorter distances, where transport
costs formed a smaller proportion of total distribution cost.
These cost disadvantages of rail meant that rail rates to allow
competition against road transport could not be offered by British
Rail on the shorter routes, as they were likely to be less than the
marginal costs of moving the freight. Rail could only profitably
tender at a realistic level on the longer hauls.
A comparison with the costs of operating heavier lorries showed
that, due to their larger load, the rail stockholding cost penalty
was reduced. However, the use of such lorries offered the
company significant operating cost savings, and hence
substantial economies, which further eroded rail's ability to
compete for the traffic. This example demonstrated that by
careful fleet management the 'own account' operator could
obtain very significant cost reductions from the use of heavier
lorries rather more than the savings suggested by the
operating cost reductions for individual vehicles. These savings
stem from factors such as the ability to reschedule operations and
to adjust consignment sizes and delivery frequencies to suit the
new vehicles, the opportunity to use the heavier vehicles on the
most suitable routes during the interim upgrading period, and
the scope for further productive work from any increase in
capacity provided by the larger vehicles.
 142

An additional consideration was that some of the major retailers

insisted on bulk deliveries to their own central warehouses,
bypassing the manufacturer's depots: such traffic also offers
substantial scope for economies through direct trunking in
larger lorries. Overall, it appeared that not only would rail be
unable to win new traffic, but that the existing traffic was at risk.
So it proved; this customer has since abandoned the use of rail.
(v) Maritime container traffic
An alternative approach to using rail where at least one end of
the journey has no rail connection is via inter-modal services. At
present, partly due to loading gauge constraints, the only
inter-modal service operating within Britain is using containers.
Use of container instead of a road trailer involves some slight
weight penalty and a more substantial loss of volumetric
capacity. However, much maritime traffic is containerised in any
case, and therefore this penalty does not arise. The mode choice
decision facing the shipper is in this case much more akin to
choosing between two road hauliers, since no special facilities
are needed for him to make use of rail.
Our case study specifically examined container movements from
the West Midlands to the port of Felixstowe (some 280 km). Monte
Carlo simulation was used to analyse a sample of movements. It
was found that rail was generally only competitive for 20 foot
containers; for 40 foot, road rates were cheaper. For a given rail
rate, a major consideration was how far the journey to/from the
container terminal in Birmingham lengthened the overall
length of haul compared with direct road haulage. Rail was
competitive even with long collection and delivery journeys on
the far side of Birmingham from Felixstowe, but uncompetitive
where direct road transport involved a length of haul advantage.
The marginal nature of the advantage enjoyed by rail even in
this limited area is shown by the extent that this would shrink
 143

given a 5% rise in rail rates. Of course, rail may be competitive

outside this area where special discounts are made available. By
encouraging the use of 40 foot containers, heavier lorries would
again damage the position of rail substantially.

7. CONCLUSION

We have argued in this paper that the conventional approach to

studying freight mode choice decisions via discrete choice models is
of limited use, especially in the circumstances of total deregulation
and specialisation pertaining in the British freight market. The
principal reasons for this are the fact that use of rail often involves
purchase or leasing of specialised equipment and changes in
stockholding, costs of which must be added to transport costs before
modal comparisons can be made. Such assets may often be used for
more than one flow, in which case mode choice decisions between
flows are not independent. Moreover, freight rates themselves vary
enormously according to circumstances; road rates vary with the
quality of the road system and the existence of a backhaul, whilst rail
rates vary from avoidable cost to the maximum the market can bear.
In these circumstances, much can be learned from a case study
approach; examining the total distribution cost of realistic
alternatives given the particular circumstances of the freight flow in
question. We have illustrated this approach with 5 case studies
undertaken in 1983/4. These illustrate the above points admirably. For
instance, in case study (iii) more than half the cost of using rail was
borne by the customer in terms of purchase or leasing of equipment
rather than through the rail rate itself, whilst the improved
utilisation of equipment through diverting a set of flows to rail was a
crucial consideration. Road competition varied substantially between
the two flows in case study (i), and so accordingly did the rail rate. In
 144

case study (iv), extra stock-holding costs due to the use of rail varied
from 10% of the rail rate at long distances to over 50% at short. In
case studies (ii) and (iii) the decision to iron out seasonality by
storing the product close to the point of consumption in the first case
and close to the point of production in the second, provided a regular
flow for which rail could be competitive.
We also claimed that freight mode choice decisions are frequently
akin to investment decisions, with major differences between short
and long run costs. This again has been borne out by the case studies.
In the case study (i), much of the necessary equipment was already
owned, in one case having been purchased for a quite different
traffic flow, and had little opportunity cost. On the other hand, in
case studies (ii) and (iii), ending of traditional rail wagonload services
had forced an investment decision. In both cases, a decision against
purchase - by leasing ar subcontracting - maintained some flexibility
but at a penalty in terms of costs. It is clear that in an uncertain
world, the lack of flexibility exhibited by a rail freight policy based
on private sidings and privately owned wagons is a substantial
handicap, which will need to be addressed by new inter-modal
methods if rail is to win back traffic in the general merchandise
market.
The results presented here are based on a small number of case
studies, although we are seeking to extend the sample in a current
project, which is making use of stated preference methodology to
examine alternative combinations of price and service quality. No
doubt a case study approach of this nature appears unsophisticated
compared with much current-day transport modelling. But, given the
complicated nature of the mode choice decisions and the enormous
diversity of the freight market, we believe this to be a fruitful
approach.
 145

ACKNOWLEDGEMENTS
The Authors are indebted to their colleague Mr. G. Tweddle
(University of Leeds) who undertook the computing and statistical
analysis for most of the case studies.

REFERENCES

Baumol, W.J., Vinod, H.D. (1970), An Inventory Theoretic Model of

Freight Transport Demand. Management Science 16 : 413-21.
Bayliss, B.T., Edwards, S.L. (1970), Industrial Demand for Transport.
HMSO, London.
Christopher, M. (1971), Total Distribution: A Framework for Analysis,
Costing and Control. Gower, London.
Christopher, M. (1985), Strategy of Distribution Management. Gower,
Aldershot.
Joy, S. (1971), Pricing and Investment in Railway Freight Services.
Journal of Transport Economics and Policy 5 : 231-46.
Pike, J. (1982), Major Factors Influencing Modal Choice in the UK
Freight Market. Transport Operations Research Group,
University of Newcastle. Research Report No. 52.
Roberts, P.O. (1977), Forecasting Freight Demand. World Conference
on Transport Research. Rotterdam.
Watson, P.L., Hartwig, J.C., Linton, N.E. (1974), Factors Influencing
Shipping Mode Choice for Inter-City Freight: A
Disaggregated Approach. Transportation Research Forum
Proceedings of Fifteenth Annual Meeting. Washington.
Whiteing, A.E. (1982), Choice of Mode for Bulk Freight Transport.
Unpublished PhD Thesis, University of Leeds.
Whiteing, A.E., Tweddle, G. (1984), Heavy Lorries, Transport Costs and
Choice of Mode. Focus on Physical Distribution Management.
Sep/Oct.
Winston, C. (1981), A Disaggregate Model of the Demand for Inter City
Freight Transportation. Econometrica 49: 981-1006.
Winston, C. (1985), Conceptual Developments in the Economics of
Transportation. An Interpretive Survey. Journal of Economic
Literature 23 : 57 -94.
Young, W., Richardson, A.J., Kinnear, R. (1982), Modelling Inter-
Urban Freight Mode Choice. Journal of Advanced
Transportation 16 : 303-22.
 146

Table 1
BR Freight Traffic by Commodity, 1985

Tonnes Mean Length

of Haul (km)

Coal and Coke 65.9* 63

Metals 14.1 141
Agriculture, food and drink 0.7 503
Industrial minerals 2.4 141
Chemicals and allied products 2.9 247
Construction 16.6 153
Oil and petroleum 9.1 224
Motor vehicles and components 0.7 355
General merchandise 0.4 409
International traffic 1.2 330
Containers 7.9 310

All Commodities 122.0* 126

1 Affected by coal strike; 1985/86 financial year figures some 15m tonnes
higher.

Source: Transport Statistics Great Britain 1975-85.

Table 2
BR Freight and Parcels Traffic by Type of Service, 1985

Tonnes (m) Receipts (im)

Parcels 1 125.8
Wagonload 8 )
Trainload 106 ) 440.2
Container 8 30.1

Total 122 596.1

Source: Transport Statistics Great Britain 1975-85.

 147

Table 3
Components of Total Distribution Cost for Each Option

YEAR

Cost Category 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

OPTION 1. DIRECT DISTRI-

BUTION BY ROAD PUBLIC
HAULIERS
Investment: loading
facilities X

Payments to road hauliers X X X X X X XX X X X X X X X

OPTION 2. DIRECT DISTRI-

BUTION BY ROAD ON 'OWN
ACCOUNT
Investment: loading
facilities X
Investment: vehicle garage
& maintenanc e
facilities X
Investment: vehicle fleet X
Replacement vehicles (net
of second-hand sales) X X X
Lorry fleet: running costs XXXXXXXXX X X X X X X
Lorry fleet: standing costs XXXXXXXXX X X X X X X
Lorry fleet: maintenance
costs XXXXXXXXX X X X X X X
Garage operating costs XXXXXXXXX X X X X X X

Continued ...
 148

Table 3 continued
YEAR

Cost Category 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

OPTION 3. RAIL TRUNK HAUL

WITH LOCAL ROAD DELIVERY
Investment: rail loading
equipment X
Investment: rail wagon
fleet X
Investment: rail sidings X
Investment: distribution
depot X
Investment: delivery fleet
garage and
maintenance
facilities X
Investment: delivery
vehicle fleet X
Replacement delivery
lorries (net of second
hand sales) X X X
Delivery fleet:
running costs XXXXXXXXX X X X X X X
standing costs
maintenance costs XXXXXXXXX X X X X X X
Distribution depot oper-
ating costs XXXXXXXXX X X X X X X
Garage operating costs XXXXXXXXX X X X X X X
Payments to British Rail
for haulage XXXXXXXXX X X X X X X
Rail wagon maintenance
costs XXXXXXXXX X X X X X X
Incremental stock-holding
costs XXXXXXXXX X X X X X X
 Table 4
Minimum Tonnage 'Thresholds' for the Rail Option

Rate of 'Section 8' grant (per cent) o 50 60 80

Trunk Haul (kilometres) 60 80 100 60 80 100 60 80 100 60 80 100
Road vehicle operating costs
reduced by 10 per cent
Appraisal over 5 years * * * * 0.30 0.26 * 0.26 0.22 * 0.20 0.15
Appraisal over 10 years * * 0.26 * 0.22 0.18 * 0.20 0.16 * 0.16 0.12
Appraisal over 15 years * 0.28 0.22 * 0.20 0.16 * 0.18 0.16 0.30 0.16 0.12
Central estimates for road
vehicle operating costs
Appraisal over 5 years * * * * 0.26 0.22 * 0.24 0.20 * 0.16 0.13 .j::.
Appraisal over 10 years 0.28 0.23 <D
* * 0.19 0.15 * 0.17 0.13 0.26 0.13 0.11
Appraisal over 15 years * 0.24 0.20 * 0.16 0.14 0.30 0.16 0.12 0.26 0.12 0.10
Road vehicle operating costs
increased by 10 per cent
Appraisal over 5 years * * 0.30 * 0.22 0.18 * 0.20 0.16 0.26 0.14 0.11
Appraisal over 10 years * 0.24 0.20 0.30 0.16 0.13 0.27 0.15 0.12 0.23 0.11 0.09
Appraisal over 15 years * 0.20 0.16 0.280.14 0.12 0.260.14 0.10 0.22 0.10 0.08

Table refers to tonnage required for the rail option to have the lowest 'Total Distribution Cost'
over the relevant period of appraisal (millions of tonnes per annum);

* More than 0.30 million tonnes per annum required

Discount rate 5 per cent.

 THE PREDICTION OF MULTICOMMODITY FREIGHT FLOWS: A
MULTIPRODUCT MULTIMODE MODEL AND A SOLUTION
ALGORITHM

Michael Florian, Jacques Guelat

Centre de recherche sur les transports, Universite de Montreal, P.O.

Box 6128, Station "A", Montreal, Quebec, CanadaH3C 3J7

We present in this paper a normative model for simulating freight flows

of multiple products on a multi modal network. The multi modal aspects of
the transportation system considered are accounted for in the network
representation chosen. The multiproduct aspects of the model are
exploited in the solution procedure, which is a Gauss-Seidel - Linear
Approximation Algorithm. An important component of the solution
algorithm is the computation of shortest paths with intermodal transfer
costs. Computational results obtained with this algorithm on a network
that corresponds to the Brazil transportation network are presented.

1. INTRODUCTION

The prediction of multi commodity freight flows over a multimodal

network has attracted much interest in recent years. In contrast to
urban transportation, where the prediction of passenger flows over
multimodal networks has been studied extensively and many of the
research results have been transferred to practice (see, for instance,
Florian, 1984), the study of freight difficulties and complexities of
such problems, received less attention.
The class of models that was well studied in the past for prediction of
interregional flows in the spatial price equilibrium model and its
variants. The model, stated initially by Samuelson (1952) and extended
by Takayama and Judge (1964, 1970) then by Florian and Los (1982),
Friesz, Tobin, Smith, and Harker (1983) has been used extensively for
analyzing interregional commodity flows. This class of models
determines simultaneously the flows between producing and
consuming regions as well as the selling and buying prices. The
 151

transportation network is usually modeled in a simplistic way and

these models rely to a large extent on the sup ply and de man d
functions of the producers and consumers respectively. The
calibration of these functions is essential to the application of these
models and the transportation costs are unit costs or may be functions
of the flow on the network. There have been so far few
multicommodity applications of this class of models, with the majority
of applications having been carried out in the agricultural and
energy sectors in an international or interregional setting. It is not
this class of models which is the main topic of this paper.
The class of models which we consider are network models which
enable the prediction of multicommodity flows over a multimode
network, where the physical network is modeled at a level of detail
appropriate for a nation or a large region and represents the
physical facilities with relatively little abstraction. The demand for
the transportation services is exogenous and may originate from an
input-output model, if one is available, or from other sources, such as
observed past demand. The choice of mode, or subsets of modes is
exogenous and intermodal shipments are permitted. In this sense,
these models may be integrated with econometric demand models as
well. The emphasis is on the network representation and the proper
representation of congestion effects in a static model aimed to serve
for comparative static analyses or for discrete time multi period
analyses.
The Harvard Model (Kresge and Roberts, 1971), which is probably
the first published predictive freight network model of the type that
interests us, resorted to a fairly simple "direct link" representation of
the physical network and congestion effect were not considered.
Later, the MultiState Transportation Corridor Model (McGinnis et aI.,
1981; Jones and Sharp, 1979; and Sharp, 1979) went a step further in
representing an explicit multi modal network, but without any
consideration of congestion. The Transportation Network Model
 152

(Bronzini, 1980) does not consider congestion effects either. The first
model that considers congestion phenomena in this field, is the
Freight Network Equilibrium Model (Friesz, Gottfried and Morlok,
1986). This is a sequential model which uses two network
representations: an aggregate network that is perceived by the users,
which serves to determine the carriers chosen by the shippers and
then more detailed separate networks for each carrier, where
commodities are transported at least total cost.
In an effort to combine the variable demand modeling approach of
spatial equilibrium models with detailed description of the shippers
and carriers, in recent articles, Harker and Friesz (1986a, 1986b)
present a theoretical approach and mathematical formulations that
are yet to be tested in a particular application.
The class of models that we present in this paper do not consider
shippers and carriers as distinct actors in the decisions made in
shipping freight. The simplifying assumption is made that the goods
are shipped at least cost, even though the shipment of freight is
governed by a variety of micro-circumstances that prevent the
achievment of total cost minimization. The justification for this
assumption is that, at a strategic level, predicting freight flows based
on this assumption, when reliable modal demand is available, is
satisfactory for the purpose of scenario comparisons when the
investments considered are of large magnitude.
The multimodal aspects of a national transportation system are
accounted for in the network representation chosen. A link of the
multimodal network is defined by its origin and destination nodes and
a single mode. Parallel links are allowed between two adjacent nodes,
one for each mode available to transport goods between them. The
intermodal transfers at a node of the network are modeled as link to
link permitted movements. Appropriate cost functions may be
associated with links and intermodal transfers.
The multiproduct aspects of a national transportation system are
 153

accounted for in the formulation of the predictive model and is taken

advantage of in the solution procedure. The algorithm developed for
this problem exploits the natural decomposition by product and
results in a Gauss-Seidel like procedure.
The multi mode-multiproduct model is formulated in the most general
way, permitting in principle nonconvex and assymmetric cost
functions. Nevertheless, certain simplifying assumptions made on the
structure of the cost functions may simplify the problem and permit
the solution of large size problems in reasonable computational times.
The paper, which is mainly based on Guelat's (1986b) work, is
organized in the following way. First, the network representation
chosen to integrate modes and transfers is described in detail; then
the multi mode multiproduct assignment model is formulated and the
solution algorithm adopted is presented; next, two salient aspects of
the model are analyzed in detail, namely the form of the average and
marginal cost functions and the computation of shortest paths with
inter modal transfer costs on the network representation chosen;
finally, some computational results obtained with this algorithm are
presented.

2. THE NETWORK REPRESENTATION

The physical network infrastructure represented by the network

model chosen supports the transportation of several products on
several modes. A product is any commodity, goods or passengers, that
generates a link flow specifically associated with it. A mode is a means
of transportation that has its own characteristics, such as vehicle
type and capacity as well as a specific cost function.
The base network is the network that consists of the nodes, links and
modes that represent all the physical movements possible on the
available infrastructure. The model that we have chosen defines a
 154

link as a triplet (i,j,m) where i is the origin node, i eN, where N is the
set of nodes of the network, j is the destination node, jeN and m is the
mode allowed on the arc, m eM, where M is the set of modes available
on the network. Parallel links are used to represent the situation
where more than one mode is available for transporting goods
between two adjacents nodes. In order to motivate our network
modeling choice, consider the following simple example, which is
shown in Figure 1. It consists of three modes: road transport, diesel
rail and electrified rail.

D I IIII I I DIESEL RAIL

E I I I I I I I ELECTRIFIELD RAIL
R ::::::::=:::::: R0 A D

Figure J: Physical Network

Cities A and B are served by all modes; A and C are served by diesel
rail and road, whereas Band C are served only by road. In order to
simplify the presentation, no intermodal transfers are permitted.
The most compact representation of this network is to connect all
cities by directed links and to allocate the modes as link attributes.
Thus, link (A, B) has all the modes permitted, link (A, C) has the
diesel and road modes, while link (B, C) has only the road mode. This
network representation has some major disadvantages for the model
that we seek. If a single flow is associated with a link, it must be the
total flow on the link and the flows specific to each mode are not kept
explicitly. If multiple flows, one for each mode, are associated with
each link, then these may vary in number from link to link,
 155

Figure 2: Compact Representation

depending on the number of modes associated with a given link. In

addition, the physical difference of the infrastructure modeled is not
explicit in such a representation and the specification of cost and
delay functions for each mode poses the same problem as that
mentioned above for the flows for each mode. In order to overcome
these drawbacks, it is necessary to choose a network representation
which permits easily the identification of flow of goods by mode, as
well as cost and delay functions by mode. This is equivalent to keeping
explicitly "copies" of the network, one for each mode defined in a
particular application. This type of network representation becomes
prohibitive if large networks with many modes need to be considered.
An elegant way of achieving the aim of efficient representation of
the multi modal network is to permit parallel links between each node,
one for each mode permitted. In this way, the network model
resembles the physical network, since the rail and road
infrastructures are physically different. Also, if on a physical link,
such as the rail facility, there are two different types of services,
such as the diesel and electric train services of the example described
 156

in Figure 1, a separate link may be attributed to each service, since

they would have different cost and delay functions. For this example,
the network with parallel links is described in Figure 3.

Figure 3: Network Representation Chosen

In this representation, the mode is an integral part of the network

and is not merely an attribute of the link. The parallel links
introduced in the network, as may be seen in Figure 3, may lead to
difficulties in implementing network algorithms unless parallel link
between adjacent nodes that represent different modes are
structurally different. This is accomplished by defining a link as a
triplet (origin, destination, mode).
Once the network representation chosen, it is necessary, in order to
model intermodal shipments, to permit and associate the appropriate
costs and delays for mode to mode transfers at certain nodes of the
network. This may be accomplished by expanding (or exploding) a
node where transfers occur by adding as many nodes as there are
arcs entering and exiting the node by adding transfer links between
these nodes to form a bipartite graph. An example is given in Figure
4.
 --r:r-
157

__
1 -Q- -
"'- /
"'-/
/"'-.
/ "'-
,
2 '4
'\
~--D--~---
'\
'\
"
TRANSFER (1,4) ( 1, 3) (2,4)

ROAD
- - - - RAIL DIESEL
- - - - - RAIL ELECTRIC

Figure 4: Explosion of a node

The explicit explosion of nodes would increase the number of links

and arcs of the network; also, if carried out explicitly, the new nodes
do not represent the physical network and the transfer arcs
represent a mode to mode transfer so they are not unimodal as the
other arcs of the network.
The representation chosen for transfers does not require the
explicit modification of the network. Transfer are represented
implicitly by a pair of arcs, one reaching the node and the other
leaving the node. Transfer arcs are not added to the base network;
rather the transfers permitted at each node may be displayed or listed
by referring only to the pairs of arcs defining the transfers at a
given node.
 158

3. THE MULTIMODE MULTIPRODUCT MODEL

In the context of strategic planning of freight flows on a national or

regional scale, the most efficient use of the transportation
infrastructure is to transport the freight at least total (generalized)
cost. Even though it is reasonable to assume, that even in countries
where a central authority controls and regulates the shipment of
goods, a variety of micro-circumstances in fact prevent the precise
achievement of the goal of shipping at least cost, the model that we
formulate is based on the objective of minimizing total costs. The
notion of cost is central to our model and we interpret cost in the most
general way, in the sense that it may have different components,
such as monetary cost, delay, energy consumption, etc.
The network that we consider consists of a set of nodes N, a set of
arcs A, A C NxN, a set of modes M and a set of transfers T, T e AxA. We
denote their cardinality, nN' nA' nM and nT respectively. With each
arc a, aeA, we associate a cost function sa (.) which depends on the
volume of goods on the arc, or possibly, on the volume of goods on
other arcs of the network. Similarly, a cost function st (. ) is
associated with each transfer te T.
The products transported over the multi modal network are denoted
by index p, peP, where P is the set of all products considered, which is
of cardinality n p. Each product is shipped from origins 0, 0 e 0 eN, and
destination d, deD eN of the network. The demand for each product and
for all origin/destination (0/0) pairs is specified by a set of 0/0
matrices for the corresponding subsets of modes. It is assumed that
the mode choice is determined exogenously. Let gm(p) be the demand
matrix associated with product peP, where m (p) is a subset of modes
that belong to M (P), the set of all subsets of modes that may be used to
transport product p.
The flows of product p on the multi modal network is denoted by vP
and consists of the induced flows of this product on links and
 159

transfers.

v p = (V: ),
(v t ),
a EA
teT
1
The flow of all the products on the multimodal network is denoted by
V= (v P ), peP and is a vector of dimension np(nA + nT).
The average cost functions sg (v), on links, and sf (v), on transfers,
correspond to a given flow vector v. The average cost functions for
product p are denoted, similar to the notation used for the flow v P , sP,
peP, where

s P= [(S ~ ), aEA 1
(St ), teT

and s = (sP), peP is the vector of average cost functions of dimension

np (nA + nT)·
The total cost of the flow on arc a, a eA, for the product p, peP is the
product sg (v)v~ ; the total cost of the
flow on transfer t, teT is
sf<v)vt The total cost of the flows of all products over the multi modal
network is the function F that we seek to minimize

F =
peP
r (r
laeA
s P (v ) v P +
a a
L
tEr
s {' (v ) v / ) ='s (v l V [1]

over the set of flows which satisfy the conservation of flow and
nonnegativity constraints. In order to write these constraints for the
multiproduct multi mode network defined above, the following
notation is used. Let Ko~ (P ) denote the set of paths that lead from
origin 0, oeD to destination d, deD by using only modes m(p)eM(p),
peP. The conservation of flow equations are then
r hk =g ~ (P) , oeD ,deD, m (p )eM (p),peP [2]
keK: (P)

where h k is the flow on path k. The nonnegativity constraints are

 160

hk ~ 0, keK: (P), oeO ,deD, m (P )eM (P ),peP [3]

Let n be the set of flows v that satisfy [2] and [3]. Since the
conservation of flow equations are stated in the space of path flows,
for notational convenience, the specification of n requires the
relation between arc flows and path flows, which is

v: =
keK
L P Oak hk ' aeA ,peP [4]

where kP = m(p)~M(p) ~ tiMJ Ko'd(P) is the set of all paths that may

be used by product p, and

1 if aEk
Oak =
{
o otherwise
is the indicator function which identifies the arcs of a particular
path. Similarly, the flows on transfers are

[5]

1 if tEk
where { 0
otherwise
The transfer t belongs to the path k if the two arcs that define the
transfer belong to it.
In conclusion, the system optimal multiproduct, multi mode
assignment model consist of minimizing [1] subject to [2]-[3] with the
definitional constraints [4]-[5].
The model is sufficiently general to be adapted for different ways of
specifying the demand. Even though typical applications of the model
are likely to be carried out after an "a priori" mode choice calculation,
which would allocate the demand for a product gP to a set of mode
subsets, it is equally possible to permit the demand for a product to be
transported over all the allowed modes, that is m (p) is the set of all
modes of the network and M (p) has a single component, which in this
 161

case is m (p). Also, the model is flexible in the specification of

intermodal movements. The mode to mode transfers may be restricted
to occur only at specific nodes of the network, and only between
specific modes.
We turn our attention next to develop a solution algorithm for this
model.

4. A SOLUTION ALGORITHM

The problem that we consider may be stated in a compact form as

Min F(v), subject to vEQ [P]
Since constraints [2]-[5] are linear, Q is a polytope which, if the
muItimodal is strongly connected, is nonempty. Q is compact as well, if
the cost functions that we consider are stricly positive, hence the
paths considered do not contain cycles.
It is assumed that F (v) is a convex-function, once differentiable on
the open space that contains Q. These assumptions are satisfied, for
example, by average arc (transfer) cost functions of the type

sP =
a l l
L u. (~. + vP)
a
z(i)
'
U. > 0,
1
a > 0, 0:::; z (i) <
1
00

As demonstrated by this example, the average cost funciotns need

not be convex (0 < z(i) < 1) for F(v) to be convex.
The size of the problems that are likely to occur in specific
applications (np (nA + nT) - 100,000-150,000) mitigates the use of
second order algorithms that require the use of the Hessian of the
objective function or its approximation in order to solve [Pl. The most
widely used first order method is the linear approximation method
(Frank and Wolfe, 1956). This method, which is widely used for
solving large scale network equilibrium problem (see Florian, 1986)
has a sublinear rate of convergence in the vicinity of the optimal
solution, however it has proved to be robust in applications which do
 162

not require a very precise solution. Its straightforward adaption for

the model that we seek to solve poses a problem of dimension: the
vector v is of dimension n p (n A + n T) and so is the dimension of the
feasible direction of descent generated by the linear approximation
method. This may render the straightforward application of the
linear approximation method impracticable on the most widely
available computers.
The structure of the model suggests a natural decomposition by
product. Q is the direct product II QP where QP is the set of feasible
P
flows of product p on the subnetworks m (p) EM (P). The descent
direction of the linear approximation method is found by minimizing
the linear approximation of the objective function, which in this case

would be FP (F= f/
p=1
FP); thus one would have to solve np subproblem

in a cycle of the algorithm. The algorithm that we develop in this

section is based on this observation, and may be characterized as a
Gauss-Seidel - Linear Approximation Approach. For each product p, a
descent direction is computed for v P which is of dimension (n A + nT)'
~hen considering a particular product, all the flow variables
pertaining to the other products are kept at their previous value.
This approach resembles the block Gauss-Seidel method, except that
the subproblem for each block is not solved exactly; rather, for each
product p, a single iteration of the linear approximation algorithm is
carried out. The statement of the algorithm is as follows:
Algorithm A
Step 0 - Initialization
Determine v (initial feasible solution)
Step 1 - Major cycle

Void = v; for each peP; carry out Ip.

Ip. Minor cycle

Compute cP (v) (marginal costs)
 163

Find w P (extreme point found by shortest path

computations)
dP = w P - vP (descent direction)
Compute Ap (optimal step size)
vP=vP+A dP (update flow for product p).
P
Step 2 - Stopping criterion
If (v ::F void)' return to step 1.

Since the algorithm is stated in a rather compact form, some

comments on the details of each step are in order. The minor cycle Ip.
implements one iteration of the linear approximation method in the
subspace of flows related to product p. A descent direction is found by
minimizing the linear approximation of FP on n P , which is
Min yo FP (v) y, subject to yen P (LP p) .
Since F(v) = s(v)T (v) it follows that yo F(v) = s(v)T + v T s' (v). Let the
marginal cost be defined as c (v) = s (v) + s' (v) Tv. The linear
programming subproblem is
Min cP (v)T y, subject to y e n P
The solution of this problem, as is well known, is obtained by
assigning the demand gm (p) on the shortest paths corresponding to
the modes that belong to m (p) computed with arc costs cP (v).
The optimal step size AP is obtained by a one-dimensional
minimization of F in the direction (0, ... , d P , ... , ol unless cP (v l dP = °
in which case Ap = O.
An initial (extremal) solution may be obtained by carrying out a
major cycle with initial marginal costs corresponding to v = 0, that is
c (0) and by setting AP = 1 in each minor cycle Ip.
The algorithm is stopped when the flows v do not change after a
major cycle was carried out. The current solution is optimal, as will be
demonstrated in the following section. In practice, the algorithm may
be stopped after carrying out a predetermined number of major
cycles or after a maximal execution time. In addition, the supposed
convexity of the objective function F may be used to construct a
 164

stopping criterion based on the "relative gap" RG

F(v) - BLB(v)
RG = 100 *
F(v)

where B L B (v) represents the best lower bound obtained during the
previous major cycles carried out. This lower bound is computed by
solving the linear programming problem

Min V F(v) y, subject to yea .

A lower bound on the optimal solution F(v*) is given by F(v) + V F(v)
(y* - v), where y* is the optimal solution of the above problem. This
lower bound may not be computed by using the shortest paths
detained at each minor cycle lp.; it requires the solution of as many
shortest paths problems as there are 010 matrices gm (p). As it is rather
"expensive" to compute, its computation would depend on the power of
the computer available for solving the problem.

S. CONVERGENCE ANALYSIS OF THE ALGORITHM

In order to prove the global convergence of the algorithm

presented in the previous section, we show that F is a descent
function relative to algorithm A and that the algorithmic map, which
we denote by A as well, is closed on a.
Lemma 1 : Let y be the solution obtained from v after carrying out a
minor cycle lp. F(y) ~ F(v).

Proof: { ifp =p
yP =
vP otherwise.
dP=wP-vP, if p=p
Then y = v + Ap D, where D = (DP)pep and DP = {
o otherwise.

Let g(A)=F(v+AD); by the assumptions made on F, g is continuously

 165

differentiable. Thus
g' (A) = VF(v + W) D = e(v + WlD
= y. cP(v + ADlDP = eP(v + ADldP
pEP
and g' (0) = eP(v)T tiP
- if g' (0) = 0, then A = 0 in which case y=v and F(y) = F(v).
P
- if g' (0) -:F- 0, then g' (0) < 0 by the definition of w P ; thus D is a
feasible descent direction for F at v. By the definition of A , it
P
follows that F(y) < F(v) .
Now let S .c.. n be set of flows that satisfy the Kuhn Tucker conditions
of problem (P), or equivalently, the set of optimal solutions of P. If F is
strictly convex S is a singleton. The set S may be characterized by the
variational form
S = {ven I VF(v) (w - v) ~ 0, 'v'wen} .

Let A: n~n be the (one to many) algorithmic map.

Lemma 2: veS if and only if veA(v).
Proof: First we prove that the condition is necessary.
V F(v) (w - v) ~ 0 'v' wen is equivalent to
2. eP (vl (w P - v P ) ~ 0, 'v' wen .
pEP
Consider peP and y = (yP)pep e n such that yP= VV if p -:F- p.
It follows that

In particular, if w P is the extremal flow generated in the

linear subproblem of the minor cycle Ip, it follows that
e P (vl (wP-v P )O. Hence v will not be modified in any
=

subsequent minor cycle and v e A (v).

The sufficiency of the condition is demonstrated by
contraposition. Let ve n -S. There exists then awe n such
that
P T P P)
VF (v) (w - v) < 0 or 2- e (v) (w - v < 0 .
peP
It is impossible for eP(v)T dP = 0 for all peP; but, in the
proof of Lemma 1 it was shown that if cP(v)T dP < 0 at a
 166

minor cycle the objective function F decreases strictly

and as F cannot increase at a minor cycle, it follows that
F (y) < F (v) for all yeA (v). In particular v does not belong
to A (v).
Corollary 1: F is a function of descent relative to A.
Proof: Let yeA (v). By applying Lemma 1 n p times, one for each
subproblem p, it follows that F(y) ~ F(v). By Lemma 2, F(y)
< F(v) if ve.o-S.
The second part of the convergence proof consists of the
demonstration that the algorithm map A is closed on .0. In order to do
so, let P = (PI' ... , P n ) and A is decomposed accordingly:
p

_ Pnp I .
A - A 0 •••.... oA . .o~n

where AP = M. if : n~.o

AP is the algorithmic map that corresponds to a minor cycle, D P

represents the search for a descent direction and M the
one-dimensional minimization. More formally, let
DP: .o~.oxU

v ~ DP(v)
T T
where DP (v) = {(v, d) : d = (0, ... , dP , ... 0), dP = w P - vP , where
w P = Arg Min VFP(v)y,
ye.aP
and
U = .0-.0 = {y = Yl - Y2; Yl' Y2 e.o}
M:.ox U ~.o
(v, d) ~ M(v, d)

V if V F(v) d=O
{
where M(v,d)={y:y= v+A*d otherwise, with A*eArg Min F(v+Ad)}.
O~A~l

Lemma 3: DP is a closed mapping on .0.

P roof: Let {v} k be a sequence of n that converges to v. Let, on
 167

the other hand, {(v k , dk)}k be a sequence of QxU such that

(v k , d k ) e DP (v k ) and which converges to (v, d). By the
definition of DP(v k ) the direction d k may be expressed as
yk _ v k where yk = v k except for the p'th component
where (yk)p = (wk)p. Thus we have that

i = d k + v k , ykeQ .

The right term of the equation tends to d + v = y; y = v

except for the p'th component. In order to show that (v,
d) belongs to D P (v) it suffices to point out that yP is the
optimal solution of the linear subproblem
Min VFP(v) z, subject to zeQP .
Then VFP(v k ) (yk)p5, VFP(vk)zP, 't/zPeQP

By involving the continuity of V F it follows that

V FP(v) yP 5, V FP(v) zP, 't/ zPeQP
Lemma 4: The map M is closed on DP (v), 't/ veQ.
Proof: Let (v,d) eDP (v) and let {(v k , d k ) h be a sequence of QxU
which converges to (v,d). On the other hand, let {yk} k be
a sequence of Q such that ykeM(v k , d k ), which converges
to y. Consider first the case where d:F- O. There exists then
a K such that dk:F- 0 for all k ~ K. In the following we
consider that k ~ K

*k II yk - v k II
hence A = -----
II d k II

The term on the right hand side tends to

II y - v II .;.. A* (e[O,l])
II d II

and hence y = v+A*d

It remains to show that the A* above solves the
 168

one-dimensional minimization problem. Since F (yk)

~F(vk + Ad k ) for all AE [0,1], by using the continuity of F
and by taking the limit for fixed A, one obtains:

F(y) = F(v + A*d) ~ F(v + Ad), 'if AE[O,l].

We consider now the case d=O.

As A*kE [0,1] for all k and as d k tends to zero, the term on

the right hand size tends to zero as well. By taking the
limit one obtains that y=v.
Corollary 2: AP is closed on n.
Proof: AP : n --+ nxu --+ n
nxu is compact since n is compact. By Lemmas 3 and 4 all
the hypotheses of Lemma 4.2 of Zangwill (1969) are
satisfied.
Corollary 3: A is closed on n.
Pnp 1
Proof: By applying corollary 2 to A = A 0 ...... oA and Lemma
4.2 of Zangwill (1969) the result follows.
The global convergence of the algorithm A follows from
convergence Theorem A of Zangwill (1969) and Corollaries 1 and 3
above.
We turn our attention next to the average and marginal cost
functions.

6. THE COST FUNCTIONS

In the minimization problem [P], defined in section 4 of this paper,

the average cost functions sa (v), aEA and St (v), tET may in principle
depend on any or all components of the vector v. The Jacobian matrix,
which appears in the definition of the marginal costs, may therefore
 169

be a full matrix, which usually implies lengthy evaluations of these

costs. We consider next several restrictive and simplifying
hypotheses in the structure of the average cost functions, which
preserve nevertheless sufficient generality to model properly
nonseparable average cost functions.
In its most general form, the marginal cost for transporting product
p on the arc a is given by the expression

~!A
P asP
aSa t
c!a =sEa + L v P
a + L
v P
t
[6]
peP av P teT av P
J
and the marginal cost for transporting product p on transfer arc t is
as aP
~ P vP J
c_P =S_P + L
~!A - vaP + L ---- t
t [7]
t t peP
avE t
teT av P
t
The first simplifying assumption that we make concern the
dependence of the cost function on an arc on the flows on the
transfers and vice versa.
Assumption 1: sf (v), pEP, tET do not depend on the arc flows v~ ,
pEP, a EA. With this assumption equation [6] simplifies
to

c_P =S_P + L L •v P
a [8]
a a peP aeA

A similar simplification of equation [7] results from:

Assumption 2: sg (v), pEP, aEA do not depend on the transfer flows

v f, pEP, tE T, which leads to the expression

c.! =sE + L L •v P
t [9]
t t peP teT
 170

Since transfers represent mode to mode movements it is reasonable

to postulate
Assumption 3: sf ' peP, teT do not depend on the flows of the other
transfers fe T, f :t.t.

[9] simplifies further with this assumption to

p P as!t
c =s + I [10]
T f peP av~
a

Unfortunately, a similar assumption cannot be made for cost

functions of the arcs. It is highly likely that two distinct modes (such
as rail diesel, rail electric on a single track facility) share the same
physical infrastructure between two nodes of the network. It is
reasonable nevertheless to assume that the interactions are limited to
links which are parallel, in both orientations, between two adjacent
nodes. See Figure 5.

8 _- -- ------ --------- ----0)

I

I ..
~- - - - - - - -- --- --------
• •

MODE m MODE ml

Figure 5: Parallel Links in Both Orientations

We introduce some additional notation. The arc a = (i, j, m) connects

node i to node j by mode m. Let M a be the subset of modes which is
considered in the computation of the marginal cost of arc a.

Let Aa = {aeA : a = (i,j, m') or a = U, i, m'), m' eMa} u{a}

be the set of arcs that must be considered in the computation of the
marginal cost of arc a; thus sPa (v) = sP a(v~), aeAa peP. If arc aeAa

asp
then_a_. = O. This permits the simplification of equation [8] to
aJ[a
 171

asP
P P a
• v
P
c =s + L
a- a- L a [11 ]
peP aeH_ av P
a a-
where H a = {a EA : aEA a}. The set H ii can be obtained in general by
scanning all the arcs of the network, which may be time consuming
particularly if H ii = {a} for the majority of the arcs. Therefore we
make the additional
Assumption 4: H a = Aa for all aEA.
The marginal costs of the arcs may be writen then as

p asP
P a P
c =s + L L • v
a [ 12]
a- a- peP aeA_ av~a
a

In the code which implements the algorithm of the preceeding

section in STAN, the partial derivatives required in the computation
of the marginal costs are carried out by a rather precise numerical
approximation procedure. The analytic form of the cost functions may
be rather complex, in particular for the rail mode (see Crainic et aI.,
1987), and as a consequence, so are the analytic form of the partial
derivates and cost functions. Another consideration that motivates the
numerical approximation procedure is that it obviates the
specification of the partial derivates by the user of the code, be they
simple or complex.
The method that we chose to implement in order to compute the
derivative of a function at a given value, is a polynomial
approximation based on the least squares method, which appears to be
superior to numerical interpolation (Kellison, 1975, pp. 150-151). We
have chosen to use the orthogonal polynomial of Gram, which was
adapted for our purposes (Guelat, 1986a) starting from a code written
by Casaletto and Rice (1978). The interested reader is referred to
Guelat for the details of the numerical approximation procedure for
computing partial derivatives.
We turn our attention to the shortest path algorithm used to compute
 172

least marginal cost paths, which has a central role in the solution
algorithm of the multi mode multiproduct model.

7. THE SHORTEST PATH ALGORITHM

The multimodal network that we use for the formulation of the

multiproduct assignment model contains transfer costs, which are
similar to turn penalties in the context of urban transportation
networks (see Potts and Oliver, 1972). Spiess (1984) proposed a link
labeling procedure (which is implemented in the EMME/2 code) for
computing shortest paths on urban road networks with turn penalties
at intersections. Unlike urban road networks, where a path may be
constructed with nodes that do not have turn penalties, in our model a
path that containc the links of more than one mode can be
constructed only if a mode to mode tranfer is permitted at a node of
the base network that belongs to the path.
In order to state the algorithm that we use, we introduce the
following notation. Let C a' a EA and C I' tE T be the "lengths" of the arcs
and transfers. In algorithm A, these correspond to a set of current
marginal costs. The shortest path algorithm finds the shortest path
from an origin 0 EO to all destinations dE D in the subnetworks defined
by the subset of modes of m (p ) E M (p). The shortest path is retraced by
the means of pointers to the preceding link: b d is the access link to
destination d, b a is the predecessor of link a; the length of the shortest
paths are given by variables Ud and U a' where Ua is the length of the
shortest path from the origin 0 to link a inclusive of C a; A represents
the set of links which were examined (labeled) but do not yet have
permanent labels.
Shortest path algorithm with transfers
Step 0 - Initialization
Lengths : ud = 00, deD, Uo = 0; ua = 00, aeA
 173

Predecessors : bd = -1, dED; b o = 0; b a = 0, aEA

Links to label :A=0

Dummy arc : a = (l,], in) with l=O,I=O, m=m(p); uli=O

Go to step 4.
Step 1 - Choice of arc to label
if 1\=0 then STOP.
Choose a=(l,], m) of A such that u li ::;; u a for all aEA.
Arc a receives a permanent label: A =A - {a}.
If J is a tranfer node, go to step 3; if j is a regular node, go to
step 4; otherwise continue.
Step 2 - Test of "head" node J (for destination node)
If u li < uJ then uJ= u li ; bJ= a.
Return to step 1.
Step 3 - Scan of successors with transfers
For each a = (i,j,m) such that i=Jand mEm(p) do:
if there is a transfer t= (a, a) do:
if u li + c t + c a < u a then u a = u li + c t + c a ; b a = a; A=A u {a}
otherwise, if m=m do:
if u li + ca < u a then u a = u a + ca ; b a = a; A=A u {a}
Return to step 1.
Step 4 - Scan of successors without transfers
For each a=(i,j, m) such that i=J and m=m do:
if u li + ca < u a then u a = u li + ca ; b a = a, A=A u {a}
Return to step 1.
Several remarks concerning this shortest path algorithm are in
order. Normally, each arc corresponds to only one mode. The dummy
(connector) arc that is incident to the origin node 0, has as its mode
the set m (p) of permitted modes. This is done so that the first time that
step 4 is carried out, all the arcs that leave ° belong to the
subnetwork. (This may be easily implemented by using an
appropriate bit pattern to represent the permitted modes on a link
 174

and by using only one word in the computer implementation of the

algorithm.) Thus, the first time that step 4 is executed, the test m=m is
mE m = m (p). In step 3, the arcs are scanned in increasing order;
therefore it is advantageous that the transfer of the type (a,.) are
sortcfd in increasing order as well. The arcs that belong to the
"forward star" of node i are sorted by mode in the arc table; thus an
efficient test may preclude the scan of all the successor links in step
4. The set A of labeled links is kept in the form of a binary heap,
which makes it trivial to find the link a that is the next to be labelled.
We examine next the complexity of this shortest path algorithm. The
following table shows the complexity of every step of the algorithm
and the number of times that it is executed.

step complexity # times

0 o (n N + nA ) 1

1 o (In n A ) nA

2 o (1) nN

3 o (~m (p )) nT

4 o (~m (p )) nN - n T

The complexity of the entire algorithm for one ongm node is then
o (n A In nA + 11 m (p) n N) where 11 is the average number of nodes
connected to the current node by arcs leaving the node; since the
first term dominates the second term in the parentheses, the
complexity is then 0 (n A In n A). As the shortest path algorithm must
be applied for each origin and for each subset of modes m (P) EM (p), if
10 I is the number of origin nodes and 1M (p)1 is the number of mode
subsets in a given problem then the complexity of the shortest path
 175

computations at each iteration of the solution algorithm proposed in

section 4 is O(npIM(p)IIOI nA In nA).

8. COMPUTATIONAL RESULTS

We first present in this section computational results obtained on a

small network, which permits the comparison of the Gauss-Seidel -
Linear Approximation algorithm (a) with the Linear Approximation
Algorithm (b).
The test network consists of 5 origins, 5 destinations, 19 regular
nodes, 116 links, and 226 transfers. Seven modes are permitted on the
links of this network. The following test problems were constructed.
1: A single product is transported on the network and all modes are
permitted. There is one origin/destination matrix. In this case (a)
and (b) are equivalent as can be seen in Figure 6. The slight
difference in the computational time is that in (a) the gap is
recomputed at the end of a major cycle, whereas in (b) this gap is
available automatically.
2: Three products are assigned to the network, where two products
are permitted on all modes and the third is restricted to a subset of
three modes. The demands of the three products are given by one
matrix. In this case algorithm (a) is slightly more efficient than
(b), as evidenced by Figure 7.
3: Five products are assigned to the network but only two may be
transported by all the modes. The demand for the first product is
given by three origin/destination matrices, each for different
subsets of modes. Similarly, the demand for the second product is
di vided into two matrices. Figure 8 shows that the performance of
algorithm (a) is very good.
4: The same five products of the previous test problem and the same
origin/destination matrices are assigned to the network with the
 176

difference that all the modes are permitted. In addition, the

generalized cost is the weighted sum of three costs (operation,
delay, and energy), whereas in the previous problems, only the
delay cost was considered. This has, as a consequence, the tripling
of the evaluation time of the unit cost functions, which, for
problems of this size, represent the largest part of the
computational time. The results are shown in Figure 9.
We note that in all cases where there is more than one product
algorithm (a) is more efficient than algorithm (b) both in terms of
the number of iterations and the computational time (we note here
that these results were obtained on an MC 68000 microcomputer not
equipped with a floating point accelerator). Since algorithm (a)
requires less central memory (RAM) than algorithm (b) it is well
suited for problems of larger size.
We conclude this section by giving the computational results
obtained on the network that represents the national freight
transportation network of Brazil. This network consists of 211 origins
and destinations, 1234 regular nodes, 4957 links and, 5718 transfers.
Six products (cement and steel products, iron one, fertilizer and coal,
soya oil, soya grain, and all others) are assigned and 10 modes are
permitted on the links of ths network. Only the delay cost was
considered. The test was carried out on a SUN/3 work station (MC 68020
equipped with DC 68881 floating point accelerator operating at 16.7
Mhz).
Figures 10 and 11 show the decrease of the objective function vs the
number of iterations and the total computation time respectively.
Figures 12 and 13 show the decrease of the relative gap vs the number
of iterations and the total computation time respectively.
While the computational time per iteration appears to be high,
approximately 80% of the time of an iteration is spent on computing
the marginal costs and the gap. This is due to our choice of making
the code "user friendly" and require the user to enter the cost
 177

functions directly and not impose on time the calculation of the

analytical form of the cost functions.

9. CONCLUSIONS

We have developed a multi mode multiproduct network assignment

model for strategic planning of freight flows, that permits the
modeling of national and regional freight transportation networks.
The multiproduct aspects of the model are exploited in the solution
procedure, which is a Gauss-Seidel Linear Approximation Method. The
computational results obtained demonstrate that the method is
applicable to large multi modal transportation networks.
obi. fct. obj. fct.

26000 26000

Gauu- Seidel Gauss-Seide I

Fronk· Wol fe Fronk-Wolfe

25900 25900

,%IlOP
._'_._'_0_,_,_._,-,_,_._0_,_,_,-,_._,-,- IO/ollap
,-,-,-,-,_._'_0_0_,_,_,-,-,-,_. __ ._,-,
25800 25800 -i

25700 25700 -.....J

00

O.l%IlOP
._._._._._.-.-
25600 25600
BLB I ._.-.-._-
_._._.~.I%lIap
BL8II---------------

25500;1-.--,-.--,--.--.--.--.-r--, 25!500 il--.--,---r---,r--,----,r--.--~--

o 2 3 4 5 6 7 8 9 10 o 100 200 300 400

ITERATIONS CPU-sec

Figure 6: Problem 1
obj. tel. obj.tel.

Gauss-Seidel Gauss- Seidel

72800 72800
Frank-Wolfe Frank- Wolfe

i
~
72300 72300

I.%~~_. IO/ogap
\
._._.- • .1.i
-...J
~ CD
;
:
71800 ..... n800 ...

O.I%OOp ~ •• O.I%gap ~ -
._0_._._._._._._._._._.- ._._._._.-._._._._._._.
BLB j B~~~----------------------------
71300 I I I I I 71300 I"""" ' I " " " " ' I " " " ' " I" 'i"'" i
o 2 3 4 5 6 7 8 9 10 o 10 20 30 40
ITERATIONS CPU-min.

Figure 7: Problem 2
obj. fct. abj:'cf.

17!5000 175000
,
170000 Gauss-Seidel 170000 Gauss-Seide.

Frank-Wolfe Fronk-Wolfe
165000 165000
\
\
I
160000 160000

155000 155000

150000 1!50000

.45000 145000
......
())

\ o
140000 140000
\
.35000 135000 ......
..".
5°'qJlap 50!. <lOP ••••••• •__
130000 ._.":.-J.' >.::.::::......-._.-
._._._._. .......... . 130000 ._._._.,,! . c.;;._._._._._._ ...-:. ...... .

125000 125000
BlB BlB
120000 120000
0 2345678910 0 60 120
INTERATIONS CPU-min.

Figure 8: Problem 3
obj.fcl. obj.fct.

Gouss- Seidel Gou•• - Seidel

1230 1230
Fronk - Wolfe Frank-Waif e

1180 1180

1130 1130

1080

... ... co
1030
.........................
..........
980 980

93O-L~.!'! .i.'!L. _. _. _. _. _._. _. _. _. _._ 930-U?j{Q..JI!lL._._._._._._._._._._._

880+1--.--,r--.--r-~--~_.--.--,r-~ 880+1-----r----r----r----~--~----,

o 2345678910 o 2 3 4 5 6
ITERATIONS CPU-h.

Figure 9: Problem 4
 182

Total cast (xIOOO)

100

90

80

70 6 products
60

50

40
BLB
60

20

10

0
0 2 3 4 5 6 T 8 9 10
ITERATIONS

Figure 10

Total COlt (x 1000)

100

90

80

70 6 products

60

50

40
SLB ~-------------==:~=======================
30

20

10

o 2 3 4 5 6 T 8 9 10 II 12 13 14 15 16
CPU-time (hrs.)

Figure 11
 183

ReI. oap (%l

100

90

80

70 6 product s

60

50

40

30

20

10

0 /0
2 3 4 5 6 7 8 9
0
ITERATI ONS

Figure 12

ReI. qop (%l

100

90

80

70
6 produc ts
SO

50

40

30

20

10

0
4 5 6 7 8 9 10 II 12 13 14 15 16
0 2 3
CPU-tim e (hr.,)

Figure 13
 184

REFERENCES

Bronzini M.S. (1980), Evolution of a multimdal freight transportation

network model. Proceedings of the 21 st Annual Meeting
Transportation Research Forum 475 -4 85.
Casaletto J.J., Rice J.R. (1978), Smoothing and Estimation Derivates of
Equispaced Data. Applicable Analysis 8:143-152.
Crainic T.G., Florian M., Leal E. (1987), A model for the strategic
planning of freight transportation by rail. Publication #518
Centre de recherche sur les transports, Universite de
Montreal.
Florian M., Los M. (1982), A new look at static price equilibrium
models. Regional Science and Urban Economics 12:579-597.
Florian M. (1986), Nonlinear Cost Network Models in Transportation
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Frank M., Wolfe P. (1956), An Algorithm for Quadratic Programming.
Naval Research Logistics Quarterly 3:95-110.
Friesz T.L., Tobin R.L., Harker P.T. (1983), Predictive intercity freight
network models. Transportation Research 17 A:409-417.
Friesz T.L., Gottfried J.A., Morlok E.K. (1986), A sequential shipper-
carrier network model for predicting freight flows.
Transportation Science 20:80-91.
Guelat J. (1986a), Calcul des derivees (patielles) des fonctions de cout
dans Ie progiciel ST AN. Publication #535 Centre de
recherche sur les transports, University of Montreal.
Guelat J. (1986b), Une procedure de resolution du probleme
d'affectation multimode-multiproduct par decomposition sur
un espace produit. Publication #488 Centre de recherche sur
les transports, University of Montreal.
Jones P.S., Sharp G.P. (1979), Multi-mode intercity freight
transportation planning for underdeveloped regions.
Proceedings of the 20th Annual Meeting Transportation
Research Forum.
Kellison S.G. (1975), Fundamentals of numerical analysis. Richard D
Irwin Inc. Homewood Illinois.
Kresge D.T., Roberts P.O. (1971), System analysis and simulation
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vol. 2 Brookings Institute Washington D.C.
McGinnis L.F., Sharp G.P., Yu D.H.C. (1981), Procedures for multi-state,
multi-mode analysis: vol. IV. Transportation Modeling and
Analysis U.S. D.O.T. report no. DOT-OST-80050-17/V.N.
Potts R.B., Oliver R.M. (1972), Flows in Transportation Networks.
Academic Press NY.
Samuelson P.A. (1952), Spatial price equilibrium and linear
programming. American Economic Review 42:283-303.
 185

Sharp G.P. (1979), A multi-commodity intermodal transportation

model. Proceedings of the 20th Annual Meeting
Transportation Research Forum.
Spiess H. (1984), Contribution a la theorie et aux outils de planification
des reseaux de transports urbains. Ph.D. thesis Departement
d'Informatique et de Recherche operationnelle Universite de
Montreal Publication #382 Centre de recherche sur les
transports, University of Montreal.
Takayama T., Judge G.G. (1964), Equilibrium among spatially separated
markets: a reformulation. Econometrica 32:510-524.
Takayama T., Judge G.G. (1970), Alternative spatial price equilibrium
models. Journal of Regional Sceince 10:1-12.
Zangwill W.I. (1969), Nonlinear programming - a unified approach.
Prentice Hall Englewood Cliffs NJ.
 ESTIMATION OF INTERREGIONAL FREIGHT FLOWS USING
INPUT/OUTPUT ANALYSIS

Guy Picard
Centre de recherche sur les transports - Universite de Montreal- C.P.
6128, Succursale "A" - Montreal (Quebec) - Canada

Sang Nguyen
Centre de recherche sur les transports et Departement d'In/ormatique
et de Recherche operationnelle - Universite de Montreal- C.P. 6128,
Succursale "A" - Montreal (Quebec) - Canada

This paper describes the generation-distribution component of an

integrated freight transportation model for Canada. This component is
formulated as an optimization program with an entropy type objective
function and a set of input/output linear constraints which explicitly
take into account the existing regional and industrial interrelationships.
Salient features of the methodology used in the development of the
required data base for the model's calibration are discussed, and the
model's capability to measure the impact due to changes in tansportation
costs and/or final demands is illustrated.

1. INTRODUCTION

This paper is devoted to the presentation of the generation-

distribution component, TOMM-Dl, of an integrated freight
transportation model for Canada, called FRET2. FRET, which is mainly
based on works by Bigras, Hamelin, and Nguyen (1983), Los (1980),
Wilson (1970), and Leontief and Strout (1963), is composed of two
components: the first, TOMM-D, simulates the Canadian domestic
traffic of 64 commodity groups between 67 geographical zones, while
the second, FRETNET3, produces the modal split and the assignment of

1 TOMM-D stands for Transportation Oriented Multiregional Model-

Disaggregated Version
2 FRET stands for Forecasting Regional Economies and Transportation.
3 PRETNET stands for PRE Network.
 187

flow on the Canadian network.

The generation-distribution model TOMM-D is formulated as an
entropy type model including a set of iput/output constraints to
explicitly take into account the regional and industrial
interrelationships. As for the FRETNET model, its modal split
component is a Box-Cox logit model whereas its assignment model
remains to be defined and calibrated.
As the operational efficiency of a model depends largely on the
quality of the data used, we have also built a data base which may be
considered as the most complete freight flow data base in Canada. This
data base, resulting from a nontrivial fusion of the Canadian Institute
of Guided Ground Transport (C.I.G.G.T.) and Statistics Canada
Input/Output Division data bases, is composed mainly of
origin/destination matrices for 67 zones for each of the 64 commodity
groups for three transportation modes, namely trucking (for-hire
and private), rail, and shipping.
TOMM-D can be used to assess the impact on regional productions as
well as interregional flows due to variations in the final demands,
transportation costs, and import/export ratios.
The remainder of this paper is organized as follows. The next section
provides a review of existing generation and distribution models for
freight transportation. The formulation of TOMM-D is described in the
second section. Section three discusses the relationship between
transportation costs and freight demands and outlines the
methodology used to generate the trucking data. Finally, the last
section illustrates the capability of TOMM-D to measure changes in the
freight traffic due to variations in transportation costs and final
demands.
 188

2. A REVIEW OF EXISTING MODELS

The following review is not exhaustive, but covers the main streams
in freight transportation demand modelling, namely optimization,
empirical, and input/output modelling.
Linear programming models. Earlier linear programming models are
variants of the Hitchcock transportation model, which consist of
distributing freight flows between known supply and demand points
in a way that minimizes the total cost of transportation.
Although used in many applications (Mera (1971), Chrisholm and
O'Sullivan (1973), O'Sullivan and Ralston (1974), Baranov and Matlin
(1981», the linear programming approach is rather limited. Since in
addition to the maximization of the system transportation cost which
implies a state control over all shippers, the approach does not allow
cross flows (positive ij and ji flows) and thus cannot be applied to
nonhomogeneous commodities.
Spatial price equilibrium models. The spatial price equilibrium model
(S.P.E.M.) adds more realism to the preceding one by allowing elastic
demands and supplies. The interregional flows as well as the level of
regional production, consumption, and market prices are determined
simultaneously.
A spatial price equilibrium for a given product is established when:
i) the demand price in the market equals the delivered price (supply
price and transportation cost) of the commodity for all positive
interregional flows; and (ii) if the demand price is lesser or equal to
the delivered price no shipment may occur. This state of equilibrium
may be expressed as follows:

II~ + c~. ~ p~ 1·f x··k equals 0

I IJ J 'J
= p.k if x··
k is greater than 0
J 'J
l:
J
~ =rJc
'J ~
for all i, k

l:
,
Jf.IJ = JfI for all i, k
 189

~. ~ 0 for all i, j, k
lJ

rr~l = Sik(Of) for all i, k

p~
J
= Dj k (1k ) for all j, k

where

Of is the amount of commodity k produced at i,

t1k is the amount of commodity k demanded at j,

:0.lJ is the interregional flow of commodity k from i to j,

~k is the supply price of commodity k in region i,

st(Ol) is the inverse supply function of commodity k in region i,

p~ is the demand price of commodity k in region j,

J
D~(d~) is the inverse demand function of commodity k in region j,
J J
dlJ is the transportation cost of commodity k from i to j.

This equilibrium model is a multicommodity version of Samuleson's

(1952) original model.
Takayama and Judge (1964, 1971), using linear supply and demand
functions, were apparently the first to propose an equivalent
quadratic programming formulation to the above equilibrium
conditions. Since then, several empirical applications of the quadratic
programming model have been made. For example, Schmitz and
Bawden (1973) studied the international trade of wheat and the impact
of changes in rail freight tariff rates on Canadian wheat exports were
studied by Nagy et al. (1980).
More recently, MacKinnon (1975, 1976) studied the price
equilibrium model from an algorithmic point of view; Hazell and
Scandizzo (1974, 1977) introduced an interesting stochastic supply
model for a single region, and Florian and Los (1981) considered
non-linear tansportation costs and formulated the single product
model as a convex program and the multi commodity model as a
 190

variational inequality problem. This line of approach was also

followed by Tobin and Friesz (1983). Finally, Thore (1982) introduced
an income measure into the price equilibrium model to deal with the
case where the national economy is dominated by one or several
products.
Similar to the linear programming model, the S.P.E.M. does not allow
cross flows and can only be used for homogeneous commodities, such
as agricultural products. For the modelization of a complete economy,
this approach seems unsuitable.
Entropy models. The concept of entropy, which is familiar to
information and thermodynamic theory, provides a useful framework
to analyze an interesting class of distribution models. In
transportation modelling, a practical way to define this concept is by
using the proportion P ij' obtained by dividing the flow f ij between
zones i and j, by the sum ~ ~ fij" The values P ij may be interpreted as
l J
the joint probability to have a flow between i and j, and the entropy
of this system is:

H=-L. L. p .. /'nP ..
lJ lj"
l J

The entropy may be considered as a measure of uncertainty, and

entropy distribution models are based on the principle that the
distribution with the highest level of incertainty is the one which
minimizes estimation bias.
The most widely used entropy model is the well-known gravity
model. Mera (1971), Chrisholm and O'Sullivan (1973), O'Sullivan and
Ralston (1974), Nijkamp (1975), and Pitfield (1978) have applied both
linear programming and gravity models to freight transportation.
There is no conclusive evidence of the superiority of either one of the
models, although, a positive correlation between the efficiency of the
LP model and the degree of homogeneity of the commodities
considered has been clearly established.
 191

More recently, Pitfield (1978), Vermot-Desroches (1979), and Peschel

(1980) questioned the ability of these models to simulate freight flows
adequately.
Regression models. The regression models express the transportation
demand (for a particular mode or for all modes) between any pair of
regions as a function of a variety of determinants, such as:
- level of production of the origin zone;
- level of consumption of the destination zone;
- distance and/or transportation costs between zones; etc.
A good example of this kind of model is (Canadian Transportation
Commission (1975»:

T cijt = exp (~ (J.ij D ij) exp ( ~ ~ij D ij t)

IJ IJ

1h' 1'k' 1J.

II D, Eh't' II D~ Ek 9 II E~t t;"t
h,i ' I kJ J :.II J. r. 'J

where:
Tcijt is the flow of commodity c from origin i to destination j at
time t,
Dij is a dummy variable that allows isolation of a separate
intercept (J. ij and a separate time trend ~ i / for each link from i
to j,
E hit is the h th structural push variable of region at time t,
Elejt is the kth structural pull variable of region j at time t,
E J.t is the 1. th common structural variable for all regions,
Di , Dj are dummy variables that allow E hit and Elejt to have different
effects on the regions. These effects are reflected by the
different coefficients 'Yhi' 'Ykj'
In contrast to previous models, the present approach is an attempt to
take into account the interregional and interindustrial relations
which govern freight flows. For instance, stell production is used as a
pull variable in iron ore flow estimation. However, this model cannot
 192

take into account all the interindustrial relations within a whole

economy. A better way to deal with these relations is to use
input/output analysis, as we will see in the next section.
Input/ouput models. Some of the first interregional freight flow
models which take into account the economic activities of the region
are simply spatial disaggregation variants of the Leontief national
input/output economic model. For example, in !sard's (1951) model the
basic structural equations are as follows:

J l -I- l: :x!fh
}
l} l:
}
k
Yij for all k, h,

x~~
l} b~"
I} z~} for all h, k, i, j

where zk.l is the total output of industry k in region i, is the trans- Xir
action flow from industry k in region to industry h in region j,
while Yijk represents the part of the final-demand sector for the
commodity k in region j fulfilled by the output of region i. Finally,
b1j is the spatial input/output coefficient. Note the assumption of a
one-to- one correspondance between industrial sectors and goods or
services.
Collecting the interindustry interregional flow data for the estima-
tion of the spatial input/output coefficients (b kh
ij ) , either by direct
observation or by sampling freight movements, is definitely
prohibitive. Consequently, one must resort to some approximation
method which may involve rather stringent assumptions. For
example, Moses (1955) and Chenery et al. (1953) assumed a constant
ratio between the quantity of a certain commodity which is imported
from another region and the quantity
provided internally for
production to calculate spatial trade coefficients 1. The stability of the
interregional trade structure, embedded in the Moses-Chenery type
models, implies the insensitivity of trade flows to modifications in the
kh
1 The spatial input-output coefficient b ij is commonly defined as the product
of a technical and a trade coefficient.
 193

transportation system or the tariff structure.

A more elegant method for dealing with this problem was suggested
by Leontieff-Strout (1963). It overcomes the rigidity of the trade
coefficients by assuming that the ultimate destination and origin of
the goods are irrelevant to producers and consumers who respond
only to prices. They further suggested that interregional trade flows
have a gravity functional form. Wilson (1970) later showed that
Leontief-Strout's model is an instance of the following more general
entropy model:

Min l:l l: L x~
] 7i lJ
I.n :A.lJ

subject to

for all k, i

for all k

where

rl.lj is the trade flow of commodity k between i and j,

afh is the regional technical input-output coefficient,

c1j is a measure of the transportation cost for shipping one unit

of commodity k from ito j,
yf is the final demand of commodity k at i,

c!' is the observed base year total cost of transportation for

commodity k.

Following the Leontief-Strout and Wilson approach, Los (1980)

formulated an interregional freight flow model for Canada. This
model uses a rectangular input/output coefficient matrix and the
following objective function:
Max {y l; s~. x~. - k
x·· I. n (x k.. /z k.. ) }
k ~k ~ ~ lJ lJ I]
(xij)
 194

where Si~ is a measure of the profit obtained in producing one dollar

of output in region j, zt
is an observed base year flow and y is a cali-
bration parameter. The second term of the objective function is the
Kullback-Lieber (1965) "discriminatory information function" used
mainly in the analysis of contingency tables in statistics, and
introduced into transportation modelling by Snickars and Weibull
(1977). In Los' model, this "information" term is used to model the
inertia effect in transport and economic systems.
To overcome a calibration problem encountered in the application
of Los' model to the Canadian Provinces, Brigas et al. (1983) proposed
the use of the following objective function:

Min l:l:L x~
I ) 1C -1)
Ln (x~ Iz~. )
I) I)

where

and e;.j is a measure of the transportation cost, E is a vector of other

explanatory variables and P a vector of parameters. The calibration of
it is achieved using regression tecniques and the observes base year
flows zi .
TOMM-D, an improved and desaggregated version of this last model,
will now be presented.

3. TOMM.D, A GENERATION·DISTRIBUTION MODEL

This section presents the formulation of the model as well as the

methodology used to calculate the input/output coefficients.
Model formulation. The formulation of the model is the following:
 195

R R ~..
l: I. I. x~ I.n
__ x'f.
lJ _ [1]
l= 1 j,;} k Ell lJ k lJ
z lJ..

R R
s.t. l: ~..Jl
J=l
= y.
Ilel 1
a.k~
l
l: :x!J. + "'~•
J=l lJ
ke/1, i=l, ... , R [2]

~j ~ 0 ke/ 1, ij=l, ... ,R [3]

where:
R is the number of geographical zones (for the Canadian
application, R=67),
K is the number of commodities and services analyzed (for the
Canadian application K =88 and represents 64 commodities,
called tradeable goods, and 24 services, called non-tradeable
goods),
11 is the set of indexes of the tradeable commodities (\/ 1\=64),
12 is the set of indexes of the nontradeable commodities (\/ 1 \ =24),
x'f.lJ is the flow of tradeable commodity k between region i and j,

a.~h is the total domestic need (direct and induced) for commodity k
per unit of output of commodity h in region i,
vf is the global final demand for commodity k in region i,

if; is a pre specified a priori value for the flow x~

Objective function. Expression [1], which is a measure of the distance

between two distributions, provides a solution that tends toward the
prespecified flows ~ . These flows are indirectly obtained from a
regression model which takes into account the following attributes:

- interregional costs;
- interregional distances;
- production level of region of origin;
- consumption level of region of destination.
When the scenario being analyzed has no measurable direct impact
 196

on these four variables, the a priori values used are simply the
observed flows of the base year. On the other hand, if a scenario
induces a modification of anyone of these attributes, then the a priori
values 1;'
are determined as follows:

k [4]
~j

where:

~.
lJ
is the observed flow of tradeable commodity k between region
i and j during the base year,
~k is a set of coefficients of a regression model for commodity k;

this regression is of the form:

[5]

where:

zt is the estimated value of the flow zt

CTK/j is the transportation cost per km of one unit of commodity k
between zone i and j during the base year,
,
pfc is the net production of commodity k during the base year
within region i,
A~ is the net consumption of commodity k during the base year
J
within region j,
D·.
IJ
is the distance between zone i and j,
Ak is the set of relative variations, with respect to the base year,
of socioeconomic variables included in the regression model
[5] for commodity k.
As the estimation of the observed flows is made with a log-linear
functional form, the correction factor f(·) takes the following form:
 197

where v is the subscript associated with the four variables used in

model [5].
Thus, following either a transportation cost modification on one or
more links of the network or a regional production variation, the
function f (~k, L\ k) allows correction of the observed flows and
produces a priori flows zt
which reflect these modifications.Examples
of such functions are given in section 4.
Input/output constraints. Although the model takes commodities and
services into account, it does not explicitly consider the service flows.
This is due to the assumption that:
nontradeable commodities (personal services and retail services)
are produced and consumed within the same region.
In this case, it has been shown that the production of services can be
linearly related to the production of tradeable goods, since Leontief's
production functions are assumed.
In constraints [2], the structural coefficients (l ~h are calculated in a
way that explicitly takes into account the link between tradeable and
nontradeable commodities. The left-hand side of each constraints
r.epresents all the flows of tradeable commodity k arriving in region
i, while the right-hand side represents the different uses of the
commodity k in that region. On the one hand, there is an intermediate
demand for commodity k needed to produce all tradeable commodities
shipped to the domestic market from region i. This demand can be
direct or induced by the production of nontradeable commodities. On
the other hand, there is the global final demand, 'o/f, which consists
of three parts:

1) the domestic needs for commodity k in region i generated by the

production which is destined for export abroad.
2) the domestic needs for commodity k induced by the final demand
for nontradeable commodities.
3) the domestic needs for commodity k to fulfill the final demand of
commodity k.
 198

Calculation of input/output coefficients. The

input/output coefficients
afh used in the model are computed from the 67 basic regiona input/
output matrices, based on a rectangular input/output accounting
framework.
Let ~nk denote the production of commodity or service k by sector n

,
in region i, and U~n is the quantity of commodity or service k used by
sector n in region i. Then the input/output coefficients a~h are
I

defined as:

,
a lfh =
i=l, ... ,R
k,h=l, ... ,K

where:
v:nh i =1, ... ,R
d'fh =--'- n =1, ... ,N
h=l, ... ,K
N
l: ~h
n=l '

bTfh
,
uJcn i =1, ... ,R
n=l, ... ,N
I
k =1, ... ,K

The coefficient dih is the market share of sector n in the production

of commodity k (kelt U 12 ) in region i, whereas the term k is a br
technical coefficient which indicates the amount of commodity or
service k that is used per unit of output of sector n in zone i, then the
coefficients a~ are computed from the a~h (Los (1980».

Compatibility conditions of I/O data and OlD matrices. The following

conditions must be satisfied to ensure the compatibility of the I/O
coefficients and the flow matrices.
R N
k + ~k = l: vf'k - (INV)~ i =1, ... ,R [6]
.l: Zoo
'J I
J=t n=t kelt
R N
.l: 1;.
1=1 lJ + Ml =
n!1
aJ kn +t1 j=l, ... ,R
kelt
[7]
 199

On the one hand, the domestic flow zt

of commodity k (kEI 1 ) from
region i and the export Xf,
mus be equal to the production k of V7
commodi ty k by each of the industrial sectors in region adjusted to
take into account variations in stocks (INV)f (equation [6]).

On the other hand, the domestic flow Z~j arriving in region j and
the import M t
must be equal to the intermediate uses djn of the N
industrial sectors and the direct final demand Ll j (equation [7]).
Recall that export as well as import coefficients are exogenous to the
model.

4. THE DATA BASE

This section describes the data required by the regression model [5]
as well as some results of the estimation of these regressions.
Interzonal flows. First, the flows by transportation mode for the 64
commodities were estimated and then aggregated.
The C.I.G.G.T. data bank provided the interregional flows between
the 67 geographical zones by truck, rail, and ship. The rail and ship
flows were acceptable, however, the truck flows showed many
inconsistencies. Firstly, these flows, obtained from a survey made by
Statistics Canada on only one percent of all movements, were not
sufficiently reliable at the regional level considered. Secondly, the
survey only includes the for-hire trucking and not the private
trucking. Since Canadian private trucking is at least as important as
the for-hire trucking, this is a rather important oversight. It was
necessary to combine several sources of data to construct better OlD
flow matrices for the overall trucking industry.
In order to obtain the truck flows by commodity, the first step
consisted of subtracting the provincial ship and rail flows given by
the C.I.G.G.T. from the provincial global flows given by the I/O
 200

division of Statistics Canada. Another difficulty encountered was that

the C.I.G.G.T.'s data are in tons while Statistics Canada's data are in
dollars; therefore, the value per ton for each of the 64 commodities
had to be estimated.
The second step consisted of distributing these provincial flows into
flows between the 67 zones. To do this, the share of the provincial
production and consumption within each zone for every commodity
had to be calculated, mainly using the 1979 census and the Canadian
Mineral Yearbook.
Next, the flows leaving and entering each zone by truck (except for
a few commodities mainly forwarded by pipeline and floatation) was
obtained as a residual value of the flows by all modes of transportation
and that made by ship and rail. The interzonal truck flows were then
obtained by solving the following program for each of the 64
commodi ties:
TlJ..
Min I I T lJ.. I.n - - - [8]
j T ..
lJ

subject to

~ TlJ.. =0·l i =1, ... ,67 [9]

J
~ TlJ.. =D·J j =1, ... ,67 [10]
l

L I T .. = Tl', I,J =1, ... ,8 [11]

iEl jeJ lJ
Tij~ 0 i,j =1, ... ,67 [12]

where:
Tij is the freight flow forwarded by truck from zone i to j,
Tij is the C.I.G.G.T. freight flow forwarded by truck from zone i to
j,
t
TIJ is the freight flow forwarded by truck from province I to J,
O·l is the difference between total production of zone and
freight flows shipped by rail and boat from this zone,
D· is the difference between total consumption of zone j and
J
 201

freight flows arriving in j by rail and boat.

The for-hire truck flows were used as a priori values since it is
believed that these flows reflect, to a degree, the general structure of
the truck flow matrices.
These results cannot be validated directly, since data corresponding
to the desaggregation level used in this study do not exist. However, if
the mining products are not considered, then the total tonnage
forwarded by truck (for-hire and private) is about 200 million tons
and coincides with the value found in studies made by the Ontario and
Quebec transportation departments.
Interzonal transportation cost. The C.I.G.G.T.'s data base provides, for
each OlD pair, the average freight rate for every commodity for rail
and truck. Since it is very difficult to get transportation freight rates
for private trucking, the for-hire truck freight rate was used as a
proxy for the whole trucking industry transportation cost. There is
unfortunately no information on shipping rates. However, since for
domestic traffic shipping is not as widely used in Canada as the two
other modes, this omission is not important and the interzonal
transportation cost was calculated as the following weighted average
of truck and rail rates.

km
lCT.··
m l}
-----
~~l
l } m
CTKk = _ _ _ _ _ _ _ ___
ij
D··
l}
• p~l

where:

CTK'f
l}
is the transportation cost per km to forward one dollar! of
commodity k from zone i to j,

1 In TOMM-D, all flows are expressed in dollars.

 202

CT/Jm is the transportation freight rate per ton of commodity k

from zone i to i by transportation mode m (rail or truck),
z/jm is the flow of commodity k (in tons) by mode m from zone i
to j,
Dij is the distance by road between zone i and j,
PRf is the value per ton of the commodity k in zone i.

Note that in this formulation the weights associated with the freight
rate by rail and truck are the same for each OlD pair of a given
commodity. Such a weighting scheme, based on the overall traffic per
mode instead of the OlD flows by mode, has been adopted to provide an
expression for transportation costs which does not contain the
dependent variable zt despite the fact that it may be lead to less
realistic interzonal transportation costs.
k
Production and consumption variables. For the interregional flows Zij
(i:~:j) the net production and consumption are used, whereas for the
intraregional flows the gross values are used. Since the level of the
interregional flow k (i"# j) depends not only on the consumption of
z··
lJ
commodity k in region j and the production of this commodity in
region i, but also on the consumption of commodity k in i as well as
the production of commodity k in j.

Estimation results. For each commodity the following regression

model is used:

Since the geographical regions considered are not of the same size,
the presence of heteroskedasticity in the estimation of [13] must be
expected. Among all possible heteroskedasticity forms, the following
fairly general one has been chosen:

(qf)2 = E[(uiJ )2] = cr 2 (p/ • A f)'1.

A least squares estimates of the value a is obtained by replacing (cri j)2

by the estimates (e t) obtained from [13] in the following equation:
 203

In nearly 25 % of cases, the hypothesis H 0 : a. =0 is rejected, implying

the presence of heteroskedasticity. For each commodity, the model is
then transformed by dividing [13] by (Pt • ~l )<X!2 yelding:

In z.~ ~o In CTK~. In D ..
'J 'J 'J
- - - - - + ~1----- + ~2 - - - - -
(li k • Al )<X/2 (li k • Al )<X/2
In A~
J

The coefficients associated with the transportation cost and distance

variables are significatly different from zero (0,05 level test) for 80%
of the commodities analyzed. As for the production and attraction
variables, they are significantly different from zero in nearly 95% of
the cases. The mean value of the R 2 is 0,53, which is reasonable for
this type of study.
The results indicate that in general the relative impact of the
distance on flows is greater than the relative impact of transportation
costs. Indeed the mean' value of distance elasticities, given by the
coefficients ~ 2' is -0,98, whereas the mean transportation cost
elasticity is -0,65.

5. SCENARIO ANALYSIS

Two applications are now presented to illustrate the model's

capability to measure the impact of changes in the transportation
system or economic atributes. In the first scenario, the transportation
costs for every good originating from the province of Quebec are
 204

decreased by 20%. This allows evaluation of the impact of

transportation costs on regional production, and indicates how the 110
constraints alter the flows calculated with the regression model.
In the second scenario, the final demands for commodity #62
(personal goods) for every region within the province of Quebec are
increased by 10%. Although that this commodity only represents a
low share of the total tonnage carried in Canada, it nevertheless
represents nearly 10% of the value of all commodities transported.
Moreover, since any increase in personal income produces an
increase in the sale of personal goods, this scenario allows
investigation of the commercial interregional relationship in a key
sector.
Transportation cost modifications. The first step of this scenario
consists in determining new a priori values for interregional flows
whose transportation costs have been decreased. This is made in the
following way:

z~. = z~ • f(Ak /:1 k )

IJ IJ I-' ,

k k ~1
IJ • (1 + uCTK··
A
= z·· IJ ) '

The relative transportation cost variation, /:1 C T Kkij ,is equal to -0,2
for every commodity, whereas the value of the coefficient ~kl' which
represents the transportation cost elasticity, depends on the commodi-
ty analyzed. On the average, the value of ~1 is -0,65 for all
commodities.

The first modification produces a mean increase of 15,95% in the

flows leaving the province of Quebec.
The second step, which this time involves all the flows, is aimed at
finding values which respect the 110 constraints. It was noted that
several flows that increased in the first step of the method, now
decreased. The mean increase of the flows leaving the province of
 205

Quebec is only 8% after the second step. 94% of all other flows
decreased, and the average decrease was 1,9%.
These results indicate fairly well that a conventional regression
demand model that does not take I/O constraints into account
overstimates the impact of transportation costs on transportation
Table 1

I commodity commodity absolute I relative

I number name variation ($) I variation (%)

62 personal goods 277 524 000,00 I 2,24

I
31 other animal 35 542 000,00 I 1,31
and vegetable I
manufactured I
material I
I
64 manufactured 16 586 000,00 I 0,08
misc. goods I
I
41 chemical pro- 10 876 000,00 I 0,32
ducts I
I
48 iron, steel and 6 787 000,00 I 0,10
alloys I
I
40 chemicals 6 569 000,00 I 0,29
I
63 containers 4 869 000,00 I 0,14
(not COFC) I
I
61 other manu- 3 185 000,00 I 0,06
facturing I
equipment I
I

demand. Thus, the elasticities calculated by the regression model [5]

may be seen only as long run elasticities and those found after the
second step of the model, which are smaller, as rather short run
elasticities.
Final demand modifications. In this scenario, the final demand for
commodity #62 in Quebec is increased by 10%, which represents an
 206

increase of $394 336 047,00 (CDN). The domestic final demand increase
is, however, only $269 725 856,00 because 31 % of the Quebec final
demand is imported from abroad.
Table 1 shows the variations in Canadian production for commodity
#62 as well as for its major input sources.
On the whole, 54% of the global Canadian increase in production is
located in Quebec, while 39% is in the province of Ontario. However, if
commodity #62 is not considered, then the production of only a few
commodity groups (raw materials and pulp and paper) shows a larger
increase in Quebec than in Ontario.
At a more desaggregated spatial level, the scenario produces a large
impact on the production of many Ontarian zones, whereas for the
province of Quebec, only the Montreal region shows a strong increase
in its production.
These results reflect the low industrial integration level of Quebec's
industries in comparison with Ontario's industries as well as the high
integration level of Ontario's urban systems. Although these facts
were already well-known on a qualitative basis, TOMM-D adds a
quantitative dimension to the understanding of regional problems.

6. CONCLUSION

This paper discusses the formulation and calibration of TOMM-D, a

generation-distribution model, which successfully blends the
maximum entropy distribution approach with input/output
techniques. Moreover, the model does not use fixed market share
coefficients as in conventional input/output analysis, but allows
variations of market shares induced by modification of transportation
costs.
The model's capacity to simulate the Canadian regional and
industrial interrelationships is illustrated with scenarios related to
 207

changes in transportation costs and final demands.

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 MATHEMATICAL MODELS IN LOGISTIC SYSTEM DESIGN

Lucio Bianco

Istituto di Analisi dei Sistemi ed Informatica and Progetto Finalizzato

Trasporti - Consiglio Nazionale delle Ricerche - Viale Manzoni 30,
00185 Roma, Italy

The major goal of this paper is to underline the contribution of computer

technology and quantitative methods to the development of logistics.
After recalling the basic concepts of physical distribution and their
evolution, the structure of a logistic system and the links with the
business functions are illustrated. Then, the fundamental mathematical
models, both for the logistic network design and for some key decision
problems in logistic system design, are analyzed and discussed.

1. INTRODUCTION

One of the main factors which contributed to the rapid evolution of

logistics was the advent of a sophisticated computer technology
together with a quantitative analysis capability.
Since 1970, the discipline has witnessed a significant development of
computerized quantitative tools of sufficient power to supply
penetrating analysis of even the most complex logistic systems.
The early 1970s, in fact, was one of the most prolific periods of
research and development in computer models for logistic system
design and control. This trend, as documented in detail by a number of
authors, was even more dramatic in the latter part of the 1970s. The
fundamental reason for this trend is that every firm that ships a
variety of products from several plants, through a number of
warehouses, to a widely dispersed clientele has a continuing need of
monitor and readjustement of the distribution system in response to
the changing conditions. So, to deal with such complexity, it is no
longer sufficient the use of traditional tools, but the need is to have
comprehensive computerized models. This doesn't imply that all
 211

logistics problems yield to quantitative analysis or that any logistics

problem yields completely to a quantitative approach. Rather,
quantitative techniques help to uncover alternative courses of action
that may not have been obvious or to evaluate more effectively and
efficiently alternatives that could not be considered without the aid of
quantitative tools. These observations justify the wide literature
devoted to the application of quantitative analysis to logistic system
design and management.
In this paper, in particular in the next four sections, the
distribution concepts, the structure of a logistic system and the links
with the fundamental business functions are analyzed.
In the successive sections emphasis is given to mathematical models
for logistic system design. More in detail, after a review of models
utilized in logistic network design, the main decision areas in logistic
system design are examined and the relative fundamental
quantitative approaches are illustrated.

2_PHYSICAL DISTRIBUTION CONCEPT

In their simplest form, all economic activities can be described as

an interaction between two sectors, a business sector and a market
sector, to exchange products that can be either physical goods or
services. The business sector procures goods and services from supply
markets, transforms them, and distributes the resulting goods and
services to demand markets. Therefore, we can depict economic
activities as a flow of goods and services represented in Fig. 1, where
it is shown also the use of surplus demand, not used for consumption,
to generate new supply. Moreover, it can be observed that both
procurement and distribution phases involve the management of
physical resources and then the concept of physical distribution.
Prior to 1960, management did not view the distribution mission of
 212

the firm as an integrated task. Instead, distribution was carried out in

a series of fragmented, uncoordinated movements of goods and
information. For example, customer order processing was frequently
the responsibility of the accounting function; traffic or
transportation management might be the responsibility of
marketing, while warehousing of raw materials and in-process goods
was typically the responsibility of manufacturing. Similar
fragmentation existed with respect to other activities which affected
the flow of goods into, through, and out of a business to its customers.
The result of this situation was a poor distribution performance and
a general inefficiency within individual firms.
During the 1960s a number of progressive firms began to consider
the potential of integrating distribution members into a unified
organizational whole for the purpose of planning operations and
control. The reasons of this interest was in the fact that production
technology was well advanced and marketing costs were steadily
increasing. In order to reduce costs and remain competitive in the
market place, it was necessary to look to one of the few areas that was
relatively untouched: the distribution of the product.
In most firms, in fact, the cost of distribution represents from 15 to
45 percent of total costs. Some of the costs are incurred in inventory,
some in materials handling, some in transportation, others in
warehousing and storage, and so on.
It was seen, therefore, that new focus upon efficiency in
distribution was a logical outgrowth of business environment. That is,
the distribution area was one of the last remaining frontiers for
significant cost savings. The principal method of securing such cost
reduction opportunity was to view the distribution as an integrated
task rather than the traditional fragmented task taking place in many
parts of the firm.
This trend accelerated during the 1970s and led to an integrated
distribution system.
 213

INVESTMENT
SUPPLY DEMAND

PHYSICAL FLOW
- - - FINANCIAL FLOW

Figure 1: Economic Activities Diagram

3. INTEGRATED DISTRIBUTION MANAGEMENT

One of the initial problems encountered when the concept of

integrated distribution is discussed is that of definition. No single
model of distribution systems exists that is applicable to all firms. The
distribution function in fact, like other functions, has evolved within
the framework of the management philosophy and available
resources of individual firms. However, La Londe and others (1985)
underline that three general approaches to integrated distribution
management have emerged. They are: (1) physical distribution
management, (2) materials management, and (3) business logistics.
The distinctions between these three approaches are illustrated in
Fig. 2.
 MATERIALS MANAGEMENT PHYSICAL DISTRIBUTION MANAGEMENT:l

COMPANY
I ~
I i ---.......

• RAW MATERIALS GOODS I

IN I FINISHED
• SUB-ASSEMBLIES FIELD
• MANUFACTURED PARTS PROCESS I GOODS INVENTORY
I
• PACKING MATERIALS INVENTORY I INVENTORY
rv
~

.j:>.

' - - - - - - - - - - - - - - - BUSINESS LOGISTICS - - - - - - - - - - - - - - '

Figure 2: Alternative Orientation to Integrated Distribution

Management
 215

Physical distribution is basically concerned with the integration of

finished goods distribution. That is, physical distribution is the
moving of finished products from the end of a production line to
customers.
The materials management approach, on the other hand, focuses on
the acquisition of raw materials, supplies, and goods-in-process
inventory.
The third area, and the most comprehensive approach to integrated
distribution systems, is business logistics.
This term comes from the military concept of logistics, but its
meaning is not as broad.
La Londe and others (1970) define business logistics as "a total
approach to the management of all activities involved in physically
acquiring, moving, and storing raw materials, in-process inventory,
and finished goods inventory from point of origin to point of use or
consumption" .
Another definition is given by Heskett and others (1973) for which
business logistics refers to "the management of all activities which
facilitate movement and coordination of supply and demand in the
creation of time and place utility on goods".
With respect to these points of view the term logistics is often used
interchangeably with distribution, being the terminology of
distribution or logistics typically depending on a specific company or
a specific author. What is more important than semantics is an
understanding of the concept that integrated distribution is, as
stressed by La Londe and others (1970), an approach to the
distribution mission whereby two or more of the functions involved
in moving goods from source to user are integrated and viewed as a
system for purporses of managerial planning implementation, and
control. In fact, the linkages that exist among the components of
physical distribution (see Fig. 3) make the system approach
particularly applicable. So, a change or modification in one
 216

component, such as packaging, has a link with and effect upon other
components (transportation, storage and material handling). Each
may impinge upon another; but to make the management effort
effective they must be linked and worked together in a system that
maximizes corporate objectives.
The result of these evolutionary trends is a revolution in the
organization of the companies and the emergence of logistics as a top
management function.

PHYSICAL
DISTRIBUTION

(SUPPORTING
COM PUTER ANDI
COMMUNICATIONS

MATERIAL
HANDLING

Figure 3: Components of a Physical Distribution System

4. THE STRUCTURE OF A LOGISTIC SYSTEM

As we have previously said, an organization can be conceptually

described as an entity that procures goods and services from supply
markets, converts them by production and logistic processes at
 217

production and logistic facilities, and distributes them to demand

market.
The physical means for accomplishing these three steps constitute
the organization's logistic system. Thus, as Bender (1983, 1985)
suggests, a company's logistic system can be viewed as the bridge
between its supply markets and its demand markets.
Analyzing the structure of this bridge, we find that the logistic
system can be described as a network which nodes are stationary
inventories with variable levels such as plants and warehouses, and
which links are transportation operations, or flowing inventories
with constant, intermittent levels. The physical functioning of the
network can in turn be viewed as a cascade of material movements
between inventory systems that replenish each other in sequence,
triggered by demand markets.
Fig. 4 illustrates the material flows between markets, through
facilities. The behaviour of the logistic system can be briefly
described as follows:
1. When the inventory systems at the demand markets need
replenishment, they trigger reorder signals: purchase or
replenishment orders.
2. The reorder signals are received at one or more of the other
inventories in the' system: logistic facilities (distribution centers,
warehouses, branches), plants, or supply markets.
3. The reorder signals trigger material movements that replenish
the demand market inventory systems, while at the same time,
facility inventories are reduced until depletion.
4. The material movement from one inventory to another takes
place through a transportation system that constitutes a series of
in-transit or flowing inventories.
5. The depleted inventories at production and logistic facilities in
turn trigger periodic reorder signals on the higher-level
inventories to replenish them, and so on.
 218

SUPPLY MARKETS

n
.- PRODUCTION FACILITIES

z> z
Q
o
+
~
::l
LOGISTIC FACILITIES .... en
ct:
~
en
a

DEMAND MARKETS --------_ .... __ .....

Figure 4: Schematic Diagram of a Logistic System

It is helpful to describe the logistic system in terms of a

concatenation of inventory systems, because this highlights the need
to consider the impact of stationary as well as flowing inventories in
evaluating the configuration of a logistic system. It also highlights
the need to relate closely the company's logistic system with its
customer's and supplier's inventory systems, to ensure its maximum
effecti veness.
We can illustrate the material flow in a logistic system around its
major functions.
Fig. 5 shows that the logistic system constitutes the physical
 219

interface between supply and demand markets. There are two points
worth noting in this figure.
a) Material flow between the logistic system and the markets it
connects takes place in both directions, because of returns and
replacements. The replacement backflow is becoming
increasingly important because of the need to recycle material.
Furthermore, in some industries, such as book publishing,
returns may constitute a very high proportion of original
shipments.
b) Because of the close interaction between the logistic and the
production systems, it is necessary to clearly define their
interface. This is normally accomplished by assigning the
responsibility for production planning to the logistic function;
this function consists of translating sales forecasts into shipping
forecasts, which in turn are used to calculate the inventory
levels required at different points of the logistic system. On this
basis, the production system can then be assigned the
responsibility of scheduling production, to produce the required
inventories when and where they are needed.
The physical components involved in the logistic system described
are markets, facilities, and equipment. Markets are terminal nodes of
the system that can only originate or receive freight. Supply markets
originate freight; they are sources only. Demand markets receive
freight; they are sinks only.
Facilities are intermediate nodes of the system that originate and
receive freight; they are both sources and sinks, and can be of two
types: production or logistic. For both types of facilities, it is useful to
define the following attributes:
Through-put capacity is the maximum amount of freight that a
facility is capable of receiving or of shipping in a given time
period, whichever is larger. Receiving and shipping installed
capacities are usually equal by design, since any facility has a
 220

(/)
I-
Z
UJ
:i
SUPPLY UJ
>4--------------------~ ~
MARKETS .-J
no
r----4------------------ ~ - - ---,
I PROCUREMENT oen I
zO::
I
SOURCING
<!!! I
I (/)~ I
I CONSOL IDATION Zno
O::~
I SORTING ~en
I-
I DISPENSING UJO
I 0::1-

I DISPOSAL
PRODUCTION :
STEERING CONSOLIDATION
MANUFACTURING I
CLASSIFICATION
SUBASSEMBLY ~I INTER/INTRA ~--------------~ RECLAMATION
ASSEMBLY FACILITY FLOW
I RECYCLING

t-----_l----·
FINISHING
SALVAGING
~
0::
DELIVERY PRODUCT SUPPORT <
o
z
~
CONSOLIDATION MAINTENANCE o
CD
SORTING REPAIRS
DISPENSING :::E
REPLACEMENTS 1&.1
I-
(/) en
~
I- ~
Z (I)
UJ o
~ :i
DISTRIBUTION
~
0:: UJ
< o
CHANNELS 0
z < (,!)

~
..J
no o.-J
CARRIERS 0 UJ(I)
CD 0:: 0::
PARCEL SERVICES UJ
:::E o:i
FREIGHT UJ zO
I-
FORWARDERS en < I-
en
I~ en ~
zo
~ I~
I~
0::
~:::E
I- 0
MARKETING ~
UJO::

CHANNELS I!!! O::~

I~
AGENTS
I~
WHOLESALERS
I
RETAILERS
I
BRANCHES

--1-----
I
L __ L_ - - - -- - - - - - - - - __ .J
DEMAND MARKETS

Figure 5: Material Flow and Major Functions in the Logistic System

 221

limited capacity to hold inventory.

Through-put is the smaller of outbound or inbound freight shipped
or received by a facility in a given time period.
Inventory variation is the amount of outbound minus inbound
freight shipped and received by a facility in a given time period.
The usual time period considered for logistic system design is one
year.
The principal types of facilities are production facilities, logistic
facilities, and equipment. Production facilities include plants for
basic manufacturing subassembly, assembly and finishing. These
facilities receive raw materials and components and convert them
into finished products by physical, chemical, or biological processes.
The second category, logistic facilities, includes consolidation and
distribution centers, warehouses, branches, terminals, and salvaging,
re-cycling, and maintenance centers. These facilities receive and
ship finished products. They transform them through physical
operations such as repacking and order assembly, and add value to
them by making them available at strategically located points.
Furthermore, they allow the consolidation of freight, thus producing
savings in transportation costs and improvements in delivery times.
The materials handling and transportation equipment establishes
the links between facilities and markets in the logistic system, and
can be described, as we saw before, as a set of flowing inventories
with constant, intermittent levels.
In addition to these physical components, which constitute the
configuration or network of a logistic system, two other components
complete the logistic system:
The organization needed to operate the system.
The management system, represented by the information
management techniques, and the hardware and software for data
collection, transmission, storage, retrieval, processing, and
display, needed to support the organization and the physical
 222

configuration.
These three components constitute the equivalent of the three legs
of a logistic tripod; they support each other and the total system.

s. LOGISTIC SYSTEM AND BUSINESS FUNCTIONS

The structure of a logistic system, as previously described, can be

depicted as in Fig. 6. The design of a logistic system should clearly
specify (1) the structure and characteristics of each of its three

LOGISTIC
NETWORK

Figure 6: The Components of the Logistic System

 223

components, (2) the manner in which each component ties in with

the other two, and (3) the relationship between the logistic system
and the other major functions with which it is directly related:
marketing, production, and finance.
The first two points can be accomplished simultaneously by
designing the three components sequentially as in Fig. 7. The third
point is accomplished by including in the logistic system
requirements the major policies established by the marketing,
production, and finance functions. In regard to this, the main
objective is to design the logistic system in such a way that it serves as
a mechanism to reconcile the needs of all functions in an optimal
fashion.

r-------------------
I
I
I
I DEVELOP REOUIREMENTS
a DATA FOR
LOGISTIC
NETWORK ANALYSIS

~
«
0
I
I
I DATA DESIGN LOGISTIC
MODEL a SIMULATE I
I MANAGEMENT SYSTEM
I
I
I
_________ ....J
L- --------

STRUCTURE THE LOGISTIC

ORGANIZATION

Figure 7: Logistic System Design Sequence

 224

The logistic needs of marketing, production, and finance are usually

translated in terms of three factors: (1) number and extent of product
lines, (2) number and location of inventory points such as warehouse
and branches, and (3) level of inventory investment.
Generally, these needs are reflected as shown in Table 1. In the
usual management process, marketing, production, and finance
executives tend to consider each other's requirements. However, it is
necessary for them to have a mechanism to ensure the optimal
trade-offs between their conflicting interests.
The logistic function is in the best position to draw together all the
above requirements, add to them the pertinent logistic costs, and
arrive at the optimum compromise: the solution that maximizes the
company's total profit. To this effect, it is necessary to specify the
main features of each component of the logistic system and the
related design problems.
In the following sections of this paper we deal only with the logistic
network, which configuration is the most complex to define, and with
some key-problems in logistic system design.

6. LOGISTIC NETWORK DESIGN MODELS

The specification of the logistic network configuration must include

(1) market allocation, (2) facility determination, and (3) equipment
description.
1. Market allocation includes the assignment of each demand
market to one or more facilities from which it must be served;
and the assignment of supply markets to the production or
logistic facilities they must serve, and the quantities they must
supply.
2. Facility determination includes the number and location of
production and logistic facilities; the mission of each facility (the
 225

~
Number of Number of Inventory
Products Inventory Points Investment Level
'Functions

Marketing HIGH HIGH HIGH

To maximize sales To increase proximity To minimize back
volume to customers orders

Production LOW LOW HIGH

To minimize set To simplify transfers To obtain economies
up costs to distribution of scale through
long runs

Finance LOW LOW LOW

To conserve cash
To minimize promo- To reduce fixed costs
and credit and
tion costs and risks and obtain economies
of scale minimize inventory
carrying costs

Table 1: Logistic Needs of Major Business Functions

functions to be performed, and the products to be processed at

each one); and the through-put capacity of each facility, and the
maximum inventory it must be capable of holding.
3. Equipment description includes the type of materials handling
equipment needed in all facilities, to move, store and retrieve
materials; and the type of transportation equipment and
arrangements needed to move freight throughout the system.
These characteristics imply obviously a complex design process
which crucial step is that of modeling and simulation. So we examine
now the historical evolution of modeling meth3ds available for
logistic network design, underlining that it has been shaped by the
capabilities available in computers and their software.
Three major types of models have been used in logistic network
design. In chronological order they are:
 226

Center of gravity models

Costing/heuristic models
Mathematical programming models
Center of Gravity Models
In this type of model, given all sources and sinks in the system, and
the volumes they originate or receive, the approach is to calculate the
center of gravity of all volumes, and locate a trans-shipment facility
there.
Gi ven the coordinates (X i' Y i) of all sources and sinks with respect to
an arbitrary pair of axes, and the volumes wi attached to each, the
coordinates X, and Y of the center of gravity can be calculated as
follows:
LW.X.
X I I

LW.I
LW.Y.
I I

LW.I

This approach presents numerous problems.

1. It assumes that the solution includes only one trans-shipment
location, or it assumes arbitrary boundaries to produce multiple
trans-shipment-Iocation solutions, with one trans-shipment
location within each arbitrary boundary. This approach ignores
the interactions between the arbitrary zones.
2. It assumes that transportation costs are directly proportional to
distance, and that the same proportionality constant applies in all
directions. In practice, these assumptions are unrealistic even
with private carriage: there are fixed costs, and nonlinear
relationships between costs and distances.
3. It assumes that the straight-line distance between two points is
representative of actual distance. In practice highway mileages,
are normally higher than straight line distances measured on a
map.
 227

4. It ignores processing cost differentials at different facilities.

5. It ignores capacity constraints, service requirements, and
multilevel logistic systems.
6. It yields answers that are often impractical locations: the middle
of a lake or desert, or a point far from transportation services.
7. It assumes given shipment volumes out of each plant.
8. It does not provide the means to estimate how far from the
optimum is the calculated cost.
9. It does not provide sensitivity analysis.
10. It assumes one product, or a uniform mix of products throughout.
Under these conditions, it is obvious that this technique should not
be used for facilities location; its results are guaranteed to be wrong
unless none of the problems cited above holds true. This technique
was popular before the advent of computers. It was rendered obsolete
in the late 1950s when the use of costing and heuristic techniques
became practical through the use of computers.

Costing/Heuristic Models
Given a solution, completely defined by its market allocations,
facilities, links, and their associated volumes, and a data base
containing all costs, rates, demands, and constraints, a costing model
will calculate the cost of the solution input and display the cost
elements.
A heuristic model is a costing model with the capability to generate
automatically, following pre-established rules, alternative solutions
so that the model can pick the lowest cost alternative among those
evaluated. This approach has severe limitations:
1. It does not guarantee that the best possible solution available has
been identified; it only selects a "good" solution from a limited set
of alternatives.
2. It does not provide an estimate of the penalty to be paid with
respect to the best possible solution.
 228

3. It does not handle capacity constraints, or it does so in an

arbitrary way.
4. It does not provide sensitivity analysis, to determine the impact on
the solution of data accuracy and constraints.
This approach is a significant improvement over the center of
gravity approach. However, because of its limitations it is not
practical for structuring logistic networks.
From the late 1950s to the mid 1960s this approach .made it possible to
model larger models at a lower cost than models using a mathematical
programming approach. The most popular heuristic models were
based on the Kuehn-Hamburger algorithm, or variations of it. Around
the mid-1960s, the size, speed, and cost of computers and the
optimization packages that came with them reached a break-even
point with heuristic techniques. Since then, the mathematical
programming approach has rendered costing/heuristic models
obsolete for logistic system design.
Mathematical Programming Models
The availability of large-scale, high-speed, low-cost computers since
the mid-1960s has made it practical to use mathematical programming
techniques to model, simulate, and optimize the configuration of
logistic networks. More specifically, the use of mixed integer
programming provides the analyst the tools needed to model
faithfully the behaviour of logistic systems, and to calculate optimal
strategies considering the effect of fixed costs, nonlinear costs, and a
variety of real life constraints. As a consequence, the problems
encountered with center of gravity and costing/heuristic programs
can be eliminated.
Furthermore, the use of mathematical programming techniques for
logistic system simulation provides three unique advantages of great
value:
Guaranteed optimality. For a given set of conditions that allow a
feasible solution, the optimal solution or solutions can be
 229

calculated. If a different solution is desirable, then the penalty

with respect to the optimal solution can be calculated.
- Sensitivity analysis .Given a solution, it is possible to calculate for
input parameters how much they can vary without changing the
optimal solution, that is, the sensitivity of the solution to changes
in system conditions. This feature makes it possible to identify the
few parameters that determine the structure of the solution, so
that their accuracy may be refined if necessary.
- Marginal analysis. Given a solution, it is possible to calculate the
marginal cost or profit for any flow in the solution, that is, the
penalty or gain that would be incurred if the flow considered
were changed by one unit, with everything else in the system
remaining constant. A very important use of marginal costs is to
establish transfer prices in the system.
To structure the solution to a distribution problem, it is useful to
think in terms of a logistic network built with two types of elements:
Nod e s: Stationary inventories of variable level, such as markets
and facilities.
Links: Flowing inventories of intermittent constant level, such as
transportation links.
Both elements may have associated costs and capacity constraints. In
addition, nodes may have material balance equations relating
quantities of incoming and outgoing products, and links may have
response times associated with them. Using nodes and links, the
structure of a logistic network can be defined as shown in Fig. 8.
The use of mathematical programming in the design of logistic
networks makes it possible to state the problem in economic terms, as
a resource allocation problem. From an economic point of view, there
is a resource allocation problem when there exists a set of
requirements that must be satisfied through the use of available
resources when (1) requirements are multiple, and can be ranked in
order of preference or priority, and (2) resources are scarce and can
 230

SUPPLIERS

PRODUCTION PLANTS

ASSEMBLY PLANTS

DISTRIBUTION CENTERS

WAREHOUSES

MARKETS

Figure 8: Representation of a Typical Logistic Network

 231

be used optionally to meet several requirements.

In a logistic system, the basic requirements are market demands that
are usually represented by a large number of customers or demand
areas, and that can be ranked according to their profit contribution.
The resources available, facilities, equipment, and materials, are
scarce in the sense that they impose capacity or supply constraints,
and they can be used optionally to produce or distribute a variety of
products. Thus, the design of a logistic network meets all the
necessary and sufficient conditions that define a resource allocation
problem. Therefore, we can use mathematical programming to find
the optimal solution to the problem.
The problem can be stated mathematically as follows: Given a set k j
of cost or profit contributions associated to each relevant material
flow or activity X j in the system, we can construct an objective
function Z, such that:
Z = "i k.X.
. J J
J
We want to determine the value of each element Xj in such a way that
the value of Z is optimized, that is, maximized if Z is a profit or
minimized if it is a cost function.
This must be done subject to a set of constraints of the form:

"i IJ J - r·I
j C··X·<

where C ij is the amount of resource i required by activity j and r i is

the overall amount of resource i available.
These constraints represent maximum capacities, demands, material
balances, and so on.
It is customary to represent the problem in matrix form in a
so-called detached coefficient matrix as follows:
 232

kl k2 k3 ... k n = Z

C u C 12 C13 ... C 1n ~ rl

C 21 C 22 C 23 ... C 2n ~ r2

In the matrix above, the first row represents the coefficients of the
objective function; the other rows represent the coefficients of all
the constraints in the problem. Columns 1 through n represent the
coefficients of the variables contained in the objective function and
the constraints. The last column, known as the right-hand side,
contains the coefficients representing the limits of the model's
variables.
All the values in the detached coefficient matrix are set by the
inputs to the model, including demands, capacities, operational costs,
and transportation costs. The structuring of the input values in a
detached coefficient matrix that represents all the characteristics of
the problem is known as "matrix generation". Once the matrix is
generated, the calculation of the values of Xj that optimize Z subject to
the row constraints is known as the optimization. Once the optimal
solution has been found, it is possible to conduct sensitivity analysis
of the problem, which can take several forms:
Ranging analysis, or static sensitivity analysis, is a calculation of
the upper and lower values that a matrix coefficient can take
without changing the solution. This procedure is extremely useful
in assessing the impact of potential error in the value of a
variable: if the range is wide, a large error in the value assumed
for the variable will not affect the solution. Conversely, if the
range is narrow, a small error in the value assumed for the
variable may affect the solution.
 233

Parametric analysis, or dynamic sensitivity analysis, is a method

to assess the impact on the solution of simultaneous changes in
many coefficients. Its value goes beyond that of ranging because
it identifies not only the specific values where significant errors
mayor may not be tolerable, but in addition serves to identify
those parts of the solution that are likely to remain in it in spite of
substantial changes in system characteristics.
- Recursive analysis is a form of parametric analysis. The
difference is that whereas a parametric analysis program
conducts a set of changes in a pre-established way, a recursive
analysis program conducts each change on the basis of the results
obtained in each run, given pre-established rules to do so.

7. MAIN PROBLEMS IN LOGISTIC SYSTEM DESIGN

The logistic system design is a strategic planning problem which

involves three key decision areas: (1) facility location, (2) inventory
planning, and (3) transport selection and routing. Although there are
many more problem areas such as warehouse layout or materials
handling system design, the first three typically have the greatest
economic impact on the firm. The major questions that define these
key decision areas are summarized in Ballou (1981) and shown in Fig.
9.
The Facility Location Problem
The keystone planning problem is that of locating facilities:
deciding on the proper number, location, and sizing of stocking
points, which vendors or plants should serve these stocking points,
and which stocking points should serve the various customers. The
geographical placement of facilities creates an outline for the overall
logistics strategy by specifying the paths over which products flow to
the marketplace.
 PHYSICAL
DISTRIBUTION
SYSTEM DESIGN

INVENTORY FACILITY TRANSPORTATION

POLICY LOCATION SELECTIONI ROUTING

• WHAT TURNOVER RATIO SHOULD • WHAT NUMBER, LOCATION, • WHICH CUSTOMERS

BE MAINTAINED? AND SIZE OF STOCKING SHOULD BE
POINTS IS BEST? SERVED OUT OF
• WHICH PRODUCTS SHOULD
WHICH STOCKING
BE MAINTAINED AT • WHICH PLANTS / VENDORS
POINTS? I\)
WHICH STOCKING POINTS? SHOULD SERVE WHICH U)
..J::>,
STOCKING POINTS ? • WHICH VEH ICLES
• WHAT LEVEL OF PRODUCT
SHOULD BE
AVAILABILITY SHOULD BE • WHICH PRODUCTS SHOULD
ASSIGNED TO
MAINTAINED IN INVENTORY? BE SHIPPED DIRECT
WHICH CUSTOMERS?
FROM PLANTS/VENDORS
• WHICH METHOD OF
AND WHICH THROUGH • IN WHAT SEQUENCE
INVENTORY CONTROL
THE WAREHOUSING SHOULD CUSTOMERS
IS BEST?
SYSTEM? BE SERVED 7

• WHICH MODES OF
TRANSPORTATION
SHOULD BE USED 7

Figure 9: The Three Key Decision Areas in Logistics System Design

with Typical Decisions Questions
 235

The Inventory Planning Problem

Since the level of inventory in the distribution system depends on
the number of stocking points and the demand assigned to them, and
the inventory policy that is used influences the number of stocking
points and their placement in the distribution network, inventory
policy and facility location are interrelated problems. Therefore,
inventory policy, the methods by which inventory levels are
controlled, must be described at an aggregate level of analysis so as to
be compatible with the facility location analysis. The goal of strategic
planning involving inventory policy is to answer such questions as:
which method of inventory control is best, taking into account both
inventory and transportation cost considerations? Should a push or
puil inventory strategy be used? Which products should be
maintained at which stocking points?
The Transport Selection/Routing Problem
The planning of transport modes and routes also has an important
impact on facility location decisions, and vice-versa. Shipment
consolidation is the key economic force that links these three major
planning problems. The use of additional distribution points (either
warehouse or cross dock break bulk operations) will tend to lower
total transportation costs. However, facility location planning
involves assigning customer demand to distribution points, and
increasing the number of points will decrease the opportunity for
shipment consolidation and efficient routing so that transportation
costs will increase. Decision about the types of carrier to use and the
customers to be served out of each warehouse are issues to be resolved
jointly using both facility location and transportation planning.
The interrelationship of the three problem areas described above
defines the proper scope for strategic distribution planning in most
firms. But what role does the computer play in the planning process?
When a strategic planning problem is national in scope and involves
multiple products, plants, warehouse, and customers, the difficulty of
 236

manipulating such costs as purchase/production, inventory,

warehouse, order processing, and transportation while searching for
the best distribution system design, can be impractical when manual
methods are used. As computers have became more powerful in terms
of speed and memory capacity, computer models and the methods to
support them have been developed to deal effectively with such
problems. However, no one model seems to handle the entire range of
problems effectively at this time. Models that deal effectively with
transport selection and routing are clumsy and inefficient in
handling facility location issues. Thus, computer approaches to
planning have tended to use separate models for each of the three
problem areas, working them in concert to achieve the desired
overall results. More will be said about these models in the next
sections.
In particular, since facility location is the key planning problem, it
will be emphasized within the limited space available in this paper.

8. FACILITY LOCATION

The location of facilities for a logistic system is a problem involving

investment and long-term contract decisions that are difficult or
impossible to change. In making these decisions, top management
balances investment cost, including inventory carrying cost, against
the cost of transportation and providing satisfactory customer
service. Thus, facility location models must implicitly incorporate
aggregate description of the transportation systems that are
determined by any set of locational decisions. For these reasons the
problem of locating stocking points in a distribution network has
intrigued management scientists for many years. As a result, a
number of effective models have been developed.
They range from computer simulation (Shycon and Maffei, 1960)
 237

and sampling (Mabert and Whybark 1977) approaches through

heuristic approaches (Kuehn and Hamburger 1963, Ballou 1982) to
exact solution approaches (Efroymson and Roy 1966, Khumawala 1972,
Geoffrion and Graves 1974).
These approaches represent different degrees of modeling accuracy
and rigor used in the solution procedure. For example, simulation
models have the advantage of permItting cost relationships to be
described in great detail and the problem scope to be as broad as
needed. The solution procedure is one that costs out specified numbers
and locations of warehouses. Many computer runs are required to
evaluate different warehousing configurations in order to be assured
of a low-cost solution. In contrast, the so-called "exact" solution
approaches compromise in favor of the solution procedure that
guarantees the mathematical optimum number, size, and location of
warehouses. The demands of the optimization procedure often result
in the sacrifice of some degree of problem description and detail.
Heuristic approaches usually provide good problem detail and often
provide optimal solutions, although optimal solutions cannot be
guaranteed. The choice of procedure should be made on the basis of
the compromise that is most important in the particular problem
situation.
In this paper, for expositional purposes, we discuss in some detail a
specific exact solution approach derived by. Shapiro (1985). Following
it, the overall facility location problem can be solved in two
successive steps. In the first we assume that the locations are
geographycal points where production, storage and .sales activities
take place. Then the problem is that classical of designing the
configuration of the distribution network and its capacities, so as to
minimize the sum of investments, yearly production, transportation,
and inventory carrying costs to meet anticipated demand, or so as to
maximize yearly net profit if product mix is allowed to vary. In this
case a mixed integer programming model can be established.
 238

In the second step the more detailed problems of facilities layout,

where the facilities take up a positive area in which equipment is
placed and people work, are tackled.
Mixed Integer Programming Model
A typical facilities location problem is as follows. A company wishes
to establish regional distribution centers (DCs) from which to service
its customers. The distribution centers are to be stocked with many
products that are received from several plants with known
production capacities operated by the company. The products can be
aggregated into a small number of product classes, say 25 or less.
Customer demands for each product are also assumed to be known, and
the individual customers can be aggregated into a smaller number of
geographical markets. Associated with each DC are lower and upper
bounds on the allowable total throughput. The possible locations for
the DCs are given, but the actual sites to be used are to be optimally
selected. The questions to be answered simultaneously by the model
are:
Which DC sites should be used?
What size DC should be constructed at each site selected?
- What markets should be served by each DC?
Which products should be produced by each plant, and in what
quantities?
What pattern of transportation flows from the plants to the DCs,
and from the DCs to the markets, should be selected for each
product class?
The objective is to minimize the annualized sum of investment,
production, transportation, inventory, and handling costs for
meeting the known demands, subjects to plant capacity and DC
throughput constraints.
A mixed integer programming model of this facility location
problem is constructed as follows. Let i be the index for plants, j the
index for possible DC sites, k the index for markets and I the index for
 239

products (product classes). The input parameters for the model are the
following:

ai = annual production capacity of plant i

ail = production capacity used per unit of output for product
I at plant i
P il production cost per unit of output of product I at plant i
Ij annualized fixed cost associated with establishing a DC
at site j
bjl DC capacity used per unit of product I shipped through
DC at site j
b../ij minimal and maximal allowed total annual throughput
for a DC at site j
v· = variable unit cost of throughput for a DC at site j
J
c··1
lJ
= unit cost of shipping product I from plant i to a DC at
site j
hjkl= unit cost of shipping product I from a DC at site j to
market k
d k1 = annual demand for product I in market k

Define the variables x ijl as the non-negative amount of product I

produced at i and shipped to a DC at site j. Similarly, define the
variables Y jkl as the non-negative amount of product I shipped to
market k from a DC at site j. Let the zero-one variables Zj determine
whether (Zj = 1) or not (Zj = 0) a DC is located at site j. Of course, only
those combinations that are feasible or reasonable from a cost
viewpoint are permitted as Xijl and Yjkl variables.
The model is: minimize

(1)
 240

subject to
I aOlxool<
, 'J - ao, for all i (2)
j,l

I xi"[ = I Y °kl for all j,1 (3)

i:1 k J

I YOkl = d k1 for all k,1 (4)

° J
J

b..j Zj S; Ib jl Yjkl S; ~ Zj for all j (5)

k,l

Xijk ~ 0, Yjkl ~ 0, Zj= 0 or 1 for all iJ,k,1 (6)

The four terms in the objective function (1) are, respectively,

production costs, DC fixed investment and variable costs,
transportation costs from plants to DCs, and transportation costs from
DCs to markets. The costs reflect different production costs for each
product in various plants, different DC costs in different regions, and
transportation by different modes, with different unit costs, between
the plants, the DCs, and the markets. The constraints (2) limit total
production at each plant i to its total capacity ai' The equations (3)
Jtalance the material flow of each product into each DC against the
flows out. The constraints (4) require that demand d k1 be met for each
product I in each market k. The constraints (5) relate throughput at
DC site j to the decision whether or not to locate a DC there. In
particular, if the model selects Zj = 0 (a DC is not located at site j) then
(5) becomes I k,l b jl Y jkl = 0 which implies Y jkl = 0 for that j and all
markets and products k, I; on the other hand, if Zj = 1 (a DC is located at
site j), then (5) limits the throughput Ik,l b jl Yjkl to lie between the
specified limits I2..j and lij .
Commercial mixed integer programming codes currently available
can easily handle models of the form (1 + 6) with 100 to 200 DC sites,
100 markets for 20 products, and 20 plants. The advent of these codes
in the early 1970s made the solution of such facilities location models
a practical matter.
 241

The previous model possesses embedded network structures which

can sometimes be exploited by special purpose optimization codes. The
networks are the smaller one connecting the plants to the DC sites,
and the larger one (since there are usually many more markets than
plants) connecting the DC sites to the markets. Under the additional
assumption that each market is serviced by a unique DC for all
products, and that production constraints are on individual products
at plants, Geoffrion and Graves (1974) developed an efficient
solution technique for (1 + 6). The technique, based on Bender's
decomposition method, consists of separating or decomposing (1 + 6)
into a master problem involving the locational variables. zj' which is
linked to a number of network subproblems, one for the distribution
of each product from the plants through the DCs to the markets.
There are obviously a large number of other extensions and
changes possible for the model, but they overcome the space available
for this paper.
Facility Layout Model
In the previous model, facilities are treated as points to be optimally
located. Once the facilities locations have been established, the
facilities assume positive areas into which equipment is to be placed
and arranged. Layout design problems are not easily analyzed by
quantitative methods because it is difficult to quantify fully the
relative merit of one layout over another. In addition the spatial
complexity of layout design is difficult to capture by analytic models.
Nevertheless, useful quantitative methods for layout design have
been developed, sometimes in an interactive, man-machine mode.
Francis and White (1974) describe a broad survey of facilities location
methods, and Kusiak and Heragu (1987), give various formulation of
the facility layout problem and the algorithms for solving it.
In particular the facility layout problem has been modelled as:
- quadratic assignment problem
- quadratic set covering problem
 242

- linear integer programming problem

- mixed integer programming problem
- graph theoretic problem.
Here we limit ourself to deal only with the first approach.
This model is, in detail, a well defined mathematical programming
model that incorporates many of the costs of layout design and is
derived by viewing the design problem as optimally assigning n
centers to n discrete locations.
The centers can be storage areas, service areas, machines,
departments, or offices. The costs captured by the model are of two
types. There is the linear or absolute cost aij associated with assigning
center i to location j. In addition, there is the relative cost C ijkl

asseciated with assigning center i to location j and center k to

location I.
The cost C ijkl is often derived by the equation

where
K conversion factor
Ii k a measure of the desirability of locating centers i and
k close together. This could be the traffic in tons that
move between the centers, or some subjective
composite measure
djl distance between locations j and I
The assignment problem is to assign centers to locations so as to
minimize the sum of absolute and relative costs; namely

min (f. t
,=1 )=1
~
. a').. x··') + 2 (7)

subject to
 243

~x .. = 1 for i = 1, ... , n (8)

. I')
)=

~x .. = 1 for j = 1, ... , n (9)

. I')
l=

x I).. = 0 or 1 (10)

This is a quadratic assignment model that is a difficult one to

optimize. Exact mathematical programming techniques, such as
branch-and-bound (Gilmore 1962, Lawler 1963) and cutting plane
(Bazaraa and Sherali 1980, Burkard and Bonninger 1983), could be
used to solve it. When the time requirements of exact methods are
considered to be excessive for problems of real interest, heuristic
algorithms can be utilized for extracting useful answers from the
model (Armour and Buffa 1963, Hillier and Connors 1966). Ritzman
(1972) compared experimentally four promising heuristic algorithms
for problems with n .as large as 40. Scriabin and Vergin (1975)
compared the performances of three heuristic algorithms with the
performances of human subjects using manual and visual methods to
locate centers. They found that the human subjects did better on
larger problems (n = 20) due to superior ability to recognize and
visualize complex patterns. Last survey of heuristic algorithms is in
the paper of Kusiak and Heragu (1987) who compare twelwe
algorithms on the basis of their performance with respect to eight
test problems commonly used.
Unfortunately, the quadratic assignment model (7 + 10) does not
allow for accurate modeling of the materials handling costs on flows
between centers. The linear dependence of the relative cost term C ijkl

on distance is unrealistic when there are economies of scale in

conveyor installation costs. Moreover, some equipment such as
forklift trucks can be bought only in discrete units. The development
of models that integrate facilities location and materials handling is
an important area of future study.
 244

9. INVENTORY PROBLEM

The inventory problem is to stock inventory so that good service can

be provided to customers by having the right products in proper
quantities at the right place, at the right time, and in good condition,
all at the most economical cost consistent with this service. The
demand for good customer service and the need to provide it at an
economical cost is the classic trade-off in physical distribution
management.
Costs of providing customer service increase rapidly as customer
service levels become greater. For example, if all order were filled
completely, without back orders, inventories in most firms would
need to be exorbitantly large. Conversely, very low inventories would
result in excessive out-of-stocks, back orders, and, conseguently lost
sales. In this case, the basic trade-off is between the cost of providing
good customer service and the cost of lost sales resulting from
inadequate service.
It follows that the two basic questions of an inventory policy are
how much to order, and when to order. The problems are typically
resolved by balancing holding and replenishment costs against
stock-out costs. The cost of an inventory control system should also be
included in the analysis.
The first problem is both a planning and management problem,
while the second-one is essentially a management problem.
In this section we discuss only the quantitative methods for
answering the question how much to order.
How Much to Order
This basic question of inventory policy is often answered by the
application of deterministic cost minimization models. One such model
gave rise to the economic order quantity (EOQ) formula
 245

2 • d ·K
x*= ( 11)
h

where d = demand per period (units)

K = cost per order
h = carrying cost per unit per period
x*= economic order quantity (units)

Many variations of the basic EOQ model and formula can be derived
by adjusting some of the assumptions. Nevertheless, all these formulas
rely heavily on the assumption that the relevant data is known and
remains unchanged with time.
Conceptually, the simplistic EOQ model is but one of a family of
richer normative models that could be used to derive order quantities.
To be sure, the simplicity of the EOQ formula is an important reason
for its widespread use in managing inventory systems with thousands
of items. Nevertheless, richer models have had some impact on the
pratice of inventory policy and are not necessarily so complicated
that they should be summarily dismissed, especially when we take
into account the improvements in computer technology.
The formalism best suited to describe the richer models is dynamic
programming. Let T denote the number of periods we wish to consider
in our planning horizon. These periods are indexed by t. Let d t denote
the demand in period t, which we assume to be forecast with
certainty. The decision variables determine the ending inventory
variables y t by the equations

Let c t (x,y) denote the immediate cost incurred in period t when x is

the quantity ordered and y is the ending inventory. An example of
such a cost function is
 246

K + h if x >0

Ct (x,y ) = (12)

h • (y + J... d ) if x = 0
2 t

The parameter K is the fixed cost of an order. The parameter h is the

unit holding cost which we have chosen to attribute to average
inventory which equals y + 112 (d t - x). This function coincides with
the cost function used in the EOQ derivation. The objective is to
minimize the sum of costs

over the planning horizon while meeting demands in each period.

For simplicity, we assume there is a target inventory level YT which
we wish to achieve at the end of the planning horizon.
An optimal order policy for the inventory problem just described is
computed recursively .. For t = 1, ... , T, we let Ft (y) equal the minimal
cost of meeting demand in each of the first t periods and having Y
units of inventory at the end of period t. The functions F t satisfy the
recursions

minimum {c t (x t , y) + Ft-l (y - x t + dtn

Xt~ 0
subject to y - xt + d t ~ 0 for t = 1, ... , T (13)
F O (y) = 0 for all y.

An initial inventory state YO is assumed to be given. For fixed t, the

function F t (y) is solved in principle for all ending inventory states y
 247

of potential interest. Then t is indexed to t + 1 and the process

repeated. An optimal solution to the inventory problem has been
found when we have computed FT (YT)' which is the cost of an optimal
policy. The computations naturally produce as well an optimal policy
* ... ' x t *, •.. , xT *' were
xl' h Xt *.IS . I order quantity
an optima . or I
ot ·
sIze +Jor
the item in period t.
The relationship of the dynamic programming model just presented
to the EOQ formula (11) is the following. Suppose demand d t = d in all
periods t and that the immediate cost function Ct (x, y) is the one
given in (12). Suppose further that we let the planning horizon grow
very large. Then, in the limit, an optimal policy would be x t * = x * =
~[(2.d.K)/h] for all t sufficiently large; that is, use the EOQ formula
(11) in every period to compute the order quantity. Clearly, these
assumptions leading to an optimal EOQ policy are very restrictive.
Aspects of the dynamic programming approach just discussed can be
found in the dynamic lot size research of Wagner and Whitin (1958)
and Zangwill (1966). The basic single item models have been
embedded in multi-item models that integrate production and
inventory planning under shared resource constraints (Dzielinski
and Gomory 1965, Lasdon and Terjung 1971). A model for lot sizing of
the components in multi-stage assemblies was studied by Crowston,
Wagner and Williams (1973). The textbook by Wagner (1975) contains
several chapters on dynamic programming and inventory
management.
Dynamic programming models which are richer than the one
producing the EOQ formula have not found widespread use in
inventory management. However, computation is now sufficiently
fast and inexpensive to permit the more realistic models to be used in
the appropriate circumstances, for example, to analyze inventory
policies for product classes. The more accurate descriptions of demand
patterns and costs in these models would surely lead in many cases to
lower inventory costs.
 248

10. VEHICLE SCHEDULING AND ROUTING

Rapidly rising fuel costs have heightened interest in computer

programs that assist in selecting and routing vehicles, especially
trucks. Trucking represents in fact a great part of all intercity
freight movement. Some practical programs have been developed to
assist in such problem areas as shipment consolidation and routing
(Belardo, Duchessi and Seagle 1985). However, the bulk of the
modeling effort has been directed toward the problem of scheduling
of vehicles on routes where the vehicles can make multiple stops
before returning to their starting points (Clarke and Wright 1964,
Golden, Magnanti and Nguyen 1977, Magnanti 1981, Bodin et al. 1983,
Christofides 1985, Kolen, Rinnooy Kan and Trienekens 1987).
For this reason in this section the vehicle scheduling and routing
problem is discussed.
Vehicle routing problems exist in many varieties ranging from the
dispatching of delivery trucks of consumer goods (Sciarrone 1988) to
the scheduling of oil tankers (Sassano 1988). The basic problem is that
a fleet of vehicles with fixed capabilities (number, capacity, speed,
etc.) is to be used to transport goods between specified pickup and
delivery points to meet given demands. The problem is to determine
which demands will be satisfied by each vehicle and what route each
vehicle will follow in servicing its assigned demand. The usual
objective is to minimize the total cost of operating the fleet including
fuel, personnel, and vehicle depreciation costs. The selected routes
must often satisfy a variety of constraints due to fixed vehicle
capacity, time windows for delivery, and union regulations on driver
work schedules.
Single Depot Delivery Problem
For the purpose of discussion, the focus in this subsection is on an
important and common special case of the vehicle routing problem. A
vehicle fleet delivers products stored at a central depot to satisfy daily
 249

customer orders. The customers specify their orders prior to the start
of each day and the vehicles must then be scheduled to deliver the
day's orders. Each vehicle has a fixed capacity. Each order uses a fixed
portion of vehicle capacity and must be delivery within a specified
time window. This is the vehicle routing problem faced, for example,
by a large department store or a processed food distributor. This
problem is called the single depot delivery problem.
The single depot delivery problem has an exact formulation as a
mixed integer programming model (Fischer and Jaikumar 1978). The
objective function is to minimize the total costs to travel to the
customers. The constraints partition into three types. The first type
assigns customers to vehicles. For each vehicle, there are two types of
constraints. One set ensures that the vehicle makes a complete tour of
the customers assigned to it. These are the constraints of a traveling
salesman problem which is a well known combinatorial optimization
problem for which efficient, exact, and approximate algorithms are
known. The second type of constraint set for each vehicle contains
precedence and timing constraints on deliveries to the customers
assigned to it.
This mixed integer programming formulation is enormous for
single depot vehicle delivery problems of reasonable size - say, those
involving 10 to 30 vehicles and 100 to 1000 customers. The difficulty is
reduced somewhat if Bender's decomposition method is used because it
breaks the problem down into manageable components which have
special structures (i.e., traveling salesman, generalized assignment)
that can be exploited. Thus far, however, the decomposition approach
has not been perfected and heuristic solution methods have been the
most viable and universally applicable.
In fact a good heuristic may give solutions very near to the optimal
one. Moreover, today, many tools to evaluate heuristic algorithms
performances, have been developed. They follow, in particular, three
directions: the analysis of performance in terms of computation time
 250

and quality of the final solution (Golden et a1. 1985), the worst-case
analysis (Christofides 1976 and Solomon 1986), and finally the
probabilistic analysis (Marchetti Spaccamela et a1. 1984 and Psaraftis
1984).
Most of the heuristic methods that have been developed for the
single depot delivery problem can be categorized into five types:

1. Tour building heuristics (Clarke and Wright 1964, Golden,

Magnanti and Nguyen 1977, Chapleau et a1. 1984, Hart and
Shogan (1987), Solomon (1987»
2. Tour improvement heuristics (Lin and Kernighian 1973,
Waters 1987)
3. Two-phase methods (Tyagi 1968, Christofides et a1. 1979 and
1986, Dror and Levy 1986)
4. Incomplete optimization methods (Christofides, Mingozzi and
Toth 1981)
5. Generalized assignment heuristic (Fisher and laikumar 1981)

The first three types are modified traveling salesman problem

heuristics. In the first type, a link between two customers is added
sequentially until all customers have been assigned to some route.
Every time a link is added, the vehicle capacity constraints are
checked for violation. The choice of a link is motivated by some
measure of cost savings.
Tour improvement heuristics begin with a feasible vehicle routing
schedule. At every iteration some combination of links are exchanged
for another and a check is made to see if the exchange is both feasible
and reduces cost. In the two-phase method, customers are first
assigned to vehicles without specifying the sequence in which they
are to be visited. Subsequently, routes are obtained for each vehicle
using a traveling salesman problem heuristic. Incomplete
optimization methods apply some implicity exhaustive algorithm,
 251

such as branch-and-bound, and simply terminate prior to optimality.

The approach of Fisher end Jaikumar (1981) is a heuristic in which
an assignment of customers to vehicles is obtained by solving
optimally a generalized assignment problem with an objective
function that approximates delivery cost. The approximation is
derived from traveling salesman calculations which also produce
feasible solutions to the problem. The initial guess at an assignment of
customers to vehicles is important to the efficiency of the method.
Fisher and Jaikumar provide heuristic rules for doing this. This
approach has a number of attractive features. It will always find a
feasible solution if one exists, something no other existing heuristic
can guarantee. It can be easily adapted to accommodate many
additional problem complexities. For example, by parametrically
varying the number of vehicles in fleet, the method can be used to
optimally solve the problem of finding the minimum size fleet that
can feasibly service the specified demand. Fisher and Jaikumar report
on favorable computational experience with their method as
compared to several other methods for problems with 5 to 19 vehicles
and 50 to 200 customers. Solution times were on the order of six
seconds to two minutes on a DEC-I0 computer. The generalized
assignment heuristic just discussed has been used to plan routes for a
national delivery operation involving about five depots, 1200
customers, and 12 trucks. The approach was generalized to
incorporate a number of additional constraints on the problem,
including multiple depots, a constraint on total route time, and the
possibility for each order of alternative delivery by common carrier.
The delivery routes for this operation are reorganized every six
months. The new system was first used in the June 1980 and produced
a reduction of 15 percent in annual delivery costs.
In the latest years others heuristics have been proposed that cannot
be classified in the previous five groups. Among them it must
emphasize the simulated annealing approach to combinatorial
 252

optimization (Kirkpatrick et al. 1983) to solve the routing problem

(Golden and Skiscim 1986).
Other Vehicle Routing Problems
The single depot vehicle delivery problem is clearly one of a large
number of related vehicle routing problems encountered in practice.
The approaches just discussed are the ones to consider using· on most
variations. More generally, vehicle routing problems must sometimes
be integrated into tactical and strategic decision making involving,
for example, driver manpower scheduling, depot location, and
vehicular fleet selection. At the moment, hierarchical integration of
vehicle routing models with longer term planning models can best be
described as an important but not well developed research area.
Some other specific approaches to vehicle routing are worth
mentioning. One is a model and solution technique developed by Agin
and Cullen (1975), applied to large size military vehicle routing
problems with multiple stops, commodities, modes of transportation,
and time periods. The model structure resembles a multi-commodity
network flow problem with variable arc capacities. The objective
function can include operating costs and penalties on early or late
arrivals at destinations. A heuristic decomposition approach, similar
in spirit to the one of Fisher and Jaikumar (1978), is used to break the
model up into subproblems, one for each vehicle to be scheduled.
Successively, Brown and Graves (1980) reported on a real-time
system for dispatching petroleum tank trucks. Their system is
designed to assist the dispatcher who still controls the dispatching
decisions by specifying certain vehicle routes, customer assignment,
and tank truck loads. The system uses heuristics based on optimizing
network models that reflect only part of the overall dispatching
problem. Brown and Graves assert that the dispatching system has
improved operations. Individual dispatchers using the system have
the capacity to deal with up to 400 loads per day, compared with an
industry average performance of 80 to 150 loads per day. In addition,
 253

transportation costs were reduced by about 3 percent.

Recently, Sassano (1988) addressed the following problem: at each of
a given number of origin ports is available a given quantity of a
single type of crude oil. A known set of refineries (destination ports)
requires given quantities of crude oil to meet their production needs.
A fleet of tankers is available to ship the oil from origins to
destinations with the additional constraint that each tanker must
leave and arrive within a specified time window. For this problem a
mathematical model is proposed and the possibility of implementation
in a Decision Support System environment is discussed.
Finally, in a last paper, Carpaneto et al. deal with the multiple depot
vehicle scheduling problem which solution is obtained utilizing an
algorithm based on a branch and bound technique.

11. CONCLUSIONS

In the past few years, quantitative methods have made significant

new contributions to logistics business. There are several reasons for
this development. First, the increasing power of computer hardware
and software systems and their decreasing costs, have made
computer-based quantitative tools much more economical to be used
for planning purpose.
At the same time, the scope of distribution management has
expanded in connection with the increasing complexity of the
physical distribution systems, and, consequently, the analytic
methods needed to assist management decision making. Education is a
third factor contributing to the increased use of quantitative methods.
A significant percentage of middle and upper-level distribution
managers have now had at least an exposure to these methods and, as
a result, are willing to try them out. Nevertheless, these methods often
continue to seem threatening to manager not previously exposed to
 254

the seemingly arcane worlds of computer technology and

mathematical modeling. However, experience has demostred that,
when properly explained and applied, quantitative analysis tools
became the powerfull ally of the managers struggling to deal with the
uncertainties and complexities of the contemporary business
environment.

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 ANALYZING PRODUCTION-LOGISTICS INTERACTIONS

Mark A. Turnquist

School of Civil and Environmental Engineering - Cornell University-

Ithaca, New York 14853 - USA

A general model formulation is presented for addressing production-

logistics interactions. This formulation takes the form of a network-
based optimization problem, in which arcs represent production and
logistics decisions. Specific types of interactions between production and
logistics decisions are illustrated by two examples: lot sizing in relation
to fleet sizing, and simultaneous decisions on mode choice and empty
equipment movements for transporting finished products.

1. INTRODUCTION

We live in a time when terms like "global markets", "multimodal

corporations" and "world-class competition" are part of everyday
language. Manufacturing companies buy raw materials in one
country, ship them to another for fabrication into components,
assemble the components into products in a third, and sell the
products around the world. This "global economy" presents
significant challenges to such companies in managing farflung
networks through which flow raw materials, components,
subassemblies and final products.
In this context, it becomes vital to understand the relationships
between production and logistics. It is not sufficient to examine either
production or logistics decisions in isolation, for serious
suboptimization can result. This paper describes a modeling approach,
using network optimization, through which we can focus on
interactions between production and logistics decisions. The next
section of the paper describes the model formulation, and illustrates
its use through a simple example. Subsequent sections focus on two
 259

specific types of production-logistics interactions:

• lot sizing versus fleet sizing, and
• mode choice and empty equipment movement.
These sections of the paper are built upon modeling work done
specifically for the U.S. automobile industry, but are of general
relevance to manufacturing operations. In the final section of the
paper, some conclusions are drawn regarding the nature of the
interactions between production and logistics decisions, and
suggestions for further research are offered.

2. NETWORK OPTIMIZATION FRAMEWORK

The basic question addressed by the modeling framework developed

in this paper is: What products should be produced in which plants
and how should these products be distributed? Within many
manufacturing companies, it is common for more than one
fabrication or assembly facility to be capable of producing any
particular product. Automobile assembly is an obvious example; a
specific vehicle (carline, nameplate, body style and option
combination) can often be produced at two or three different
assembly plants.
In addition, each fabrication or assembly facility can often produce
several different products. In the case of automobiles for example, a
single assembly plant will generally produce more than one
nameplate within a carline (e.g., Buick Skyhawk and Oldsmobile
Firenza, or Dodge Omni and Plymouth Horizon) and more than one
body style (e.g., two-door, four-door, station wagon) of the same
carline.
When several different plants are to be used to produce a variety of
products, one must decide which plants should produce which
products. Decisions regarding the assignment of products to plants
 260

are termed product line allocation decisions. These decisions typically

are made with the objective of minimizing total costs, and are subject
to numerous constraints (e.g., plant locations, capacities and
capabilities; product demands and locations). The total cost resulting
from a particular product line allocation includes inbound
transportation of materials to the plants, production costs of specific
products at particular locations, and outbound transportation of
products from the plants to their point of use or sale.
The points of demand (use or sale) for the products are generally
distributed geographically, as are the sources of raw materials or
components, so the allocation of products to plants also implies
decisions regarding which sources of materials will be used by each
plant and which demands will be served from each plant.
The description offered in the previous paragraphs suggests a
formulation as an optimization problem, in which the objective is to
minimize total production and logistics costs, subject to constraints on
plant capacities and capabilities, and production requirements by
area and product.
For the purposes of this paper, a relatively simple formulation will
be chosen, in which the basic elements are plants, products and
demand regions.
The product line allocation decisions are made jointly with decisions
regarding which plants will serve each demand region (supplying
the various products demanded there). The formulation is a
transshipment network with nodes representing plants, products and
demand regions, and arcs representing production and transportation
activities.
Figure 1 shows a small example with two plants (A and B), two
products (1 and 2) and three demand regions (X, Y and Z). There are
twelve nodes in the network, representing the two plants, four
production allocation possibilities (each of two products in each of
two plants), and six product-demand combinations (each product in
 261

PLANTS PRODUCTION DEMANDS

POSSIBILITIES

I TRANSPORTATION'
ARCS
I PRODUCTION I
ARCS

Figure 1. Example of network formulation

each demand region). The arcs on the left hand side of the network
(connecting plants to products) represent production decisions. A
flow on one of these arcs represents production of that product in a
particular plant. The arcs on the right hand side of the network
(connecting product allocation nodes to demand nodes) represent
shipping decisions. A flow on one of these arcs represents shipment
 262

of a particular product from a specific plant to a specific demand

region. Note that all the shipment possibilities are represented - each
product at every plant is linked to all demand regions.
The plant nodes have "supply" values which represent total
production capacity. This capacity is allocated by the model to
production of various products, and is represented as flows on the
production arcs. The total flow on all production arcs emanating from
a particular plant is limited by the plant's capacity.
The flow into any production possiblity node (a specific product at a
given plant) must flow out of that node to demand regions. These
flows represent shipments of a given product from a particular plant
to specific demand regions. The total flow of each specified product
type into a demand region, from all plants, must equal the "demand"
values for that product in that region. Thus, the model assigns flows
of products to network arcs which satisfy capacity constraints at
plants and demand constraints in regions. Each unit of flow on the
network represents the allocation of a unit of production capacity at a
particular plant to make a specific product and ship it to a designated
demand region.
Each of the arcs connecting a plant node to a production possibility
node contains a unit cost which includes both inbound transportation
cost for that product at that location and production cost representing
value added at that plant. Each of the arcs connecting a production
possibility node to a demand node has a cost representing the
transportation cost for shipping a unit of product from the plant at
which the production occurs to the demand region.
This model formulation is similar in some respects to several other
formulations by previous researchers. For example, Wesolowsky and
Truscott (1975) and Sherali and Adams (1984) discuss various versions
of what has been termed a "location-allocation problem" . In the
present analysis, the plant locations are assumed to be given, but if it
were assumed that each product is only manufactured in one location,
 263

the formulation here would be very similar to the location-allocation

formulations.
In a more general context, this model is related to other recent
efforts to integrate related areas of physical distribution management
such as location, inventory and transportation. Some examples of this
work include Herron (1979), Laporte and Norbert (1981), Federgruen
and Zipkin (1984), Blumenfeld, et al (1985) and Burns, et al (1985).
The formulation may be made nonlinear to account for economies of
scale in production or transportation, or costs which depend upon the
interactions among products. For purposes of example, we will
consider initially the linear version, and then highlight some of the
interactions among plants and products in the subsequent sections,
by drawing out and expanding specific aspects of this example.

2.1 An Illustrative Example

As an example of product line allocation, consider a problem in

which three plants, located in Cincinnati, Atlanta and Dallas,
manufacture four products which are distributed across the U.S. As a
representation of geographic location of demands for the four
products we will use two-digit Standard Point Location Code (SPLC)
areas for the continental U.S. (excluding Alaska). This is a coding
system developed by the U.S. government, which defines 75 areas
covering 48 states, as shown in Figure 2. SPLC areas are defined for
Alaska, Hawaii and the Canadian provinces as well, but these will not
be used in this example.
We will assume that the total demands for the four products are as
follows:
product 1 50,000 units
product 2 75,000 units
product 3 200,000 units
product 4 25,000 units
 264

Figure 2. Two-digit SPLC code areas

The distribution of demands (for each product) among SPLC areas will
be assumed to be in proportion to 1985 population in each of the areas.
The capabilities and capacities of the three plants are as indicated in
Table 1. The information in Table 1, together with the demand
volumes and geographic distribution, specifies the constraints on the
product line allocations. A feasible solution must allocate the capacity
of each plant among the products it is capable of producing, and
distribute those products to the demand regions in such a way as to
meet the demands for each product in all regions.
The cost information required to determine the least expensive
feasible solution is embodied in the following two sets of coefficients:
Cij = unit cost of producing product j at plant i
tijk= unit cost of transporting product j from plant i to
demand region k.
 265

Table 1. Plant data for example analysis

PLANT CAPABILITIES TOTAL CAPACITY

Cincinnati products 1 and 2 100,000 units

Atlanta all products 200,000 units
Dallas products 2, 3 and 4 100,000 units

The C ij terms include both the unit production cost and the cost of
transporting the raw materials to the plant. Since this is intended as
an illustrative example, and not as a detailed case study, the exact
values of the costs need not concern us, but the results of the analysis
are a specification for production of the various products at each
plant, and determination of the distribution areas for each
plant-product combination. For example, Table 2 illustrates a possible
production plan, and Figures 3 and 4 show distribution areas for two
of the four products.

Table 2. Product allocation solution for example problem

PRODUCT NO. PLANT VOLUME

1 Atlanta 8,217
Cincinnati 41,783

2 Atlanta 9,385
Cincinnati 44,430
Dallas 21,185

3 Atlanta 130,215
Dallas 69,785

4 Atlanta 15,970
Dallas 9,030
 266

Figure 3. Distribution areas for product 1.

Figure 4. Distribution areas for product 3.

 267

One of the most important aspects of this model formulation is that it

incorporates both production and logistics costs in a single
framework so that they may be traded off against one another
explicitly, in search of an overall minimum from a system-wide
perspective.
Although the unit costs were assumed constant for this example,
leading to a linear optimization problem, interactions among plants
and products can induce nonlinearities into the cost structure. The
following sections describe two types of such interactions, and show
how models can be developed to understand their implications.

3. LOT-SIZING VERSUS FLEET-SIZING

When plants produce multiple products, the production is often

"cycled". That is, one product will be produced for a period of time,
followed by a changeover to another product (usually involving
machine setups, etc.) which is produced for some length of time
followed by another changeover, etc. Eventually, all products have
been produced, and the plant begins the cycle over again, repeating
production of the first product.
For example, this type of operation is very common in fabricating
plants in the automotive industry. A sheet metal stamping plant
produces a variety of sheet metal parts, often for several different
assembly plants. Production is cycled to reduce the time and cost of
setting up the presses between part types.
In cycling operations, inventory of each product is built up during
the production period for that product, and then used during the
production periods for other products in the cycle. Thus, the
determination of efficient production lot sizes and cycle lengths
involves trading off the setup costs of the machines against the
inventory costs of the finished products.
 268

In many cases, however, particularly in the auto industry, there is

another element of the tradeoff which bears directly on the
relationship of production costs to logistics costs. It is common to use
reusable shipping containers for shipping parts between plants. In
addition to between-plant transport, these containers serve several
other functions. They protect the parts from damage, and in some
cases are used for within-plant transport as well, so it is common to
load parts in containers as they are produced, and the parts remain in
the containers until they are used on the assembly line.
In a manufacturing system which uses this type of container
transport between plants, the costs of production cycling must reflect
the required investment in containers as well as the inventory costs
of products. An analysis of this problem was done by Turnquist and
Jordan (1986), specifically with reference to the U.S. automobile
industry. In the present paper, we wish to refer to the results of that
earlier paper, and show how they can be used to focus on the
interactions among plants and the tradeoffs between production
cycles and container fleet sizes. These interactions affect the net cost
of producing and transporting components between plants (the C ij

terms referred to in the previous section), as well as the costs of

transporting finished goods in some cases (the t ijk terms).
The system studied by Turnquist and Jordan (1986) is illustrated in
Figure 5. A production facility (component manufacturing plant)
builds parts which are used in several assembly plants. Containers
loaded with parts are shipped to the assembly plants, and then are
returned empty to the component plant. A bank, or inventory, of
empty containers is maintained at the component plant to handle
both the production cycling and uncertainties in inter-plant travel
time for the return of empty containers. The assembly plants
maintain a parts inventory (in containers), as a buffer against
variation in production, damaged or unusable parts, and uncertainty
in travel time from the supplying plant.
 269

----LOADED CONTAINERS
EMPTY
-~ EMPTY CONTAINERS CON"mINERS ASSEMBLY
PLANTS
ASSEMBLY
PROCESS

EMPTY PARTS
CONTAINER INVENTORY
BANK

PROOUCTK>N 2
PROCESS

LOADED
CONTAINERS

•• •••
COMPONENT PLANT •

Figure 5. Container movements among component and assembly

plants

The essential result derived by Turnquist and Jordan is an

expression for fleet size, S, required to support a particular
production system, as follows:

S = (lip) {A(L - 't) - 0.751 <1>-1 (P) ( f. '))i a ir1!2

i= 1

+ :f A. i [2~i + Tli - 0.751 <1>-1 (P) ~]) (1)

i=1
 270

where: p number of parts per container

A.l usage rate of part at assembly plant
A aggregate usage rate (2.A i )
L length of production cycle
production time for part
inverse cumulative distribution function of a
. standard normal random variable, evaluated at
probability P
P acceptable probability of running short of
containers
f..li average travel time between production plant and
assembly plant
cr·l standard deviation of travel time between
production plant and assembly plant i
Tli size of desired parts inventory at assembly plant i,
measured in time periods at normal usage rate.
Equation (1) can be used to illustrate the relationship between
decisions on production lot size and the required container fleet size.
As an example of this, let us assume that a component plant in Toledo,
Ohio, supplies parts used in the manufacture of product 2 at the three
plants (Cincinnati, Atlanta and Dallas) from the example in the
previous section.
We will assume that the production volumes for product 2 listed in
Table 2 are the usage rates of the component at the three plants on an
annual basis. For the purpose of using equation (1) to estimate
container fleet requirements, we will divide these values by 250 to
convert to a daily basis. The production rate at the Toledo plant will be
assumed to be 1500 parts/day.
For this example, we will assume that expected travel times from
Toledo to the three plants (or return) are as follows: Cincinnati - I
day; Atlanta - 3 days; and Dallas - 4 days. The standard deviation of
travel time is assumed to be 25% of the mean value in each case.
 271

Finally, we assume that the desired parts banks at the plants are 1
day's consumption at Cincinnati, and 2 days' consumption at Atlanta
and Dallas.
Table 3 summarizes the required container fleet size for various
production cycle lengths and acceptable shortage probabilities. A
production cycle of one day, for example, means that each day the
Toledo plant builds enough components to satisfy one day's usage at
the three assembly facilities (300 pieces). In contrast, a ten-day cycle
means that the Toledo plant will build 3000 pieces in a single
production run (requiring two days) and then will build other
components for eight days before beginning the cycle again. Table 3
shows that long production cycles can result in doubling or even
tripling the required fleet size for containers. This clearly increases
the net cost of the parts as delivered to the assembly facility, and is
another example of the need to consider production and logistics
decisions in a joint fashion.
Table 3 also illustrates the effect of uncertainty in travel times on
the required fleet size for .any particular production cycle. The
column labeled "Minimum Fleet" corresponds to deterministic
conditions (no travel time variation) and provides a lower bound on
the fleet size, determined strictly from production cycling and
average travel time data. Recognition of uncertain travel times
necessitates an increase in the fleet size, as "safety stock". As the
required reliability of the system increases (the allowable shortage
probability decreases), the number of additional containers required
as safety stock increases, but the overall impact in this example is no
more than six containers, even when the acceptable shortage
probability is .01. Thus, we can conclude that the production cycling
decisions have a much greater impact on the fleet size (and hence the
logistics costs) than does uncertainty in travel times.
 272

Table 3. Container fleet sizes related to production cycles and

acceptable shortage profitability

Production Minimum Acceptable Shortage Probability

Cycle Length Fleet 01 05 10 15 20

1 day 21 27 25 24 24 23
5 days 31 36 35 34 33 33
10 days 40 45 44 43 42 42
20 days 61 66 65 64 63 63

4. MODE CHOICE AND EMPTY EQUIPMENT MOVEMENT

Another aspect of the relationship between production and logistics

decisions can be illustrated by considering the distribution area maps
shown in Figures 3 and 4, for products 1 and 3 in the product line
allocation example. Note particularly that the distribution area for
product 1 from Cincinnati includes the area immediately sun'ounding
the Dallas plant (because product 1 is not made at Dallas), and the
distribution area for product 3 from Dallas includes areas quite close
to Cincinnati (because product 3 is not made in Cincinnati). If
products are distributed from each plant independently, it would be
quite possible for empty trucks returning to Cincinnati from Dallas to
meet empty trucks returning to Dallas.
On the other hand, if distribution decisions are coordinated among
plants, a truck could carry a load of product 1 from Cincinnati to
Dallas, be loaded there with product 2 for delivery to St. Louis (for
example), and then return empty from St. Louis to Cincinnati to be
reloaded and repeat the cycle. Jordan and Burns (1984) and Jordan
(1985) have studied exactly this sort of problem in trucking
 273

deliveries, and have created efficient methods for identifying good

"backhaul" opportunities.
This is an example of a more general problem of managing empty
equipment movements in distribution networks. The benefits of
coordinating empty equipment routing decisions system-wide are
well known (Malone, 1980). Loaded and empty movement decisions
are, however, typically made independently. Yet, loaded movement
decisions affect where equipment is needed and where it becomes
available. These factors, in turn, affect empty movement decisions.
Hence, coordinating loaded and empty movement decisions may
reduce total vehicle transportation cost.
Figure 6 shows three levels of coordination for loaded and empty
distribution decisions.

ANALYSIS
LEVEL
SIM ULTANEOUS OPTIMIZATION
SIMULTANEOUS, SYSTEM-WIDE
3 OPTIMIZATION OF LOADED AND
EMPTY DECISIONS

SEQUENTIAL OPTIMIZATION
LOADED AND EMPTY DECISIONS
MADE SEQUENTIALLY, EMPTY INCREASING
2 DECISIONS OPTIM IZED SYSTEM- CooRDI NATION
WIDE

INDEPENDENT PLANT
DECISION-MAKING

LOADED AND EMPTY DECISIONS

MADE SEQUENTIALLY AN 0
INDEPENDENTLY BY EACH PLANT

Figure 6. Hierarchy of distribution decision-making

 274

At the lowest level, each plant operates independently. This

produces a "one-to-many" distribution pattern, in which the products
from a single plant are shipped to its customers, and the empty trucks
and railcars return directly to their points of origin for reloading. An
independent system is relatively easy to control; however, it results in
transportation equipment traveling as far empty as loaded.
Moving up one level in Figure 6, individual plants make
independent decisions regarding loaded movements, but coordinate
empty equipment routing, treating fleets as a common pool for use at
any loading location. This type of coordination is currently being
performed for railcars used in delivering automobiles to dealers in
the U.S. (Transportation Research News, 1984), as well as being the
focus of the work by Jordan and Burns (1984) and Jordan (1985)
mentioned above.
Alternatively, loaded and empty decisions can be made
simultaneously. This corresponds to the third level in Figure 3, and is
the focus of the discussion in this section. The rationale for
considering this level of coordination is that total costs of product
distribution include both loaded and empty equipment movements,
and better decisions are possible if we optimize both simultaneously,
rather than separately. By coordinating loaded and empty decisions,
products are shipped by modes and routes that take advantage of
backhauling opportunities to minimize total cost. If these decisions
are made sequentially, products can be shipped to minimize loaded
cost, but empty costs may be substantially greater.

4.1 A Model of Coordinated Decisions

An optimization model has been developed by Turnquist and Jordan

(1987) for simultaneously making loaded and empty movement
decisions in shipping products from plants to demand points. The
model considers shipments by both rail and truck (including possible
 275

transshipment at intermediate points). The optimization model finds

simultaneous loaded and empty movement decisions which minimize
total (loaded plus empty) transportation costs subject to constraints
which specify that all products are delivered and flows of
transportation equipment are conserved.
Although the basic problem can be formulated as a linear program,
the size of the problem generally precludes straightforward solution.
Thus, the focus of the methodology element in the model development
is on finding ways to exploit the structure of the problem to allow
decomposition and effective solution. The Appendix presents the
detailed mathematical formulation of the model and a specialized
solution approach which exploits the model structure.
Tests with the model have indicated characteristics of situations in
which it is important to solve the loaded and empty movement
problems simultaneously, versus situations in which they can be
separated and solved sequentially without serious suboptimization.
The problems are separable in cases where the plants are all clustered
close together, or are widely distributed but serve regional markets,
and when the relative costs between rail and truck are similar for
both loaded and empty movements. When the plants are close
together, or serve geographically distinct market regions, there is
little opportunity for effective backhauling.
When one mode (e.g., rail) is less expensive per space-kilometer
(one unit of capacity moving one kilometer) than the other (e.g.,
truck) for both loaded and empty movements, the loaded and empty
sides of the problem have similar structure in their cost coefficients.
Thus, the separate subproblem solutions are also similar, and the
sequential approach works quite well. Tests in which empty truck
costs were reduced to a very small value (much less than rail) have
resulted in greater differences between the sequential and
coordinated solutions. Hence, as the characteristics of loaded and
empty movements become more dissimilar (e.g., different relative
 276

costs) their separate solutions contain more incompatibilities, and it is

more important to solve the subproblems simultaneously.
Because backhauling opportunities can have significant effect on
overall distribution costs, this analysis points to another way in
which production and logistics decisions are related. The interaction
of the tijk cost terms (using the notation from earlier in the paper)
may make it advantageous to modify distribution areas from specific
plants, or shift production from one plant to another, in order to take
advantage of opportunities to reduce overall logistics costs.

s. CONCLUSIONS

The growing complexity of manufacturing systems, and the need to

coordinate production and logistics decisions among many plants over
wide geographic areas, present significant challenges to
professionals in operations research, management science and
transportation planning. This paper has provided a model
formulation within which we can address a variety of specific issues
related to the fundamental question: What products should be
produced where, and how should they be distributed?
Through two examples, one relating to inter-plant movement of
components and the other to distribution of finished goods, we have
seen how specific analyses of subproblems can feed back into the
more general overall modeling framework by affecting the cost
structure of that formulation.
Many other types of subproblem analyses are both possible and
potentially valuable. These analyses could focus on either the cost
structure of the basic formulation or the constraints which define the
feasible region of production plans. As three examples of areas worth
pursuing further, we can cite: the effects of economies of scale and
scope in production, the effects of allowing locations to become
 277

decisions, and the addition of dynamics as an integral element in the

formulation.
Economies of scale have a major effect on the cost structure under
which product lines are allocated among plants. If there are
substantial economies of scale, it will be optimal to have each product
produced in fewer locations. Economies of scope are associated with
utilization of resources to produce a variety of products (perhaps
closely related) in one location. These are of increasing importance as
manufacturing systems become more flexible, and have potentially
great implications for the design of production networks.
Throughout the analysis in this paper, the locations of plants have
been assumed to be fixed and given. Expanding the modeling
framework to consider location decisions would make the approach
more useful as a long-term planning tool. There is quite a vast
literature on formulations involving location decisions, some of
which was cited earlier, so there is an ample base on which to build.
Finally, the issue of dynamics in the system raises questions of
production control over time, an important area in its own right. The
development of decision tools which can aid in evaluation of dynamic
product allocations (and reallocations) is an important topic to
pursue.
Each of the three topic areas listed would make the modeling
framework more comprehensive. Comprehensiveness is a virtue in
thinking about systems because it highlights areas of
interdependence among system elements. However, it is sometimes a
vice in the model themselves (especially computer implementations
of those models), because it has a tendency to make it difficult to solve
"easy" problems. What we, as researchers, should be aiming for is the
breadth of thought about system interactions which gives us the basis
on which to build simple models. Simple models, focused on the most
important of those interactions, are most useful because they focus
attention on important decision variables without obscuring them in
 278

a maze of extraneous detail. Thus, our objective should not be a single,

all-encompassing megamodel, but a suite of simpler related models,
for such a strategy is likely to prove much more effective in
application.

ACKNOWLEDGEMENTS
The research results described in this paper have grown out of my
association with members of the Operating Sciences Department at
General Motors Research Laboratories, particularly Bill Jordan, Larry
Burns and Dennis Blumenfeld. Their cooperation has contributed
substantially to the ideas expressed here. I would also like to thank
Bill Spreitzer of GM Research, who made it possible for me to spend
the summer of 1984 and the academic year 1986-87 working with
them.

REFERENCES

Blumenfeld D.E., Burns L.D., Diltz J.D., Daganzo C. (1985), Analyzing

tradeoffs between transportation, inventory and production
costs on freight networks. Transportation Research
19B:361-380.
Burns L.D., Hall R.W., Blumenfeld D.E., Daganzo C. (1985), Distribution
strategies that minimize transportation and inventory costs.
Operations Research 33:469-490.
Federgruen A., Zipkin P. (1984), A combined vehicle routing and
inventory problem. Operations Research 32:1019-1037.
Frank M., Wolfe P. (1956), An algorithm for quadratic programming.
Naval Research Logistics Quarterly 3:95-110.
Herron D. (1979), Managing physical distribution for profit. Harvard
Business Review 79:129-132.
Jordan W.C. (1985), Truck backhauling on networks with many
terminals. Report GMR-5055, General Motors Research
Laboratories, Warren MI.
Jordan W.C., Burns L.D. (1984), Truck backhauling on two terminal
networks. Transportation Research 18B :487 -503.
Jordan W.C., Turnquist M.A. (1983), A stochastic dynamic network
model for railroad car distribution. Transportation Science
17:123-145.
 279

LaPorte G., Norbert Y. (1981), An exact algorithm for summanzmg

routing and operating costs in depot location. European
Journal of Operations Research 6:224-227.
LeBlanc L.J., Morlok E.K., Pierskalla W.P. (1975), An efficient
approach to solving the road network equilibrium traffic
assignment problem. Transportation Research 9:309-318.
LeBlanc L.J., Farhangian K. (1981), Efficient algorithms for solving
elastic demand traffic assignment problems and mode split-
assignment problems. Transportation Science 15 :306-317.
Malone F. (1980), Detroit tries a bold new approach to rack car
distribution. Railway Age 181(22):16-23.
Sherali H.D., Adams W.P. (1984), A decomposition algorithm for a
discrete location-allocation problem. Operations Research
32:878-900.
Srini vas an V., Thompson G.L. (1972a), An operator theory of
parametric programming for the transportation problem - I.
Naval Research Logistics Quarterly 19:205-225.
Srinivasan V., Thompson G.L. (1972b), An operator theory of
parametric programming for the transportation problem
II. Naval Research Logistics Quarterly 19:227-252.
Transportation Research News (1984), Improved utilization of
multilevel auto rack railcars. 112: 12-13.
Turnquist M.A., Jordan W.C. (1986), Fleet sizing under production
cycles and uncertain travel time. Transportation Science
20:227-236.
Turnquist M.A., Jordan W.C. (1987), Coordinating product distribution
and equipment utlization decisions in large networks. Report
GMR-5705, General Motors Research Laboratories, Warren
MI.
Wesolowsky G.O., Truscott W .. G (1975), The multiperiod location-
allocation problem with relocation of facilities. Management
Science 22:57-65.
Zangwill W.I. (1969), Nonlinear programming: a unified approach,
Prentice-Hall Englewood Cliffs, NJ.
 280

APPENDIX

Matematical Structure of the Loaded and Empty Equipment

Movement Model

We will assume a set I of plants, indexed by i; a set J of transshipment

points indexed by j; and a set S of product destinations or demand sites,
indexed by s.
The transport options are represented as various special cases of a
combined rail-truck alternative, in which the product is shipped
from the plant to a transshipment point by rail, and then to the
destination by truck. If the transshipment point is the plant, then the
rail move disappears and the entire shipment is by truck. Likewise, if
the transshipment point is the destination, the entire move is by rail
and the truck portion becomes non-existent. In other cases, the
transshipment point will be a separate location, and both modes will
be used in combination.
The model represents both loaded and empty movements of railcars
and trucks. Railcars move loaded from plants to transshipment points,
and empty in the reverse direction. Trucks move loaded from
transshipment points to destinations, and empty back to
transshipment points.
The decision variables in the linear program are:
Xijs = units of products sent from plant i to destination s via
transshipment point j

Yji units of rail capacity sent empty from transshipment

point j to plant i
Zksj units of truck capacity sent empty from destination s to
transshipment point j that were received loaded at s
from transshipment point k
The demands and unit costs are specified as follows:
demand at destination s for products from plant i
cost per unit of product to ship by rail from plant to
 281

transshipment point j
Cji cost per unit of capacity to reposition empty rail cars
from transshipment point j to plant i
bjs cost per unit of product to ship by truck from
transshipment point j to destination s
bsj = cost per unit of capacity to reposition empty trucks
from destination s to transshipment point j.
The costs of loading and unloading vehicles are included in the C ij

and b js terms. In this way, the cost of additional handling necessary

at a transshipment point is included in the formulation. Note,
however, that for a transshipment point located directly at a plant or
destination, the corresponding C ij or b js term would be zero,
indicating that one of the modes is not used at all. Thus, in that case
there would be only one loading and unloading.
The linear program, denoted as [PI], can be formulated as follows:

[PI] min T= I I Cij I Xijs + I I bjs I Xijs

iel jeJ seS jeJ seS iel

+ I I Cji Yji + I I bsj I Zksj (AI)

iel jeJ seS jeJ keJ

s.t. I Xijs = Dis 'V ie!, seS (A2)

jeJ

I I x··
IJS
- I Yji = 0 'Vje.J (A3)
iel seS iel

I I x··
IJS
- I Yji = 0 'Vie! (A4)
jeJ seS jeJ

I x··
IJS
- L z·JS k = 0 'V jeJ, seS (A5)
iel keJ

I (Zjsk - Zksj) = 0 'V jeJ, kef (A6)

seS

Xijs' Yji' Zjsk ~ 0 (A7)

 282

The objective function terms represent costs for loaded rail moves
from plant to transshipment points, loaded truck moves from
transshipment points to destinations, empty rail moves from
transshipment points back to plants, and empty truck moves from
destinations to transshipment points. The constraints ensure that
demand is met (A2), that flows of railcars and trucks are conserved
(A3-A5), and that routing restrictions on trucks are observed (A6).
These constraints reflect the desirability of maintaining short
subtours in the truck flows so that drivers can return to their home
base frequently (see Jordan, 1985).
Problem [PI] may be very large. For example, if we consider 30
plants, 40 transshipment points, and 75 demand locations, then the
problem has over 520,000 variables and 13,000 constraints. The
constraints on empty truck routing (A6) are particularly troublesome
because they are numerous (there are J2 of them), and their presence
precludes decomposition of the problem. If the routing restrictions on
empty trucks are treated just as empty railcars - available for
repositioning to any point in the network - then the problem can be
rewritten in a way which leads to a decomposition and an effective
solution strategy.
Let the Z ksj variables representing empty truck flows be replaced by
Zsj units of truck capacity sent empty from destination s to
transshi pment point j.
Then constraints (AS) and (A6) can be replaced by (AS') and (A6'):

L L x··'JS - L Z .= 0
SJ
"i/ seS (AS')
ieI jeJ jeJ

L L x··'JS - L Zsj= 0 "i/ jeJ (A6')

ieI seS seS

The constraints set then can be considered to be made up of three

related but separately identifiable pieces: a set of constraints to
ensure that loaded movements satisfy demands at the various
 283

destinations, a set of "transportation problem" supply and demand

constraints for empty railcars, and a similar set of supply and demand
constraints for empty trucks.
The total flow of loaded units into the destinations defines the supply
of empty trucks at that location (constraints AS'). The demands for
empty trucks at the transshipment points are determined by the total
rail shipments (constraints A6') into each of those points.
The supplies of empty railcars are at transshipment points. The
supply is determined by the total flow of loaded railcars into each
point (constraints A3). The demands for these railcars at the plants
are determined by the total rail shipments from each plant
(constraints A4).
Thus, a feasible (though not necessarily optimal) solution to the
problem can be constructed by a two-step process. First, we find a set
of loaded flows which satisfies the demands. Then, these flows are
summed at plants, transshipment points, and destinations to yield
supplies and demands for empty trucks and railcars. In the second
phase, we solve two "transportation problems", one for railcars and
one for trucks, to route the empty equipment. This produces a feasible
circulation flow of both loaded and empty equipment on the network.
While a solution constructed in this fashion may not be optimal, it
does provide insight into a solution approach which will produce an
optimal solution. We can rewrite the problem to be solved as:

[P2] min TC[i1 = L L Cij L Xijs + L L bjs L Xijs

iel jeJ seS jeJ seS iel

+ ER (:I) + ET (:I) (AS)

s.t. L Xijs = Dis 'V ie/, seS (A9)

jeJ

E R (:!.) denotes the cost of empty rail flows. The notation :!. denotes the
set {xijs}, for ie/,jeJ, and seS. ER(:!.) is the optimal value function of
the transportation problem which must be solved to find the empty
 284

flows, given the loaded flows .!.. Similarly, ET(.!.) denotes the cost of the
empty truck flows as the optimal value function of the transportation
problem which must be solved to route empty trucks. This value is also
dependent upon the loaded flows, .!..
Problem [P2] is a nonlinear programming problem because ER (.!.)
and E T C~J are nonlinear functions of ,!.. In fact, they are piecewise
linear functions. Because ,!. determines the right-hand sides of the
transportation problems to be solved, ER (.!.) and E T(.!.) will be linear
over ranges of Lwhich cause no basis changes in the solution of the
respective transportation problems, but each basis change will cause
a change in slope in those functions.
It may seem strange to convert a linear programming problem into
an 'equivalent nonlinear one for solution. In most instances, we try to
make an opposite conversion. However, the advantage is that the
nonlinear problem [P2] is much smaller that the original linear
problem. The only variables which appear in [P2] are the loaded
flows, .!.. In fact, this problem [P2] is written as a nonlinear problem
only to clarify the nature of the solution approach. We will solve this
problem by solving a sequence of linear programming problems,
each of which is either a transportation problem or a problem which
can be solved by inspection. Hence, we can construct a solution to our
original (very large) problem by solving a sequence of much simpler
and smaller problems. This approach is much more efficient than
solving the original problem by "brute force" and allows practical
solution of much larger problems.
To solve [P2], we have developed a method based on the Frank-Wolfe
algorithm (Frank and Wolfe, 1956), originally devised for solving
quadratic programming problems. The algorithm's applicability to
more general convex programming problems is discussed by Zangwill
(1969). It has been used quite extensively for solving nonlinear
network problems (LeBlanc et aI., 1975; LeBlanc and Farhangian,
1981; Jordan and Turnquist, 1983).
 285

The algorithm is based on the concept that if a function f(;!.) is to be

minimized over a feasible set X, and we have available some feasible
solution ;!.i, then a good search direction is provided by the solution to
the linear optimization:

min [V f(x) I i] ~ (AIO)

~EX 4.

The algorithm works well in situations for which the gradients can be
calculated quickly and the solutions to the linear subproblems can be
obtained easily. If w * is the solution to the linear subproblem, a line
search is conducted to find the value of 8 which minimizes f[(1-8);!.t +
+ 8w*]. We then set ;!.t+l = (1-8);!.t + 8w* and start a new iteration. The
process continues until no further improvement in f(;!.) can be found.
To apply this algorithm to problem [P2] we must find the gradient
vector of the objective function. Because all the terms except the last
two are linear, their contribution to the partial derivatives is just the
coefficient on each term. The partial derivatives of the last two terms
are:
d ER(x)
= v·l - u·} (A11)
dXijs

d ER(x)
(AI2)
dXijs

for all ieI, jeJ, and seS where:

vi dual price associated with plant (demand) in empty
rail car transportation problem
u·} dual price associated with transshi pment point j
(supply) in empty rail car transportation problem
qs dual price associated with destination s (supply) in
empty truck transportation problem
r·} dual price associated with transshipment point j
(demand) in empty truck transportation problem.
 286

Thus, if we have specified a feasible solution, ~t, to [P2] -- that is, a

set of loaded shipments which satisfies demands -- we evaluate the
objective function of [P2] by solving two transportation problems --
one for empty railcars and the other for empty trucks -- and adding
those empty movement costs to the loaded movement costs. These
transportation problem solutions also produce the vi' U j' q sand rj
values as the dual variables (shadow prices) on the supply and
demand nodes in those two problems.
To search for a better solution to [P2] we first need to solve the
linear subproblem with cost coefficients from the gradient of the
objective function. This linear problem can be written as [P3].

[P3] min L = l:• •l: l: (c lJ.. + b.JS + v·l - UJ. + r·J - q S ) w lJS
.. (A13)
l J S

s.t. l: Wijs = Dis for all ie/, seS (A14)

j
The variables W ijs in [P3] have the same interpretation as Xijs in [P2]
-- that is, units of product shipped from plant i to destination s
through transshipment point j.
Problem [P3] has a trivial solution. Because the constraints are
completely separable by i-s pair, we can decompose [P3] into IS
independent subproblems, each involving the allocation of a
specified flow, D is' among different paths through the distribution
network. Because there are no capacity constraints imposed, the
optimal allocation is to assign all flow to the least expensive path.
Thus, for each i-s pair, we simply find the smallest of the cost
coefficients:

for all j e J. If j* denotes the index of the minimum cost coefficient,

then the optimal solution to [P3] is to set:
 287

(A15)

*
w·· = 0 for j *- j* (A16)
lJS

The solution to [P3], denoted ~*, provides a new feasible solution to

[P2], and we wish to search along the line between the old solution, !,t,
and the new solution, w*, for a point which minimize TC(!.). Because
any point along this line can be represented as

(1-9)!ot + 9w*

where 0 ~ 9 ~ 1, this problem is a one-dimensional optimization:

[P4] min TC[(1-9)!ot + 9w*] (A17)

Os9s1

If 9 * is the solution to [P4], we then set:

(A18)

If T C (!,t+ 1) < T C (!,t), we continue by reevaluating the gradient and

starting a new iteration. If not, we stop, with !"t representing an
approximate optimal solution to [P2].
The process of conducting the line search for 9 * deserves some
additional comment. Each value of 9 corresponds to a different set of
loaded movements (a different weighting of two trial solutions). This
implies a different set of supply and demand (right-hand side) values
for the two transportation problems which must be solved to
redistribute empty vehicles. Thus, evaluating TC [( 1-9) !,t + 9~*] as 9
changes requires the solution to different transportation problems.
One way of doing this line search is simply to resolve the
transportation problems directly at each point. This is the most
straight-forward approach, but can be quite expensive for large
problems.
Srini vasan and Thompson (1972a, 1972b) have described an
 288

alternative, more efficient method. Because we are searching along a

line, all changes in the right-hand sides of the two transportation
problems are linear, and this becomes a form of parametric
programming. Srinivasan and Thompson developed the idea of
operators which allow updating of optimal solutions to transportation
problems as various elements of the problem (costs, supplies,
demands) change parametrically. This operator theory allows very
rapid recalculation of optimal solutions as e changes, without having
to resolve the entire transportation problem.
One practical problem of note in applying this theory is that
degeneracy in the original solution of the transportation problem
causes significant computational difficulty in the updating.
Srinivasan and Thompson discuss this as a potential problem in their
second paper (1972b), and in the real problems we have solved this
has often proven troublesome.
 A METHODOLOGY FOR WAREHOUSE LOCATION AND
DISTRIBUTION SYSTEMS PLANNING

Pierre J. Dejax
Laboratoire Economique, lndustriel et Social, Ecole Centrale de Paris,
92295 Chatenay Malabry, Cedex, France

This paper presents a methodology for distribution system planning and

design, which particularly focuses on the warehouse location problem.
The methodology can also be extended to the analysis of procurement,
production and distribution systems, as well as to freight transportation
planning. After reviewing typical structures of distribution systems, a
model building project for warehouse location is illustrated, and problem
solving strategies are briefly discussed.

1. INTRODUCTION

Business logistics is becoming of increasingly important concern to

industrial planning and management for the achievement of the
global objectives of performances and cost effectiveness of the firm.
The concept of logistics itself is playing an increasing global and
integrated role in the industrial process, from the procurement of
raw materials to production itself and distribution of goods to the final
customer and down to the management of post-sales services (Ballou
et.al., 1973), (Heskett et.al., 1973), (Tixier et.al., 1983), (Handler and
Mirchandani, 1979).
This increasing importance and complexity of logistics systems
interacting at all levels of the firm as well as with the external
environment for the best management of product flows and associated
information is particularly reflected in the structure and
management of the distribution system of the firm. This complex
system is in constant interaction with the production system,
customers and other internal and external partners such as
transportation services.
At the same time considerable research has been done on operations
 290

research or other decision making techniques for the design and

optimization of the whole or particular components of distribution
systems, both at the strategic, tactical and operational levels.
An entire conference sponsored by the U.S. National Science
Fondation was recently devoted to the state of the art and research
opportunities in all aspects of logistics and transportation research
(Boyce, 1985).
At the operational level a considerable research effort has been
made on all aspects of distribution systems management with all kinds
of models and techniques. As an example, a productive area is that of
the routing and scheduling of vehicules and crews (Bodin et.al., 1983)
or inventory management (Silver, 1981), where many of the research
models have been actually implemented.
In this paper, we are more itnerested in looking at the strategic
aspects of distribution planning and design, and particularly that of
warehouse location.
A considerable and successful research effort has been done in this
area over the past twenty years (Krarup and Pruzan, 1983),
(Cornuejols et.al., 1983).
However, our experience shows that very little of this work is
actually in use in the strategic planning process of the firms. We
believe that this is partly due to the complexity of the management of
a distribution planning project and the lack of methodology on how to
do it compared to the large number of excellent work on models and
algorithms on what to do.
As an exception, we must quote the excellent and well known work
by Geoffrion (1975, 1976) and Geoffrion and Powers (1980).
Warehouse location is faced with a double complexity: the theorical
and computational complexity; and the practical complexity and
multiple aspects of real-life distribution systems, many of which
cannot readily be expressed in the form of constraints and objectives.
This papers aims at filling the gap between theory and practice in
 291

this area on the bases of our own experience at modeling distribution

systems of different kinds and advising companies for the practical
implementation of solutions.
Although focussed on the central question of warehouse number,
size and location, we believe the methodologies presented here can be
extended to the analysis of procurement, production, distribution or
freight transportation systems planning in general.
After reviewing typical structures of distribution systems, we
discuss the objectives and steps of a warehouse location project. Then
we address the question of how to build a model and analyzing the
necessary data in order to determine the model parameters. Strategies
for problem solving are then briefly discussed before we draw our
conclusions.

2. PROJECT: OBJECTIVES AND STEPS

The distribution system of the industrial firm serves the combined

objectives of storing the manufactured goods after production and
transporting them to the final customers according to demand at
minimum cost, while satisfying specific service and quality
requirements such as delivery delays.
Depending on the economic sector and specific logistical context,
distribution systems are typically organized into a number
(commonly two to four) levels:
- the production level. It is characterized by the number and location
of plants, products made, global and by product throughput
capacities, and costs of production, handling and shipping. Note
that sometimes the distribution system does not consider the
production level explicitly.
- One or more intermediate levels of central and regional distribution
centers, warehouse and depots. They serve the purpose of s_torage,
 292

wholesale and retail distribution, order preparation and shipment

to the final customer. Their attributes are their number and
location, product stored, storage or flow capacity, procurements
costs from production plants, costs of structure and operations,
inventory costs and policy.
In addition, warehouse or regional depots will be characterized by
the size of their delivery zone, number of clients, number and
capacity of delivery vehicules, final distribution policy and costs.
- The customer level, which may itself be a complicated structure of
wholesales, retailers and final customers. They are characterized by
their locations, demand per product and time period, delivery
requirements and sometimes storage capabilities.
These production, storage and customers entities may be viewed as
the nodes of a graph. The arcs represent transportation capabilities
from one entity to the next. Arcs are characterized by flow capacities
and costs. They may be duplicated to account for multiple products or
transportation modes and time periods.
Needless to say, actual distribution systems are much more complex
than this short description could let believe and may vary greatly
from one company to the next. In particular, there often exist
interconnections between the facilities that makes it sometimes
difficult to explicitly distinguish the various levels.
An example is that of direct shipment of goods from a plant to a final
customer.
Following the general planning process of industrial firms, the
planning process of distribution systems comprises three different
stages:
(i) the strategic planning stage (1 to 5 years):
• definition of the objectives in termes of profit maximization, cost
minimization, quality of service;
• long term demand forecasting;
• logistics system design: warehouse and depot location, logistics
 293

zone definition and customer allocation to depots.

(ii) the tactical planning stage (1 month to 1 years):
• distribution network design;
• transportation mode and capacity choice;
• monthly planning of storage and distribution;
• vehicule fleet planning.
(iii) the operational planning (up to one month):
• in bound transportation from plants to warehouses and depots;
• inventory management;
• order preparation;
• routing and scheduling of distribution tours from depots to clients;
• empty vehicule management.
The ultimate stage of the operational planning is that of the real
time management of operations.
In this paper, we will be mostly concerned with strategic questions
concentrated on the location distribution system and the other
planning stages. Of course tactical and operationl planning issues will
in turn result in policies which have to be considered for strategic
planning issues.
Real life problems are by definition very complex and do not fit
simply into categories corresponding to specific models for which
efficient algorithms exist, although classical models do usually
correspond to main points of interest in distribution systems
planning, such as multilevel optimization, warehouse location,
distribution tour planning.
A typical company undertaking a distribution system design project
will fall into one of two extreme category:
- either they want to redesign their whole distribution systems
completely (then they will reluctantly admit that all the problems
cannot be solved at once and that they must combine a general
overview with putting priorities on solving specific problems);
- or they want to address a specific problem, within a general system
 294

not to be changed (then they will reluctantly admit that the actual
problem is not the one that they were considering in the first
place).
Industrial companies really expect much more from a warehouse
location project than the location of their warehouses. We have
determined five main points of interest. See also Geoffrion and Powers
(1980) for a very comprehensive discussion of these questions:
1. Good understanding of the current distribution system in terms of
variuos types of costs, flow of products at all level, inventory,
bottlenecks. This gives a general diagnosis of the behaviour of the
system. It contains invaluable information for the company that
is useful per se for current operations improvement. It is also
necessary for the operations research analyst to determine
crucial points of focus for the model as well as for parameter
determination and building cost functions. Simulation of the
current system on the model is also essential to build confidence
and understanding of it and make the necessary adjustments.
Projection of the current system into the future, taking into
account trends in costs and demands. This is essential to forecast
the current system "if nothing is done about it" as well as to
compare proposed solutions to the current system.
2. After modeling (Le. simplifying the distribution system), an
"opimal" structure is usually determined using a more or less
sophisticated algorithm. Although a simplification from reality
can ignores important features, the model has the advantages of
being focussed on key factors of the problem. The so called
optimal solutions are essential to contribute at answering the
following questions:
- What should be the company structure, particularly in terms of
number and location of warehouse in the reference year. This
is the structure that the company should have now if the model
was not oversimplified and if it would be built from scratch (not
 295

taking into account existing warehouses).

- How this "optimal" structure should have evolved over the years
and in particular what should it be over a given horizon (5
years for example). This give the ideal structure to aim at
building and indicate which warehouses should be open or
closed every year.
3. "Realistic" structure to retain. The optimal structure cannot be
fully retained for three main reasons.
- current structure cannot be ignored;
- oversimplifications from reality have to be compensated for;
other objectives than total minimum cost have to be taken into
account, such as quality of service and social impact of the
solutions.
Comparing the current structure to the optimal one for each year
of the plan, one will decide what target structure to retain and
what dynamic implementation to undertake.
4. Dynamic implementation of the structure. One has to determine a
strategy to go from the current structure to the target structure to
be retained at the time horizon (5 years). In particular, one has to
decide when to close existing warehouse which do not belong to
the target structure and when to open new warehouses. This has
to be done considering the changing of the environment over the
years (costs, sales).
5. Sensitivity analyses and alternative solutions. Sensitivity analyses
is essential in logistics projects as well as in all optimization
projects. It allows:
evaluation of the robustness of the solution to changes in the
parameters (costs, demand, capacities);
- evaluation of alternative solutions. For example one can test the
impact of keeping open an warehouse not present in the
"optimal" solution;
- estimation of the impact on solutions of policy changes
 296

(shipment of products from factories to central warehouses and

depots, inventory management, customer deli very).
In order to successfully complete a warehouse location and
distribution system planning project and answer the above questions,
we propose to go through a 10 steps methodology as follows:
1- Problem definition and objectives.
2- Model formulation.
3- Data collection and analysis.
4- Choice of algorithm or other decision making aid.
5 - Model implementation and validation.
6- Solution determination on a base case.
7- Sensitivity analysis and alternate scenarios.
8- Full evaluation of scenarios and final decision.
9- Implementation of decisions.
10- Periodic follow-up and review.
The first steps correspond to the initial building of the model. They
are reviewed only once for every strategic planning project, or if
major changes have occured.
The last five steps correspod to the actual modelling of the
distribution system. They are gone through repeatedly as part of the
planning process and reviewed periodically. Of course, these steps are
seldom executed in forward sequence only, but one frequently goes
back to a previous step for solution refinement.
The next section will be devoted to the building of the model (steps
1-5) and the following one to strategies for problem solving (steps 6 to
10).
 297

3. BUILDING THE MODEL

3.1 Problem Definition and Objectives

A warehouse location and distribution systems planning project

requires careful analysis for a correct definition of the goals of the
project, the limits of the study and its relations to the other sector of
the firm and its external environment, the system structures and the
objectives and constraints may be multiple in terms of profits
maximization, cost minimization, quality of service, satisfaction of
demand, production and transportation capacity limitation,
environmental impact, marketing requirements, human factors, and
many others which we could think of.
A project will usually be initiated, starting from specific goals and
constraints which very well evolve or become more precise as the
project develops. They will seldom be definite right from the start.
The art of modeling relies on the capacity to iterate through the
multiple aspects of the project and finaly converge to widely agreed
upon solutions.
There is no way to, and may be even no use for, perfectly modeling
and solving a real life problem. It would require an infinitely
complex model, for which no exact or computationally practical
algorithm would exist to solve the problem. In fact, there is always
constraints that cannot be modelized.
Actually, solving a real life problem is the art of finding the best
compromise between three factors:
- Building a model that will be reasonably representative of the
distribution system and focussed on its characteristics and key
issues posed.
- Finding an algorithm to power the model and provide a
reasonably approximate solution to the problem in an acceptable
amount of time.
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- Designing a methodology to use the model and algorithm. in order

to solve the problem and related question while at the same time
overcoming and turning around the shortcomings of both the
model and the algorithm.

3.2 Model Formulation

A vast amount of literature has been devoted to facility location

modelling with many aspects of this key issue in distribution systems
planning and we do not intend to review them here. See for example
the surveys by Handler and Mirchandani (1979), Tansel, Francis and
Lowe (1983 a and b), Krarup and Pruzan (1983), chapter II of Aikens
(1982), Laporte (1987) for location-routing models, Daganzo and
Newell (1986) for very promising modelling approaches based on
continuous analytical approximations of distribution systems and
Dejax and Crainic (1987) for locational issues related to vehicule fleet
management.
In a broad sense, we can distinguish between three main classes of
models. We believe that they provide complementary approaches that
should be used in parallel:
- classical optimization models, that will be implemented through a
corresponding optimization algorithm;
- simulation models, which are extremely useful for the modelling
of a very complex systems, and particulary stochastic ones, as well
as for alternated scenarios evaluation of optimization models. In
the first case, they are implemented using high level simulation
languages;
- continuous approximate models appeared more recently and seem
very promising;
- expert systems, appeared also recently but their use is developing
fast. Although they are not models in the classical sense, they are
becoming useful decision making aids for the definition of
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distribution systems.
Models will differ by key factors, such as:
- number of system levels and of products;
objective function: number and possibility to consider economies
of scale, minimax problems;
stochasticity, price sensitive demands;
- requirements on the number of warehouses (m - center problem);
- capacities of warehouses or production plants;
- inclusion of issues related to the location of warehouses, such as
distribution tours to customers, or inventory management;
- static or dynamic location models.
Although this list shows that there exist locational models adapted to
many types of problems, actual distribution systems are very complex
and will never be modelled exactly. We consider unrealistic to build a
fully representative model of the distribution system under study
without any approximation or without being able to handle a problem
of realistic size in terms of number of candidate locations, clients and
products.
We therefore recommend the following:
determine the key issue involved in the warehouse location
problem from a strategic planning point of view;
- determine the minimal specifications of the distribution system,
in terms of number of levels, products, candidate location, clients;
- choose a robust and most appropriate model that will be focussed
on the key issues and offer a reasonably accurate representation
of the system;
perform the necessary aggregation of data regarding products,
customer location and demand, etc... which is incompatible to the
level of decision to make and the accuracy of available data. The
level of detail required and the precision of available data clearly
differ from strategic to operational planning models and the same
model should never be used for decisions of a different nature.
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- Build auxiliary models or approximation formulas to address the

issues which have not been considered explicitly in the main
model, such as inventory management of warehouses, distribution
tours approximations or cost functions for warehouse structure
and operations.
Solution to the problem will be achieved iteratively applying the
auxilliary models or computing parameters from the approximation
formulas and the main warehouse location model with parameters
coming from these other models.
As an illustration, let us consider the most widely studied and applied
simple plant location model (Krarup and Pruzan, 1983). Although
complex to solve optimally, it may be considered rather naive from a
practical point of view, being a two-level, linear, mono objective,
mono product, deterministic model using simplified cost parameters.
However this very robust model is one of the most widely used in
practice, in conjunction with appropriate auxiliary models and
adequate strategy for scenario definition and solution building.
Let] be the set of candidate warehouse locations and Y j = 1 if location
j is open Ue 1) and 0 otherwise.
Let / be the set of customers and Xij = 1 if demand from customer i is
satisfied by warehouse jU e I), and 0 otherwise.
Let Ii be the so-called fixed cost of opening facility j, j e ] and C ij the
total cost of serving customer i, ie/ from warehouse j, j e ] (we shall
come back later to the real meaning and contents of these cost
parameters).
The basic model is thus the following:
Determine Y j , j e] and Xij' i e ], j e ] in order to

subject to: ~EJ Xij= 1 ie/

Xij S Yj i e /,j e]
Xij e {O,l} ie/,je]
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Yj E {O,l} jEJ

Many variations of this simple plant location model exist, restricting

for example the number of open warehouses to a fixed number (p -
center problem), or imposing capacities on the annual flow of
product through the warehouses and allowing clients to be served
from several different warehouses. Other extensions are described for
example in Aikens (1982).
The model relies on clear assumptions: the distribution system of the
firm is supposed to be a simplified two level system where only the
warehouse level is subject to redefinition, with no impact on the
production level. Clients are served by direct shipment from
warehouses, unless the cost of delivery tours has been approximated
by two simple cost parameters: the fixed cost fj related to the existence
of warehouse j, j E J and the service cost C ij for client i, i E I through
warehouse j, j E J. This latter parameter may include the procurement
cost for warehouse j as well as the handling cost of warehouse j and
delivery cost to client i.
This simple model will allow us to address key strategic issues, such
as the number, location and annual throughput of warehouses
selected from a number of candidates, the territory and number of
client served by each warehouse. Other questions such as impact on
the production system, inventory and distribution policy, quality of
service will be addressed through auxiliary models or further
analyses.
In addition to the basic model, we want to be able to incorporate
additional features that will be usefull in scenarios evaluation, and
sensitivity analyses, such as:
- being able to restrict or impose the clients allocated to a given
candidate warehouse. This can be based for example on demand
volume or to meet quality of service requirements, or to force the
warehouse territories to meet specific requirements.
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Being able to impose or on the contrary forbid the opening of any

given warehouse.
Being able to impose customers to be served each from a given
warehouse.
In the warehouse location litterature, it is well known that the
optimal solution is a best compromise between:
- The total fixed costs of opening the warehouses:

I f· y.
JEJ J J
The total cost of servicing the clients through the open
warehouses:
I I Gj xlJ..
iel JEJ
In the next section, we will examine in greater detail how to
determine these costs, which is not easy for practical problems. While
the fixed costs clearly increase with the number of warehouses, the
service costs usually decrease, as the warehouses become closer to the
clients, although distance from the production plants increase.
Actually, C ij' the total cost of servlcmg client i through warehouse j
is composed of several elements:
- all transportation costs from the production plants and central
warehouses serving warehouse j;
- all handling or storage costs along the· system, that can be
associated with the goods for client i;
- the fraction of distribution costs from warehouse j that· can be
associated with servicing client i. In problems involving delivery
tours, this quantity is difficult to determine.

3.3 Data Collection and Analysis

In the previous section we discussed the fact that a "good" model does
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not need to be an exact representation of reality, but a reasonably

accurate approximation focussed on key decisions to make. Getting the
data to fit into the model is not an easy task since it requires a
transformation of the real world data to fit into the approximate
model. An additional difficulty is due to the general unavailability of
relevant data within the firm.
We address below two of the major questions that arise in getting the
relevant data for a warehouse location problems. Data collection and
analysis is essential both for the definition of the most appropriate
model and for the determination of the various parameters to fit into
it. A third essential question which we do not address here is that of
demand estimation and forecasting.
A. Customer Aggregation
Typical multilevel distribution systems have a small numbers of
factories and central warehouses (less than 20), a medium number of
warehouses (10 to 50), with a number of candidate locations that can
be well over 100. So the first three levels do not really pose
dimensional problems from a network design point of view (the
number of potential location sites does of course pose a combinatorial
problem).
The customer level, however, poses many dimentional and
conceptual problems: first it often comprises several thousands
customers. Classical models cannot handle such a large number of
customers. 100 possible warehouses sites with 2000 customers would
yeld 20000 customers allocation variables in a mono-product model.
However, considering such a large number of decision variables is
useless for a strategic planning model where the focus is on the
location of warehouse and the definition of customer zones, not on the
handling of individual customers.
Reduction in problem size is done in two ways:
(i) limitation of the number of candidate locations possible for each
client. It can be done for example in terms of maximum distance.
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Such limitation is not penalizing in practice and it is consistent

with usual practice and quality of service requirements. One has
to be careful not to be too drastic in the limitation, because it
would force the algorithm to open more warehouses than
optimally needed.
(ii) Customer aggregation: Individual customers will be aggregate into
a reasonable number of customer zones (up to 300 for example).
This aggregation may be done in two ways:
- cluster analysis: classical methods of cluster analysis are the
most appropriate in theory, particulary when customer
locations or demands are unbalanced. However they are
cumbersome to use for this type of problems and they may not
ycHd better results than the second method for most practical
problems. They also require the calculation of large distance
matrices.
- Administrative regroupment: by this we mean the construction
of customer zones that correspond to administrative districts.
This method is to use. District centers usually correspond to
points of already available distance matrices and so no
additional distance calculations are required.
After customer aggregation, the total zone demand is computed as
the sum of the individual demand and attributed to the zone. For
multimode, multiproduct problems this may result in a change of the
distribution pattern from the unaggregated situation: the customer
zone centers, which we will from now on call the clients, may require
to be delivered all products, by all available modes (road, rail).
B. Cost Determination
Classical location models rely on the so called fixed costs I j of
opening a location and variable costs C ij of allocation client i to
warehouse j, but their practical determination causes many problems,
for several reasons:
(i) distribution systems managers do not know such things as "fixed.
 305

costs". Most of the costs that can be associated to their warehouse

operations in their books are essentially variable and cannot be
easely associated to product distribution to a given client.
(ii) The model is a simplification or transformation of the real
distribution systems. The costs required by the model do not
correspond to actual physical parameters. For example, C ij
includes the cost of direct distribution from warehouse j to the
center of customer zone i. Whereas costs incurred by the
warehouse corresponds to deliveries to individual clients by
distribution tours involving a number of clients together.
(iiiLA strategic planning model requires cost parameters that are
applicable to all clients and potential warehouse locations, most
of them being non existent in the current system. It also requires
costs that will be applicable in the future and that are not biased
by current operational policies. This is exactly the opposite of
what company costs reflect: costs of all existing warehouses are
different and there are of course no costs available for non
existing warehouses.
(i v) Cost parameters determined on the current system that comprises
n warehouses will be plugged into the model to determine the
optimal number n' of warehouse and other distribution system
features. However, there is no evidence that these cost
parameters will still be valid for a system with n' warehouses,
that will differ from the current system in many respects, such
as size of customer zones, delivery tour number and policy,
inventory levels, etc. A careful feedback and post-optimization
analyses is necessary to check the validity of the hypotheses.
If we analyse the various costs incurred by the distribution system,
some of them will clearly be structural and permanent and can fall
into the "fixed cost" category; others will clearly be associated with
the service of specific clients through a warehouse. But a number of
cost factors will not easily fall into one of these two categories, wether
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they be production transportation, handling and storage, building

operations, energy or personnel costs at all levels of the distribution
system.
This is true in particular of costs factors that depend on the total
warehousing or distribution activities, but that do not depend upon a
specific client. Considering the sensitivity of warehouse location
models to the relative values of fixed and variable costs, one has to be
very careful on how to determine cost parameters.
Another relevant question to ask is wether fixed costs for different
warehouses should be different or equal in a strategic planning
model.
Customer service costs may be based upon the same unit costs, or
unit costs that may vary depending upon the geographical area.
These unit costs are multiplied by parameters such as volume and
distance to yield service costs that differ between customers.
But fixed warehousing costs may be same for all potential location or
may differ, depending on:
- geographical area (due to different land-use costs, labor costs,
transportation costs in city plain, mountain);
- warehouse size and activity (which is only determined after
optimi za tion).
We believe that fixed costs should essentially be taken as constant
independently of size. They may only differ because of geographical
considerations. But one has to be very careful how to make the fixed
cost of all potential locations vary.
We propose two methods simultaneously, in order to build a better
confidence into the resulting parameters.
(i) Normative method. Parameters are determined through a zero-
base analysis, analysing current costs, costs incurred by other
companies and weighting the results with trends appearing for the
future.
All cost factors of the distribution system may be analysed by this
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method. However it applies more easily on costs that clearly fall into
one the fixed or service cost category. They may yield an arbitrary
choice for the other costs.
In particular, it is useful to build a warehouse structure and
operations cost model of the following type:
C=C 1 +C2 +C3 +C4 , where:
C1 general and administrative costs
C2 inbound supply and handling costs
C3 inventory costs
C4 order handling and delivery costs
Each of these costs can be decomposed, as:
C 1 =/1 + a 1 v
C2 = /2 + a2 v + b 2 p
C 3 = /3 + a3 v + b 3 p
C4 =/4 + a4 v + b4 P + c4 q
where:
v is the total volume handled by the warehouse,
P is the number of products stored,
q is the number of clients.
The fixed warehousing cost will be taken for warehouse location j to
be:

(ii) Statistical analysis method. A statistical analysis of all costs

incurred by the current distribution system will be carried out using
a classical multiple or stepwise regression software package. Annual
costs of existing warehouses will be analysed against activity
parameters. This analysis will yield "fixed costs" as well as activity
costs together with coefficients of determination and confidence
intervals for these parameters.
The analysis may be conducted globally for total warehousing and
distribution costs, or separate analyses can be done relatively to the
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different distribution system components. Activity parameters will

typically be volume processed (tons, square meters or palets), number
of products, number of clients, surface or radius of delivery zone,
number and lengths of delivery tours (in hours or kilometers).
A first step of the statistical analysis consists in computing the
correlation matrix of all parameters for the whole set of observations
(the warehouses). Best explicative parameters are those having high
correlation with the (explicative) variables (the warehouses costs)
and low correlation between themselves. This usually allows for the
determination of the best two explicative parameters, such as annual
volume processed through the warehouse and a parameter
representative of the distribution territory, such as distance
travelled.
A second step in the statistical analysis will consist in performing
regression analyses of distribution costs against activity parameters.
Note that stepwise regression methods determine automatically the
best parameters.
After removing obviously points, the regression analysis exhibits
the best cost formulae for the various components of the distribution
system. Linear regression is often sufficient. This yields to
distribution costs of the type.

Carefull checking of the determination parameters of the

regression should be done as well as confidence intervals, given the
desired probability level (usually 90 or 95 %).
Actual parameters I, a, f3 are random variables belonging to the
intervals centered at the mean values 10' a o, 13 0 ,
Given these precautions, 10 will be taken as the common fixed cost of
all locations. a 0 will be a volume parameter with no effect of the
number and location of warehouses. f3 0 will be a distribution
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parameter used into the distribution costs C ij"

Some systems will not be modelled linearly and might exhibit
increasing and then decreasing return to scale.
Such cases might require the use of two sets of parameters for small
and for large warehouses. A general characterization of cost
functions may be found in Kendricks et.al. (1978) for production
systems involving decreasing, constant and then increasing returns
to scale. More complicated systems may require non linear modelling.
When simple regression is not sufficient, solving the warehouse
location problem may require either iterations of the location
algorithm, or using more general mixed integer programming
algorithms.

3.4 Choice of Algorithm

After a warehouse location model has been chosen to synthetize the

main features and objectives of our distribution systems planning
project, we are left to choose a corresponding algorithm to actually
solve our problem. The same question arises for the associated
submodels (see section 3.2).
If we restrict our discussion to classical optimization models, we must
remark, from the examination of the scientific literature, that many
models are so specific to a given warehouse location problem that
they have been implemented and tested together with a unique
solution algorithm, althrough sometimes alternate algorithms could
also be tested.
However, in many instances, one has the choice of a wide range of
different algorithms and solution techniques to power a given model.
This is particularly the case of our simple facility location model
which we took as an illustrative example.
This is due to the impressive amount of research that has been
undertaken in this area over the past twenty-five years. See Krarup
 310

and Pruzan (1983) or Cornuejols aLaI. (1983), for an extensive

discussion of all available algorithms for that classical model, and
Aikens (1982) for extensions. Algorithms range from greedy and
interchange heuristics (Kuehm and Hamburger, 1963), to
optimization algorithms relying upon various techniques, such as
Branch and Bound (Khumawala, 1972), Lagrangean relaxation
(Geoffrion, 1974), dual-based procedures (Erlenkotter, 1978), Benders
decomposition (Benders, 1962), primal sub gradient approach
(Cornuejols and Thizy, 1982) and other very specific methods
developped recently.
General characteristics that one may require from possible
algorithms to solve a given model may be as follow: we assume that
major characteristics such as number of, products, existence of
capacities, etc., have already been decided upon when defining the
model. The final choice of an algorithm will be based both on
performance criteria and capabilities to carry out and easily perform
scenarios evaluation and sensitivity analysis:
- type of solution obtained; (optimal, heuristic, simulation and
scenario evaluation);
- problem - size characteristics; (size of problems that can be
handled for a reasonable amount of computer CPU and running
time: number of network modes and arcs, maximum number of
warehouse candidates);
- robustness of computational technique, dependance on starting
solution, round-off errors;
- possibility to obtain a feasible solution and upper bound on error if
the algorithm does not run towards optimality;
- capacity to analyse alternate scenarios and perform sensi ti vity
analysis;
- portability and possibility to run on micro computers or be
imbedded into larger systems.
The algorithm to use in order to solve a particular model depends on
 311

all these factors. Actually, we believe that a good methodology may

require the successive use of several algorithms or computational
methods in order to solve the problem (see section 4).
As as example, for the warehouse location problem one could
profitably use the following types of algorithms or solutions methods:
- Simulation: it allows parameter determination, model calibration
with respect to the current existing system, and the detailed testing
of any specific solution.
- Optimization without capacities: it leads to the determination of
target solutions for the strategic aspects of the problem (where
capacities are to be determined, not imposed), and gives bounds on
the solutions that will be useful to evaluate heuristics solutions.
- Heuristics: less time consuming than exact algorithms, they
produce solutions close enough to the optimum for most practical
problems. This is because real life situation have hidden,
underlying characteristics that are not present in worst cases or
even randomly generated cases, and that can be taken care of in
building the algorithm. Heuristics let us test a number of alternate
solutions and are extremely useful to iteratively determine
solutions to the problem with techniques half way between pure
optimization and pure simulation. For example, good heuristics can
be built to impose open or closed any particular location and freely
determine the remaining ones, or to impose a given number of
open location.
- Optimization or heuristics with capacities: they will be usefull to
determine refinements of target solutions produced by the
uncapacitated algorithms. They let us take care of capacity
problems for specific locations.

3.5 Model Implementation and Validation

Distribution systems planning requires the manipulation of a large

 312

number of data, particulary relative to network design, location and

distances, to consumer demand and to cost functions. Besides, solving
the problem usually requires numerous runs of several different
algorithms and the evaluation of a number of solutions and
alternative scenarios.
For these reasons, our models need to be implemented on an easy to
use, flexible system with a modular architecture where only
necessary calculations will be done and proper storage of permanent
data will be organized. Interactive and graphic features offer such
possibilities. Modern, high capacity micro-computers offer very
interesting capabilities for that purpose.
Some interactive graphic systems applied to the areas of
production, distribution and transportation have been developped
over the past few years. They address a variety of specific
applications, mostly at the short term, operational planning level,
ranging from production scheduling to the routing and scheduling of
vehicles. See for example Fisher (1987) for a review and classification
of these systems.
Very few interactive graphic systems have been developped,
however, for the design and modelling of longer horizon tactical or
strategic planning systems such as facility location and distribution
system design. Meeraus (1983) and his colleagues have developped a
general algebraic modelling system (GAMS), that has been applied to
several international projects for the choice of investments and of
the location of industrial facilities. It does not contain graphic
possibilities, however. Sorensen (1986) has developped an interactive
- graphic modelling system for distribution systems which is applied
to vehicle routing problems from warehouses to customers.
We have developped a prototype modelling system for warehouse
location. Crainic and Mondou (1986) discuss interactive - graphic and
operations research methodologies for freight distribution and
transportation systems planning.
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It comprises three main components interacting through a menu

driven achitecture at all stages of the modelling process:
- an interactive - graphic capability allowing an easy input and
visual representation of data and results of warehouse location
scenarios evaluation;
- a data base including all necessary permanent and temporary
information on network structure (production warehousing and
client levels and transportation links), supply and demand of
products and all cost informations;
- a decision software library containing the selected optimization or
simulation models and algorithms, statistical analysis software and
solution evaluation system.
Once the distribution planning system has been constructed as
explained though the previous sections, one ultimate and essential
step has to undertaken before the actual modelling actions may be
performed: the calibration and validation of the model on the base of
a previously known situ'ation. Typically the model is run on historical
distribution structure and data.
This validation process allows the decision maker to ensure that the
model is an adequate representation of the actual system and thus to
build confidence in future predictions. This also gives the
opportunity for a final calibration and adjustment of model
parameters.

4. STRATEGIES FOR PROBLEM SOLVING

In the previous section, we have illustrated the building of a

modelling system for warehouse location and distribution system
planning. We will now briefly discuss the last five points of our
methodology, related to the actual use of this system to reach solutions
that can be implemented within the firm. Examples of such
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applications have been discussed in Dejax and Turri (1986) and Dejax
and Servant (1986).
During the model building stage of a warehouse location project (see
section 3), a model should be formulated, corresponding to the
distribution structure of the firm and project objectives. Appropriate
algorithms must be chosen to find numerical solutions. Typical
algorithms will be an optimal warehouse location algorithms,
heuristics to complement the algorithm for specifities of the problem
and algorithms such as a network flow or inventory management
algorithm to supplement the results of the main model.
Relevant data must be collected and analyzed for parameter
determination and the model should be validated on historical data.
We will suppose this historical data corresponds to the past year
operations, called year 0, and that the main objective of the project is
to determine the best logistics structure at a given horizon, n (say 5)
years from now. Year n is called the target year. This seems quite
arbitrary but usually corresponds to a long term planning period of
the firm.
Reliable data is usually not available to plan for the industrial
structure over an infinite time horizon. We have chosen to illustrate
our methodology on the bases of a multiple year dynamic project
example. A static, one period project would only be a special case.
We will call the base case the scenario corresponding to current or
forecasted data and logistics objectives and constraints that the firm
has agreed to be the most probable over the planning horizon of n
periods, and particularly for the target period.
Running the model on the base case, and later, on alternative
scenario will allow the determination of proposed logistics structures
in terms of number, location and size (annual throughput) of
warehouses, logistics zone served by each warehouse (allocation of
clients to warehouses), and general impact on the distribution system
(impact on production load, flows at all levels of the distribution
 315

system). Finally, each scenario evaluation will result in cost

determination (fixed and variable), globally and for each part of the
system.
Major questions to be answered at this step are:
1. which logistics structure should the firm have had at year 0
according to the model. How to interpret the differences with the
current system, in terms of structure and costs.
2. Which "ideal" logistics structure should the firm have at the target
year of the planning horizon and for each intermediate year.
3. Which "realistic" structure should they retain considering
practical considerations of importance that have not been included
into the model.
To answer all these questions, the model will be solved with
parameters corresponding to the base case and a list of proposed
candidate warehousing locations. This list usually include all existing
warehouses as well as a list of possible locations proposed by the firm
(usually 100 to 200).
In step 5 of our methodology, the model is validated against the
current system at year 0 by simulating the existing structure. In
particular only the existing warehouses would be kept open. Possible
differences in terms of flows and costs would be observed between the
model simulation and reality. They would be kept in mind for the final
decision regarding the proposed structure over the planning horizon.
Answering question 1 will enable us to determine which logistics
structure the firm "should have had" at year O.

5. CONCLUSION

We have presented a methodology for Distribution Systems

Planning. This methodology was particulary focused on the
warehouse location problem. It results from our experience in several
 316

major distribution system planning and design studies using optimal

as well as heuristic algorithm.
Although many features of the methodology can be used for more
general modelling problem, our purpose was to address a number of
specific problems of distribution systems planning. We particulary
insisted on the fact that good problem solving needs the simultaneous
use of three key factors: model, algorithm and methodology. They
cannot be designed independently from each other.
From them a number of specific research directors should have
appeared from the article:
- the permanent need for efficient algorithms for warehouse
location (uncapacitated, capacitated or combined with routing),
that can handle real problems;
- the need for more general location algorithms that can efficiently
handle multi-level and multi-product systems and combine
location of warehouses with flow optimization;
- the need for efficient heuristics that can handle specific features
not present in exact algorithms. The heuristics need to be tested
against exact algorithms for real problem, not only for academic
problem or against worst case, or even probalistic analyses.
- The need for sensitivity analyses and reoptimization features built
in exact algorithms;
- tl1e need for good customer aggregation methodologies specialized
for distribution problems, as well as for cost of vehicle routing
approximations to be used in warehouse location algorithms.
- the need for good dynamic implementation algorithms;
- correct solution to the problem feedback on parameters;
- interactive-graphic systems for warehouse location.
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ACKNOWLEDGEMENTS
This work was partially supported by the Office de Cooperation
France - Quebec under Project Number 20020686 FQ.
The author whishes to thank Gilbert Laporte for his valuable
comments during the writing of this paper.

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 MINIMIZING COSTS IN CRUDE OIL TRANSPORTATION.

A. Sassano

Istituto di AlUJlisi dei Sistemi ed Informatica - CNR

Via Ie Manzoni 30, Roma

The problem addressed in this paper is as follows: At each of a number of

origin ports is available a given quantity of a single type of crude oil.
Likewise, we are given quantities of crude oil required by a number of
refineries (destination ports) in order to meet their production
schedules. Finally a fleet of tankers with given volume capacity, weight
capacity and speeds is available.
It is then required to solve the transportation problem of shipping all of
. the available quantities to the required destination with the additional
constraints that each tanker must leave from the origin port and arrive to
the refinery within specified time window.
The aim of this paper is to describe a mathematical model of the above
problem and give a brief summary of an implementation of such a model
by means of a general purpose Decision Support System.

1. INTRODUCTION

The availability on medium and even small size computers of

general purpose Decision Support Systems (DSS) has drastically
increased, in the last few years, the interest of the practitioners on
quantitative methods and, in particular, on the methods of Operations
Research.
In particular, the user friendly interfaces and the sophisticated
Linear and Nonlinear Programming problem-solvers incorporated in
the last generation DSS's have turned the scepticism of the users into
a growing demand of high quality solution for their complex
problems.
This increasing opportunity to apply their methods is,
unfortunately, not completely toll free for the optimizers. In fact, as
in the case of high level programming languages, the abstract model
 320

has to take into account not only the structure of the problem but
also the features and the limitations of the DSS on which the model
will be implemented.
In this. paper we give a condensed summary of the modelling phase
of a project having the goal of assigning cargoes and routes to
seagoing tanker in order to meet the production schedules and to
minimize the transportation costs. The entire procedure will be
implemented on a DSS (Execucom's IFPS), and hence this paper also
describes the choices done by the designers to better. exploit the
features of this particular DSS.
Not many references to this problem are available in the literature.
The first paper is that by Dantzig and Fulkerson (Dantzig and
Fulkerson 1954) who formulated a simplified version of our problem
as a Hitchcock Transportation problem. In another two papers
(Bellmore et al. & 1968, 1969), the authors consider a different
problem in which the number of tanker available is insufficient to
meet the requirements and the objective is to maximize the "utility" of
the deliveries made by the tankers. The problem is formulated in
terms of arc flow variables and is solved by the Dantzig-Wolfe
decomposition. Finally, Appelgren (1971) considered a more realistic
problem, but he still assumed fixed cargoes that were the same size as
the ships, and single port dicharges.
The paper is organized as follows: we first describe (Section 2) the
main parameters of the problem, successively (Section 3) we outline
the overall structure of the project and finally (Section 4) we describe
the mathematical structure of the first module of our model.

2. STRUCTURE OF THE PROBLEM

This section describes the structure of the problem and it is

organized in three subsections. The first describes the structural
 321

parameters and the operational constraints of the origin ports. The

second and the third describe, respectively, the characteristics and
the production requirements of the refineries and of the sea-tanker
fleet.

2.1. Origin Ports.

There exist n p origin ports and at each port j is available a single

type of crude oil that will be also designated as j . This assumption does
not restrict the generality of our model since it is always possible to
describe a port in which m types of crude oil are available, as m
distinct origin ports, each associated with a single type.
At each origin port we have a list of assets of crude oil that must be
picked up within a specified time window. The quantity, the time
window and the unit price for each asset are usually specified in the
purchase contract and, in any case, are considered as esogenous
parameters by our model.
We will represent each asset ri as a quadruple U,g,d 1 ,d2 ) where j is
the origin port (and hence the type of crude oil), g is the quantity to
be picked up and d 1 and d 2 are , respectively the first and last day of
the time window in which the asset r i can be picked up.
If the available assets of crude oil at the origin ports are not enough
to satisfy the production requirements of the refineries, we have a
global deficit in the system. This problem is usually solved by
purchasing new quantities of crude oil in the so called spot market
In order to give our automated system the ability to propose, to the
human decisor, a possible purchasing strategy on the spot market, we
assume that at each origin port j there exists an unlimited amount of
crude oil j having unit price Cj whose role will be made clear in
Section 4.
 322

2.2. Refinery Requirements.

We define requirements the amounts of crude oil needed by the

refineries to maintain a given production rate. Each refinery has its
production cycles and, for each different cycle, a time window and a
list of possible types of crude oil are specified. The purpose of our
procedure is to assign the crude oil assets available at the origin ports
to the refineries in a way compatible with the time restrictions and
the requirements. Moreover we assume that each refinery is served
by a port and that the transportation costs from the port to the
refinery are negligible.
For each refinery i we have the following structural parameters:
(1) The set G j of the types of crude oil that are used in the refinery.
(2) The total amount lik of crude oil required by the refinery
during the month k.
(3) The number Yl(d) of production days from the beginning of
month I to day d (included).
(4) The list of elementary r e qui rem e n t s, each of the form Ii
=(q,k 1 ,k 2 ,t),where q is the quantity of crude oil required, t is a
list of types and (k 1 ' k 2) is the time window in which the
quantity q must be delivered to the rafinery in order to meet the
production schedule.
(5) The minimum value of the inventory level (S TO C K MIN). If the
total amount of crude oil available at the refinery is less than
the value STOCKMIN , we have a shortage.
(6) The minimum I m and maximum L m value of the inventory level
at the end of month m.
(7) The number n c of docks in the port and, for each dock, the list
of capacities (in tons) of the ships that can be served by that
dock.
All the parameters specified above impose a number of operational
constraints on the decision variables. In particular, we have that:
 323

( 1) The total amount a mj of crude oil discharged at the refinery j

during the month m and the inventory level S mj at the end of
month m must satisfy the constraint:

(2) We assume a constant rate of production and hence, denoted as

a(d) the total amount of crude oil discharged up to day d, we
have a shortage in day d if:

Sm_lj - (Ym(d)1 Y m (30»)fmj + a(d) < STOCKMIN

2.3. Sea-Tankers and Routes.

In this last section we describe the parameters associated to the

sea-tankers that are most frequently used to transport crude oil. The
sea-tankers will be classified, according to their weight (in tons) in
the following classes:

(A) 250.000 t ; (B) 150.000 t; (C) 130.000 t; (0) 100.000 t; (E) 80.000 t

Moreover, all the tankers with weight less than 50.000 t will be
included in a single class (F). The sea-tankers are supposed to sail
along fixed r 0 ute S that are identified by the pair origin port-
destination port.
For each sea-tanker j we define the following parameters:
(1) The weight class t.
(2) The number of days D ijl needed for a tanker belonging to the
weight class t to go from a port i to a port j ..
(3) The cost C ijt of running a tanker belonging to the weight class t
from the port i to the port j. The cost C ijt is supposed to be a
 324

linear function of the size of the cargo.

2.4. The Objective.

The objective of our transportation problem is the following: All the

assets of crude oil available at the origin ports must be picked up
within the specified time windows. If the total requirement of the
refineries exceeds the available assets, some extra quantities of crude
oil must be purchased in the spot market at a minimum price.
The assets available at the origin ports must be subdivided into
batches and shipped to the refineries. The transport is done by a fleet
of sea-tankers with given capacities. The batches must be delivered to
the refineries in such a way that the operational constraints
concerning the inventory and the production cycle are satisfied.
All the above operations must be done with the objective of
minimizing a suitably defined cost function, which takes into account
the transportation and the purchase price.

3. THE MODEL

In the previous section we have briefly described the structural

parameters, the operational constraints and the general objective of
our problem. The purpose of this section is to give a general overwiew
of the mathematical model and of the procedures that have been
implemented in a DSS environment.
The first point that has to be stressed is that the problem in its full
generality is very hard to solve. It is composed by scheduling,
routing, assignment and inventory control subproblems that are
tightly interconnected and hence, in our opinion, a single
mathematical model would be either intractable or meaningless.
As a consequence we took a different route and decided to decompose
 325

the problem in two subproblems. The first is the problem of

decomposing the assets at the origin ports into batches and assign the
batches to the refineries with the objective of satisfying the
requirements and minimizing a function which takes into account
the trasportation costs and the purchase price.
The second problem is that of assignig the batches to the available
sea-tanker with the objective of minimizing the transportation costs.
The two subproblems are sequentially solved and hence the
procedure that assigns the batches to the refineries ignores all the
constraints imposed by the availability and the characteristics of the
sea-tankers. Conversely, the program that chooses the sea-tankers
will consider the batches and their destinations as fixed input data.
The model is composed by two types of modules:
(1) Simulation modules
(2) Optimization modules
The simulation modules are the interactive components of the model.
They are used to assist the user to prepare the input for the
optimization phase and to analize and modify the proposed solutions.
The optimization modules have, conversely, the purpose of finding
the optimal solutions for large scale problems and are, necessarily,
not controllable by the user.
In particular the proposed model is composed by the following
modules:
(1) Interactive definition of the requirements at each refinery.
(2) Decomposition of the assets into batches and Assignment of the
batches to the refineries.
(3) Interactive adjustment of the optimal solution proposed by the
previous module.
(4) Assignment of the batches to the sea tankers.
The modules (1) and (3) are simulation modules while the modules
(2) and (3) are optimization modules. In what follows we briefly
describe the structure of each module.
 326

3.1. Definition of the Requirements.

In this phase the user is asked to specify, for each refinery, a list of
qantities of crude oil along with the associated time windows so as to
satisfy the operational constraints of the refinery. The system checks
if the list proposed by the user violates one of the constraints of the
refinery and, if this is the case, asks the user to correct the list until it
satisfies all the constraints.
The output of this module is a list of requirements of the form
Ji= (q,k 1 ,k2 ,t) , described in section 2.2.

3.2. Definition and Assignment of the Batches.

When the list of requirements is specified for each refinery, the

optimization module that produces the list of batches and assigns them
to the refineries can be activated. In Section 4 we will provide a
detailed description of this module, here we simply recall that its main
goal is to satisfy the requirements of the refineries using all the
assets available at the origin ports and, possibly, suggesting the best
possible list of crude oils to be purchased in the spot market.

3.3 Adjustment of the Proposed Solution.

This is a typical simulation module. It is motivated by the practical

need of modifying an optimal solution proposed by the module 2. In
fact, due to the simplified structure of our model, an optimal solution
could be not satisfactory for the user since some "hidden" constraint
could be violated.
A purely mathematical answer to this problem could be: add the
extra constraint to the problem and reoptimize. Unfortunately, this
answer is still not satisfactory since the user could like very much
part of the proposed solution and the reoptimization would not
 327

necessarily pres eve that "good" part.

It follows that the best way to proceed is to allow the user to modify
the optimal solution in an interactive session. The system simply
checks if the solution is feasible for the model and, in this case,
computes the new value of the objective function.
We do not discuss here the optimization module that assigns the
batches to the sea-tankers since it has not been fully designed.

4. A MATHEMATICAL MODEL FOR THE ASSIGNMENT OF

BATCHES.

In this section we study the matematical structure of the

optimization module that defines and assigns to the refineries the
batches of crude oil.

4.1. Input Data.

We suppose that the n assets ri =(P,gi,d 1 ,d 2 ) are available at the

origin ports where p is the type of crude oil, g i is the quantity and
(d 1 ,d2 ) is the time window in which the asset can be picked up.
Observe that to each port p (and hence to each type of crude oil) are
associated a set R p of special assets with g i> > 0 that represent the spot
market. Each asset rph' belonging to the set R p , has a purchase price
C ph and the time window represents the minimum amount of time in
which the price C ph can be considered constant.
Furthermore. we suppose that in the module (1) have been defined
m requirements of the form Ij = ( q j' k 1' k2 ' Ij) , where q j is the quantity
of crude oil required. Ij is a list of possible types and (k 1 ,k 2 ) is the
time window to deliver the quantity q j to the rafinery in order to meet
the production schedule.
 328

4.2. The Auxiliary Network.

We introduce a bipartite multi-graph G =(U,v,E) defined as follows:

Each node vi in the set V is associated to an asset ri (or a special asset
rph) and each node Uj is associated to a requirement ft.
A node v i is connected to a node Uj by an arc (v i' U j) having
capacity t if:
A sea-tanker having weight t. can stop at both ports i and j.
The time windows associated to the two nodes satisfy the
condition:

where A 1 and .12 are adjustable parameters.

The crude oil available at the origin port i is contained in the list
Ij of admissible types of crude oil associated to the requirement ft
We denote by A =(a ijt ) the matrix with the property that aijt = 1 if the
edge (vi,Uj) with capacity t belongs to E and aijt =0 otherwise.
The cost of the arc (vi,Uj) having capacity t is given by the cost C ijt .
If the asset rph belongs to the set R p for some port p, then we add to
the standard cost also the unit purchase price cph'
Finally, we associate a variable Xijt to each arc (vi,Uj) having
capacity t. This variable represents the quantity of the asset i (batch)
that is used to satisfy the requirement j and is carried by a sea-tanker
of capacity t.
We can now formulate our problem as a linear program in the
following way:

min L·l L'J a lJ. 't C lJ"t x lJ"t

s.t. for each asset r i (4.1)

 329

Li a iil x iil .2::.. qi for each requirement fJ (4.2)

O'5,x iil '5, t

Evidently, the above problem has a feasible solution if the sum of

the capacitities of all the arcs incident to a node v i or Uj is greater
than g i andq j respectively. Furthermore, if the total requirement
exceeds the sum of the assets available at the origin ports then the
"special assets", representing the spot market, will be used.
We conclude this section with an example of generation and solution
of the above linear program.

Example: Suppose that two origin ports PI and P2 are given with
the following characteristics:

Port PI: _ _ _ .....

A""SS....E....T.....S"--_ _ _ SHIP CLASSES UNIT PURCHASE PRICE
Quantity Time window Price Time window
(1) 320.000 t (1,4) D,E (3) 18$ (5,10)
(2) 200.000t (10,14)

Port P2: _ _ ASSETS SHIP CLASSES UNIT PURCHASE PRICE

Quantity Time window Price Time window

( 4) 300.000t ( 3,8) C,D (6) 14$ (l ,7)

(5) 200.000t (11,16)

Furthermore we have two refineries R 1 and R2 with the following

properties:

Ref. Rl: _ _ _ _ _ REOUIREMENTS SHIP CLASSES

Types of crude oil Quantity Time window
(1) Pl,P2 500.000 t (5,1 1) C,D
(2) Pl,P2 300.000t (15,17)
 330

Ref. R2: _ _ _ _ _ REQUIREMENTS SHIP CLASSES

Types of crude oil Quantity Time window
(3) P1,P2 300.000 t (5,7) C,E
(4) P1,P2 300.000t (8,14)

Finally, all the parameters relative to the routes from the origin
ports to the refineries are summarized in the following table:

- RQUTE CLASS C CLASS D CLASSE

Qays Unit !;;Qst Days llnit !;;Qst Days unit !;;Qst
PI - R1 4 4$ 3 3$ 2 2$
PI - R2 8 4$ 3 3$ 3 2$
P2 - Rl 8 4$ 3 3$ 2 2$
P2 -R2 8 4$ 3 3$ 2 2$

To conclude the description of our problem we have to choose the

values of the parameters ~ 1 and ~2 that are necessary to define the
pairs of compatible time windows. In particular, we set both to zero.
We now construct the auxiliary graph G =(V,U,E) ..
The set V contains 6 nodes, namely, those corresponding to the assets
(1),(2),(4),(5) and to the two special assets (3) and (6) representing
the spot market. The set U contains 4 nodes, the requirements (1) -
(4). The set E is defined according to the rules specified above. For
example the node corresponding to asset 1 is connected to the node
corresponding to requirement I by an edge with capacity 100.000
(class D) because:
(a) A sea-tanker of class D is compatible with port PI and R1.
(b) The two time windows are compatible since 5 ~5.5 ~11.

(c) The crude oil PI belongs to the list of requirement 1.

In a similar way we produce all the other edges of the auxiliary
graph. Figure 1 shows the graph G, the labels on the edges indicate
the class (capacity) and the unit cost. The edges drawn with heavy
 331

lines represent multiple edges.

The linear program associated to the graph is the following:

min 3xIID + 3x 13D + 3x 21D + 3x 22D + 3x 31D + 3x 41D + 3x S2D +2lx61D +

2163D + 2x34E + 18x64C + 4x44C + 4xS2C

S.t. xllD + x13D ::;..320.000

x21D + x22D ::;.. 200.000
x41D + x44C ::;..300.000
xS2D + xS2C ::;..200.000
x31D + x34E ::;..1.000.000
x61D + x63D + x64C ~ 1.000.000

xl1D + x21D + x31D + x41D + x61D ;::,.500.000

x22D + xS2D + xS2C > 300.000
x13D + x63D ?. 200.000
x34E + x44C + x64C ?.300.000

O~xl1D' x21D' x31D' x41D' x61D' x22D' xS2D' x13D' x63D' x41D
5,,100.000
0934E 5" 80.000

0~x44C' xS2C' x64C ~ 130.000

 332

FIGURE 1. g;
g ra m is the followin
bove pro
The OPtim al sO lu tio n o f the a
• -" 6 3 D ~
' x6 1 D 1
0 0 .0 0 0
. x3 1 D • x4 1 D
lJ D x13D •0":
.0 0 11D' ":12D
•
xx3 4 E == 8 0

xS 2 D == 7 0
.0 0 0

C 1 x6 4 C ""
1 3 0 .0 0 0
x4 4 C ' x S 2
e 7 .6 5 0 .0 0 0 .
and has valu
 333

5. CONCLUSIONS

The model proposed for the "batch assignment" phase, although

very simple and, apparently, not able to capture the non-linear
nature of the problem, turned out to be capable to provide
sophisticated solutions. The quality of the solutions was comparable
and in several cases for better than those proposed by the human
experts.
A possible, practical, explanation of this qualitative success is that
the human experts also do not take into account the nonlinear nature
of the problem.
Motivated by this remark we are currently, implementing and
testing an integer programming model of the "batch assignment" in
which the transportation cost is not linear in the size of the cargo.

REFERENCES

Appelgren, L.H. (1971), Integer Programming Methods for a Vessel

Scheduling Problem, Transportation Science 5, 64-78.
Bellmore M., G. Bennington and S.Lubore (1968), A Maximum Utility
Solution to a Vehicle Constrained Tanker Scheduling
Problem, Naval Research Logistics Quarterly 15, 404-411.
Bellmore M., G. Bennington and S.Lubore (1969), Further Extensions
of the Tanker Scheduling Problem, Presented at the 36th
National Operations Research Society Meeting in Miami,
Florida, November 1969.
Dantzig, G.B. and D.R. Fulkerson (1954), Minimizing the number of
tankers to Meet a Schedule, Naval Research Logistics
Quarterly, 1, 217-222.
 DELIVERY PROBLEMS IN METROPOLITAN AREAS
OPTIMIZING THE DISTRIBUTION OF A DAILY NEWSPAPER: AN
APPLICATION TO THE TURIN DAILY "LA STAMPA"

G. Sciarrone

Centro Studi sui Sistemi di Trasporto SpA - Via Sallustiana 26 - 00187

Romo - ltalia

The paper reports on an application of a VRP-Vehicle Routing Problem -

heuristic for optimizing the distribution of the daily newspaper "La
Stampa" in the Turin urban area. The news-stands involved are about 400.
The service time limit is one and half hour within the exit of the daily
from the rotaries, but some news-stands must be serviced within half an
hour. Present service requires fifteen vehicles. The heuristic shows that
thirteen vehicles could suffice to deliver the daily within given time
constraints. The paper is organized as follows: Section 1 states the links
between the VRP and the overall logistic system. Section 2 briefly
surveys the literature about solution algorithms for the VRP.
Section 3 outlines the· terms of the application to "La Stampa" and
describes the heuristic and its computer implementation. Section 4
reports the results achieved.

1. INTRODUCTION

The logistical system of a firm encompasses:

* the acquisition of the inputs to the production process
* the movement of raw materials and intermediate products to the
processing points forming the production process
* the movement of finished products from the plants to the
ultimate customer (distribution).
The third activity includes stocking the finished products, their
transportation to, if any, intermediate warehouses and the
distribution to the final customers.
In order to optimize the movement of finished products, it is
necessary to take a series of decisions of strategic nature (e.g.,
location and sizing of intermediate warehouses), of a tactical nature
 335

(e.g., the size of the vehicle fleet required for transporting the
products to the intermediate depots and from there to the customers),
and of an operational nature (e.g., deciding the routes that the
vehicles have to follow in order to serve the patronage at the lowest
possible cost).
Naturally, the distinction between these types of decisions should
not be taken too literally, in that decisions at various levels interact to
a greater or lesser extent.
There is, for instance, an obvious interaction (this is the case we are
most interested in) between the size of the vehicle fleet and the lowest
cost routes that the vehicles must follow for the distribution of
finished products to the customers.
This paper is concerned with the last link of the logistical chain, i.e.
the distribution of finished products to customers, and, in particular,
with the problem of the size of the vehicle fleet for the distribution
and with the building of the vehicles routes.
Naturally, the proposed method may be applied, with due changes, to
other areas too, as, for instance, milk distribution, urban waste
collection, etc ..

2. ROUTING PROBLEM: GENERALITIES

What follows is a brief survey of the VRP - Vehicle Routing Problem

- solution algorithms which does not aim to be complete. Current
research topics as backhauling, pickup and delivery, inventory!
routing and the like are not cited, as well as computational issues. The
focus of this very brief survey is on heuristic rather than exact
optimal algorithms.
A generic routing problem can be described as follows:
* Vehicle fleet: one or more vehicles (most applications regard a
fleet of more than one vehicle. This assumption is followed
 336

thorughout the paper)

* Type of vehicles: same or different capacity
* Vehicle depot location: one or more depots
* Type of demand: known in advance or not
* Type of network: with oriented or not oriented arcs
* Limits on the time allowed for the completion of each route
* Limits on time intervals for delivery and/or collection (time
windows) 1
* Type of operation: delivery only, collection only or both
* Type of objective: to minimise the number of vehicles needed
respecting time and capacity constraints, to minimize the total
time (or other measures of "cost") of the service given the
number of vehicles.
It is possible to say that routing problems have been studied since
the last century, though not, of course, with an application-oriented
approach like today.
The ancestor of these problems is the so-called Traveling Salesman
Problem (TSP), which has a great practical importance still today,
where the traveling salesman has to visit every town in his area just
once and return to the city from which he left. The problem here is,
of course, that of identifying the shortest route in terms of distance,
travel time or whatever. Routing problems differ from the TSP in that
there is a maximum time limit and a limit on the capacity of the
vehicles used.
As a concept, routing problem are very simple.
If one images having to build a single route serving n collection or
delivery points from a depot with one vehicle, the most obvious way to
singling out the shortest route, consists of listing all the possible
permutations of the n points, calculating the time (or another

1 For instance, if a delivery to a customer can only be made between 7.00 hrs.
and 8,00 hrs., or else not after 9.00 hrs. The first case is an example of a
"Two-sides time window", the second of a "One-sided time window".
 337

measure of "cost") needed for each route (permutation) verifying that

the time and capacity limits have been respected, and choosing the
shortest. It is equally obvious that this course of action is extremely
impractical. In fact, even for problems of minor dimension, say about
twenty points, the number of possible permutations (routes) is 20!
Even on a mainframe, it will take a very long time for computing the
travel time of every possible route.
Since the 1960s, when attempts were made to solve these problems
with the use of computers, two approaches were applied: the first,
based on combinatorial optimization methods; the second based on
heuristic algorithms.
Combinatorial, or discrete, optimization, is that branch of
mathematical programming which is concerned with problems with a
finite, possibly very large, number of possible solutions. Within the
methods of combinatorial optmization can be cited those of integer
programming, dynamic programming and those designed for solving
particular combinatorial problems like assignment, matching, etc ..
With the first approach optimal solutions can be reached, but
computation times can be prohibitive, even on mainframes, in the
case of large problems and/or special constraints. Further, one may
asks if the effort needed to obtain an optimal solution is worthwhile
in the face of approximations, measurement errors, etc. always
involved in the data base construction.
With the second approach, one has to give up reaching an optimal
solution, but computation times are greatly cutted down.
A good heuristic may however attain solutions very near to the
optimal one. Golden et al. (1985) report on the performance of some
well known heuristics on some test problems. It results that the best
heuristics give solutions that are worse from 5% to 10% with respect
to the optimal one. If used in composite procedures with so called
tour-improvement algorithms, the difference with respect to the
optimal solution decreases to 2%-3%.
 338

Heuristic algorithms start from an original idea which may even

just be based on common sense, in order to reach a sub-optimal
solution. Generally speaking the logic behind this approach, and also,
to some extent, behind the methods of combinatorial optimization, is
that of designing a procedure that considers only "reasonable" routes,
avoiding wasting time on obviously non optimal routes.
Today, after years of study and experimentation several heuristics
are available, some of which are very sophisticated, relying on
results of graph theory.
Parallel to this, a new research field has been developed, regarding
the analysis and evaluation of the performance of the heuristics,
following three directions:
* the analysis of performance in terms of computation time,
quality of the final solution, etc., resulting from the application
of the heuristics to a series of test problems; Golden et al. (1985);
* worst case analysis; Christofides (1976), Solomon (1986). In this
case one attempts to identify the maximum possible difference
between the optimal solution and that of the heuristic. As said
above, heuristics try to consider only reasonable routes
between which to choose the best, but "reasonabless" cannot
guarantee that one or more good routes will not be checked at
all during the execution of the algorithm. It may well be that
for some bad conditioned problems, the heuristics gives a
solution very far from the optimal one. So it is important to try
to analyse these "worst cases" with the aim of quantify, for a
given heuristic, the maximum difference between its solution
and the optimal one.
* probabilistic analysis; Marchetti Spaccamela et al. (1984),
Psaraftis (1984). Assuming in advance a particular probability
distribution of VRP instances one attempts to derive a
relationship between the difference with respect to the optimal
solution and the number of collection/delivery points. Loosely
 339

speaking, it is something like the analysis of the asymptotic

properties of estimators in statistics and econometrics.
For an excellent review of optimal and heuristic algorithms
updated to 1983, see Bodin et a1. (1983). See also Christofides
(1985) and Mole (1979).
Briefly, most of the heuristics used for solving routing
problems can be classified as follows:
* "Cluster first-route second"
First, a number of clusters of points is formed corresponding to
the number of routes which one thinks to use and then routes
are created inside each cluster. The main reasoning behind this
approach is that, by creating clusters, it is in fact possible to
reduce the size of the problem and, as a result, computation
times.
Examples of this approach are the "Sweep" of Gillett and Miller
(1974), Fisher and Jaikumar (1981), the "two phase" algorithm of
Christofides et a1. (1979, 1986)
* "Route first-cluster second"
first of all a single route is created serving all the points and
then that route is dis aggregated into as many routes as one
intends to use, considering of course time and capacity limits.
Examples of this approach can be found in Beasley (1983),
Golden et a1. (1984)
* "Route construction"
with this approach the routes are put together one at a time
sequentially or all together in parallel, starting from the depot,
and adding one point at a time to the route(s) under
construction according to several criteria, checking every time
for the violation of time and capacity constraints.
Examples of this approach are the "Savings" of Clarke and
Wright (1964); Chapleau et a1. (1984), Hart and Shogan (1987);
Golden, Magnanti, and Nguyen (1977), Mole and Jameson (1976).
 340

There are many ways to build a route but the key ingredients
(Golden and Stewart, 1985) are generally:
- an initial subtour or a starting point
a selection criterion (which point to select for entering into the
emerging route)
- an insertion criterion (where to insert in the emerging route
the selected customer
Many selection/insertion criteria have been proposed: farthest
insertion, nearest insertion, arbitrary insertion and other
In the latest years other heuristics have been proposed that maybe
do not exactly fit in the broad classification above. Examples are the
"Simulated annealing" (Kikpatrick et al. 1983, Golden and Skiscim
1986) who exploits concepts borrowed by statistical physics and that to
the best of our knowledge has been applied only to the TSP and the
use of spacefilling curves (Bartholdy and Platzman, 1982).
One a route has been built it is very worthwhile to attempt to
improve it by a so called route improvement procedure. The most used
are the so-called edge or branch exchange or local search procedures
of which the best still seems to be that of Lin (1965) and Lin and
Kernighan (1973) which originally proposed it as a route
construction heuristic starting from a randomly chosen route and
systematically trying to improve it by exchanging two, three, ... r,
edges in the route with other edges not in the route. The procedure
stops when no feasible exchanges can be found that improve the
current solution. Another route construction procedure based on
iterative improvement of an initial solution can be found in Waters
( 1987).
A route improvement procedure is worth implementing it also
because, as Tovey (1981) has shown, the number of local optima in
combinatorial optimization rises exponentially with n, the number of
points.
However, the number of ways in which r edges in the current route
 341

may be exchanged with r edges not in the route, also grows rapidly
with r (and of course so does the computing time). As a result
exchanges of two edges (two-opt) and three edges (three-opt) are the
most used.
In the latest years a good deal of research has been devoted to try to
decrease the number of edge-exchanges to test without decreasing the
quality of the solution. The first successful attempt is due to Or (1976)
who considers only a small percentage of the possible exchanges in a
three-opt and nevertheless attains a solution of a quality comparable
to it, but with a far less computation time.
So far the discussion refers to a single route, but the procedure can
be widened to exchanges between routes.
Further, point exchanges can be performed instead of edge
exchanges (Dror and Levy, 1986).

3. A CASE STUDY: THE DISTRIBUTION OF THE DAILY "LA

STAMPA" IN THE CITY OF TURIN

3.1 The Terms of the Problem

The application described hereafter refers to the distribution of the

daily newspaper "La Stampa" in the urban area of Turin (about 1
million inhabitants).
In brief, the terms of the problem are as follows:
* number of delivery points: 401 news-stands
* number of depots: 1 (La Stampa head-office)
* number of vehicles currently used: 15
* maximum time for the deliverying of the daily: Ih 30'
* maximum vehicle capacity: 10,000 dailys (for every vehicle)
* departure of vehicles from La Stampa head office: staggered
* demand of single news-stands: known
 342

* one sided time windows: yes. some news-stands must be served

before a certain hour
It should however be observed that the problem cannot be framed in
such a rigid way.
With respect to the terms listed (base-terms), there could be
variations also of a large degree, in particular for the time limit
within which the news-stands must be served (maximum service
time) and for the demand of the single news-stands.
The service time is the interval between the daily's exit from the
rotary machines and the last time within which it must be delivered
to the news-stands. Possible breakdowns due to failures or other
causes to the rotary machines work, delay the daily's exit and hence
shrink the service time.
The demand of the single news-stands, which in working days is
different from the one in weekends and in holidays, can vary even in
the same working days due to particular events which cause the
number of copies printed to be increased (during the year 1986 La
Stampa has distributed up to 160,000 copies a day against an average
daily demand of 120,000 copies).
Hence the objective of the work was to build up an operational tool
which could supply a solution to the base-problem but which should
also be sufficiently flexible as to permit the definition of the daily's
distribution strategies different from the base one in occasion of
particular events.

3.2 The Method Adopted for Solving the Problem

For what said before, the basic criterion for choosing the method for
solving the problem was that the algorithm had to run on a personal
computer in a reasonable computation time. This meant excluding all
methods based on combinatorial optimization, which require, as
mentioned above, lengthy computation times for large dimension
 343

problems, as is the case in the following application.

The method adopted for solving the problem belongs to the class of
"Cluster first-route second".
In the first stage of the algorithm, clusters of news-stands have to
be formed. To this end, a number of "seed" news-stands corresponding
to the hypothesized number of vehicles has to be identified according
to the following procedure:
Step 1 the first seed news-stand (i) is the farthest from "La Stampa"
head office
Step 2 choose as second seed news-stand U) the one which is farthest
from the first.
Step 3 choose the third seed news-stand (k) such that:
dist (i,k) + dist U,k) is maximum over all the news-stands not already
chosen as seeds and with the constraint that the news-stand k must
have a distance from the seeds already chosen above a prespecified
threshold value.
Step 4 choose the fourth seed news-stand (k+1) such that:
dist (i,k+1) + dist U,k+1) + dist (k, k, + 1) is maximum over all the
news-stands not already chosen as seeds and with the constraint that
the news-stand k + 1 must have a distance from the seeds already
chosen above a prespecified threshold value.
And so on until all seeds have been chosen.
All the news-stands nearest to a given seed (in terms of travel time
on the actual road network) are assigned to that seed until the vehicle
capacity limit is reached and this for each seed news-stand.
Once the clusters have been formed the routes can then be created.
A quite good and reliable procedure is that of using a good route
building heuristic and improve the route thus obtained by using a
branch exchange procedure.
From an empirical analysis made by Golden et al. (1985) (and from
the literature quoted therein), it appears that the best heuristic used
for building a route is the "Farthest Insertion" which is described
 344

below:
Step 1 start the route with "La Stampa" head office (s)
Step 2 find news-stand i such that dist (s ,i) is maximum, where
dist (s,i) is the "distance" (here travel time) betwen sand i
Step 3 given a subroute, find news-stand h not included in the
subroute and news-stand k already in the subroute, such that:
dist (k,h) = maxj (mini (dist (i,j»)
where j denotes a news-stand not in the subroute and i a news-stand
in the subroute
Step 4 find the arc (i ,j) in the subroute such that:
ins (iJ) = minij (dist (i,k) + dist (k,j) - dist (i,j»
where ins (i,j) is the cost (here in terms of travel time) of inserting
news-stand k between news-stands i and j in the subroute
Step 5 verify time and capacity constraints. If both are satisfied and
there are other news-stands in the cluster .not yet in the subroute, go
to step 3. Otherwise start a new route in another cluster. If there are
no more cluster stop.
As regards route improvement procedures Lin's two-opt with Or
implementation has been used.
It should be noted that practically all the algorithms proposed up
today for building or improving routes, refer to the TSP-framework
in which the salesman, after visiting all the towns, in our case news-
stands, just once and only once, goes back to the town from where he
left, in our case liLa Stampa" head office.
In fact, after completing the distribution of the news-papers, the
vehicles must indeed to return to the head office, but the maximum
service time limit applies for reaching the news-stands and not for
returning to head office.
Consequently, the route building and improving heuristics have
been modified in such a way as to minimize a route leaving from a
given point (liLa Stampa" head office), but not ending at "La Stampa"
again but at the last news-stand served.
 345

Once the routes for all clusters of news-stands have been created, it
may be that the maximum service time has not been respected for one
or more clusters.
In this case a between routes node exchange procedure for
reassigning news-stands from one cluster to another according to
certain criteria is started, in order to verify whether it is possible to
find a feasible solution. The procedure is implemented even if all the
clusters are feasible with the aim of improving the solution.
The heuristic ends either when a feasible solution has been found,
or when the various possibilities of switching the news-stands from
cluster to cluster have been used up without finding a feasible
solution. In this case the algorithm is given a new run after
increasing the vehicle fleet by one unit.
Another characteristics of the heuristic stems from the above
mentioned circumstance that the vehicles do not all leave together. In
other words, the maximum service time was considered to vary from
vehicle to vehicle.
Two versions of the heuristic have been created. In the first one, the
news-stands needing to be serviced not after a certain hour (one-
sided time window) were not taken into account, as was the case in the
second version.
The one-sided time windows brought about a further modification of
the heuristic used. Algorithms for dealing with tight time windows
problems has been proposed and tested by Baker and Schaffer (1986),
Kolen et a1. (1987) and Solomon (1987). Work in the related area of the
dial-a-ride problem has been done by Psaraftis (1983).

3.3 Data Base Construction

Travel time matrix between news-stands

The basic factor is the distance between news-stands, from which it
is possible to work out the travel times.
 346

There are two possible methods: in the first the news-stands

coordinates are established and the euclidean distances (" as the crow
flies") are calculated; from those data the travel times are estimated on
the basis of average speed and coefficientes relating to the degree of
winding of the roads. By the second method the distance are measured
directly on a geographical map at a suitable scale, following the
actual course of the roads. This method takes more time, but is
undoubtedly more precise and was chosen for this reason.
The distance matrix between the news-stands was created by
measuring on a 1:5000 scale map the road distances between group of
neighbouring news-stands and between some of them and other ones
belonging to other groups. There would have been no point in
measuring the distances between all the news-stands, such as, for
instance, one located north of Turin and another in the south, in view
of the fact that they could never belong to the same route.
For sake of thoroughness, however, the distance matrix was
completed using a shortest path algorithm for the missing distances.
A survey was then carried out aboard the vehicles distributing "La
Stamp a" , measuring the actual travel times between the news-stands
along current routes and the offloading times of the newspapers at
each news-stand.
A regression analysis of the relationship between actual travel
times and distances between news-stand made it possible to establish a
piece-wise linear approximation of the relation between speed and
distance between news-stands which was used to create the news-
stands' travel time matrix. It is also possible, in view of the fact that
the coordinates of all the news-stands have been put on the computer,
to assume variable speeds, and therefore travel times, in relation to
the particular area where a news-stands is located (e.g. downtown or
outskirts).
Other input data used for the heuristic
Other input data, supplied obviously by liLa Stampa", include the
 347

average working day number of copies supplied to each news-stand,

vehicle capacity in terms of daily's copies, maximum service time and
departure frequency of the vehicles from "La Stampa" head office.

3.4 EDP Implementation

The heuristic was programmed in Pascal on an IBM/AT with 512 Kb

RAM and 20 Mb on hard disk, of which 2 Mb were actually needed for
this application. In order to make the algorithm run with 512 Kb it
was necessary to solve not trivial EDP problems. The mathematical
coprocessor is not essential. Computation time without mathematical
coprocessor is only slightly longer than with it used.
The code also includes:
* a graphics module for visualizing the routes on the computer's
screen
* a module for data base management, in order to provide for
possible modifications to the data, such as addition or deletion of
news-stands, variations in the number of copies required, etc.
Graphics is nowadays widely recognized as a key component for a
successful implementation of an heuristic.
Some heuristics use interactive graphics tools for allowing users to
refine and improve routes displayed on the computer's monitor
(Belardo et al. 1985, Sorenson 1986).
Computation times
Computation times are linked to the degree of tightness of the
constraints. If the service time limit, for instance, is not very close
(in minutes) to the minimum value allowed for finding a feasible
solution given the fleet size, vehicle capacity, etc., the code runs in
15-20 seconds. If, otherwise, the time limit is set very close to the
minimum value allowed for the problem, computation times are in the
order of minutes.
Those values are clearly acceptable. It should also be noted that the
 348

maximum service time is to some extent a decision variable in as much

as a firm may find it acceptable to go slightly over the maximum
service time, if this makes it possible to save a vehicle.

3.5 How the Code Works

The code was designed to work in an interactive way. A main menu

is offered to the user, guiding him through the various modules of the
code:
* route construction
* route display on the screen
* data base modifications
* print-outs
Each function has its own special sub-menu. The code presently
supplies the following output for each route:
* code number of the news-stands included in the route in the
order in which they are serviced by the vehicles
* cumulative number of the copies delivered
* cumulative travel time
and also the total travel time and number of copies delivered to all
news-stands and the display of the routes on the screen.
This structure makes it very easy to use the program for
interactively identifying the system's optimal state (fleet size and
time/capacity constraints) and/or simulating the way in which
service can be modified if there is a variation in demand or a change
in traffic conditions, etc..

4. CONCLUSIONS

The results obtained are undoubtedly satisfying. The heuristic makes

it possible to reduce total travel time by about 7% compared to current
 349

routes. It must not be thought that this result is not significant. First
of all, the results of exercises of this kind depend clearly on the
current level of service. In this case whoever worked out the routes
for "La Stampa" vehicles did obviously a good job.
Another result worth mentioning is that the routes produced by the
heuristic are more balanced than the present routes in terms of
travel times as well as number of copies per vehicle. Further, the
heuristic made it possible to verify, and this is the most significant
point, that the current service could be carried out with 13 vehicles
instead of the 15 presently used.
In other words, service productivity can be increased by almost 15%.

ACKNOWLEDGEMENTS
The Author wishes to thank Dr. Marco Zannier, Mr. Daniele Conca
and Prof. Alfredo Rizzi for their contribution to the application
discussed in section 3.2.

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 GOODS TRANSPORT IN URBAN AREAS: A COMPARISON
BETWEEN THE UNITED STATES AND ITALY

Annalisa Morini

PFr - Consiglio Nazionale delle Ricerche - Viale dell'Universita, 11 -

00185 - Roma -Italy

This paper attempts an analysis of the urban goods transport, comparing

the main characteristics in two different countries: US and Italy. The
results indicate similar behaviour for some aspects (trip length, trucking
trips in central areas), while other aspects show the different urban
typology or the different commercial distribution. Finally, there is a
discussion on the areas in which future investigations, for the Italian
cities, should be carried out.

1. INTRODUCTION

The starting idea of this work was to make a comparison between two
different surveys, carried out respectively in the United States of
America (US) and in Italy, and devoted to analyze the characteristics
of urban transport of goods. In analyzing the problem of goods
pickup and delivery in Italian urban areas, we noticed how little
research effort in Italy is devoted to this subject. Therefore, our aim
was to verify if some useful elements for a better understanding of
problems associated with this type of transport could be desumed
through a comparison with US data.
The first phase of the comparison was to verify if the urban
transport of goods in the Italian cities had the same - or similar -
characteristics as that of US cities. In this case, it would be possible to
use US experiences, both to the further knowledge of this field and to
the adoption of planning tools. Even if this goal would not be reached,
yet some useful considerations could be done analyzing the process of
this component of the urban transport in two very different
situations.
 353

Let us now briefly define the two data-sources studied for this
comparison. The US reference guide (Christiansen, 1979) is a
collection of many enquiries gathered together in order to give the
principal guidelines on urban transport planning for goods and
services. The final users of this guide would be planners and traffic
engineers, helped in their work to both identify the nature of the
problem and to evaluate alternative problem solutions.
The Italian data refer to an on-board survey (CENSIS, 1987), within a
research program on mobility in 4 metropolitan areas: Milano,
Bologna, Roma, Bari (*). The survey is based on 145 enquiries,
distributed as follows:
- Milano 48
- Roma 42
- Bologna 30
- Bari 25
Total 145
It is convenient to underline first the limits of our approach. In
fact, in addition to the usual socio-economic and geographical
differences generally encountered when comparing situations of two
foreign countries, in this case there are three important aspects to
consider carefully:
- sample size;
- enquiry period;
- aim.
Concerning the first difference, we must take into account that the
US guide is based on several enquiries carried out in some US cities,
while Italian data are derived from only one enquiry and are
therefore based on a very small and mostly qualitative sample. As for
the second aspect, some of the data gathered in the US guide are about

(*) The program was carried out by CENSIS, an Italian research company,
within PFr. PFr is a special CNR project on transport research with a five
years program.
 354

10 years old; viceversa the Italian enquiry was carried out in the first
months of 1987: the difference is relevant, especially in this field in
which development has been considerable.
Notwithstanding this difference, it should be noticed that the US
report is a guide, so that many data are collected with the aim to
constitute a reference point for several years. Further, in this field
US research is more advanced and, as we can see from the result of
the comparison, the situation in US is even now a standard to be
reached for Italian cities.
As for the last point, the US report was realized with the aim of
helping technicians, prevalently public ones, not only in increasing
their knowledge of the urban goods transport and in designing data
collection procedure, but also in giving a complete picture of the
planning possibilities in this field. So the guide contains specific
sections devoted to analyze the following aspects:
- urban trucking characteristics;
- planning, energy and environment analytical techniques;
- transportation system management improvements;
- off-street truck terminal facilities.
The Italian enquiry was the first attempt to collect data in this sector
and the goal was mainly to understand the guidelines of urban
trucking movements and to suggest a data collection procedure for
future enquiries, in order to improve urban planning.
In comparing the two situations, we have not taken into account
some characteristics either because they are considered only in one
country, or because the type of information is not comparable.
In the following, after presenting an analysis of the US urban
trucking characteristics not included in the Italian survey, we discuss
the characteristics of the Italian case not included in the US guide;
then, the results of the comparison are illustrated.
 355

2. URBAN TRUCKING CHARACTERISTICS NOT INCLUDED IN THE

IT ALlAN SURVEY

Among the characteristics of urban trucking considered in the US

guide, we mention the following:
- nationwide urban trucking;
- urban trucking process;
- trucking problem characteristics;
- urban traffic volumes;
temporal variations.
Nationwide urban trucking
The first characteristic indicates the importance of this field in the
national economy: in 1972 urban transportation of goods in US
represented 23% of the nation's total transportation expenditure
(Kearney, 1976), increasing 15% per year between 1966 and 1973. As
regard to the extent of urban trucking activity, urban trucks make
15% of total urban vehicle trips and a similar proportion of total
urban travel.
Further, 2/3 of the trucks registered in the US are involved in local
urban operations (Smith,1969). Finally, there are some considerations
on energy consumption and air pollution.
Urban trucking process
A typical daily delivery process, with its components (terminal
activities, stem driving, zone driving, stop-or dwell time-activities) is
described.
Further, the guide distinguishes between types of routes (variable
or fixed routes), even without giving data about this subdivision.
Trucking problem characteristics
There is an explanation of the principal problems related to urban
trucking process such as congestion, safety, operating cost, pollution,
energy cost. Further, these problems generally increase with
increases in city size and density and are particularly evident in
 356

areas with intense traffic-generating land uses (such as central

business district or shopping centers, terminals, etc.).
Urban truck volumes
In the US, trucks represented 15% of urban traffic volumes
(Levinson, 1975). This percentage is relatively constant regardless of
city size (Smith, 1969). Many of the urban trucking problems are
more closely associated with medium and heavy trucks. Trucks
generally represent 8% to 12% of total traffic crossing the Central
Business District (CBD) cordon line (Levinson, 1975) and 5% to 8% of
peak hour, peak-direction traffic.
Truck travel across the CBD cordon has not been increasing: this is
explained by land-use changes (from warehousing to office) and the
opening of CBD by pass routes to serve through trucks. However,
within growing CBD core areas, as multi-story office structures
replace smaller office facilities, there is an increased demand for
urban trucking.
Temporal variations
A specific section is devoted to temporal variations (hourly - daily -
monthly variations). As regard to hourly variations, in CBD trucking
activity typically peaks before noon, with these ranges in 3 cities:
- Brooklyn between 9 a.m. and 12.00 (Habib)
- S. Francisco between 10.30 a.m. and 3.00 p.m. (Marconi,1975)
- Dallas between 11.00 a.m. and 3.00 p.m. (Smith, 1975)

3. URBAN TRUCKING CHARACTERISTICS IN THE IT ALlAN

SURVEY

In the Italian survey there is a first section describing goods

characteristics and related transport flows and a section studying
transport firms management.
From the first section we point out that:
 357

- with regard to goods typology, food has the most relevant

percentage in Roma, Bologna and Bari, while in Milano documents
and electric appliances come first;
- terminals are the principal origin of transport (53.2%), followed
by small warehouses (13.7%) and by industrial firms (11.3%);
- the higher percentage for destinations is to small shops, followed
by small warehouses and terminals;
- as regard to land-use origin, more than 3/4 of transport firms
start their travel within urban areas, while 16.6% start from
hinterland and only 7.6% from more external areas.
From the second section - transport firms management - we can
desume that:
- the variable and fixed routes transport are equally present, even
if for food transport the quota of fixed routes is the highest
(64.8%) and for furniture is the lowest (37.9%);
- from OlD areas, we have 29.2% from central area to central area,
28.3% from central area, and the same quota from suburban area,
to middle area, 33% from suburban area to suburban area.
Finally, an enquiry concerning SIP (the National Telephone
Company) and ENEL (Electric Energy Agency) is included. The
number of vehicles of these agencies travelling each day in the four
cities is respectively 2,885 for SIP and nearly 1,000 for ENEL.
Particularly, in Roma there are 1,400 SIP vehicles and 500 ENEL
vehicles travelling per day: if we take into account that the average
parking time is 7 hours and running time is 2 hours, the total parking
time per day is above 13,000 hours. Probably a deeper enquiry in this
field of service activity would be useful.
 358

4. COMPARISON OF SOME URBAN TRUCKING CHARACTERISTICS

IN THE TWO COUNTRIES

Types of urban trucks

In the US, data based on truck operations only (including personal-
use truck travel and excluding goods/services movement by auto)
suggest that over 68% of urban truck trips are made by light trucks
(see Table 1).

Table 1 - Vehicles involved in the urban delivery of goods and

services in the US

Vehicle gross
weight (kg) Trips Miles

< 4,500 68% 65%

4,500 - 9,000 28% 25%

> 9,000 4% 10%

Total 100% 100%

Source: Smith, 1969.

In the Italian case vehicle types are distributed as in Table 2.

As we can see, in Italy 63.4% of urban truck trips are made by
medium trucks. A comparison between the two countries is not very
significant, since we do not have the same subdivision of the types of
vehicles: further enquiries should take into account vehicle weight
or vehicle capacity as a parameter.
Trip Purpose
The main trip purposes in the US are delivery, pickup, both pickup
 359

Table 2 - Italy: type of vehicles

Vehicle Share

Light truck 32.4%

Medium truck 63.4%
Refrigerated freight car 2.8%
Other 1.4%
Total 100.0%

Source: CENSIS, 1987.

and delivery and service calls. Other trips (stem driving) are made in
support of these purposes. Pickup and delivery activities predominate
(see Table 3).
We notice that:
- in every location delivery is above 55%;
- the range for service stop is from 5% to 20%;
- in one case (Dallas CBD data) there is a purpose called "other"
referring to correspondence and securities and which is 10% of
all purposes. Perhaps it would be interesting to include at least the
item of correspondence in future data collections, because it is a
surely increasing service.
For Italian data, Table 4 shows the percentage related to the
preheminent activity carried out by transport companies.
Data about pickup and delivery are comparable. The principal
difference consists in the other items included in the two tables,
excluding pickup and delivery. In fact, while in the US service is an
important item which should be considered separately, in Italian
cities a considerable percentage is covered by urban freight service.
 360

Table 3 - Purpose of truck stops in urban areas

Purpose of Truck Stop

Total, All
Location Pickup Delivery Both Pickup Pickup & Service Other Total
& Delivery
Delivery
% % % % % % %

Dallas CBD* 16 59 10 85 5 10* 100

- - - 87 10 3 100

Brooklyn CBD 18 82 - 100 -* - 100

San Francisco CBD

St. Francis Hotel 12 76 12 100 -* - 100
Macy's Dept. Store 26 60 14 100 **** - 100
Bank of America 26 61 13 100 **** - 100

Chicago Study Area ***

20 55 8 83 17 - 100

General Estimate
- - - - 10-20 - -

* Two surveys
** Correspondence and securities
*** Total internal truck survey excluding trips to garage and personal
transportation
**** Data not collected

Source: Christiansen, 1979.

In the US guide some considerations on service activity are included.

A service vehicle is defined as a vehicle utilized by person
performing services. For example, the service functions are: office
machine repairs, plumbers, painters, television equipment service,
telephone service, electric service, etc. Estimates (Staley, 1978 and
Levinson, 1978) suggest that 11 % to 15% of the urban truck fleet are
service vehicles and that, measured by purpose at destination, as
many as 21 % of total truck stops may be for service. The US guide
estimates that service trucks account for 10% to 20% of urban truck
 361

Table 4 - Transport companies activity

Activity Share

Pickup and delivery 84.1%

Urban freight service 14.5%
Other 1.4%
Total 100.0%

Source: CENSIS, 1987.

stops.
Service activity would be considered as an item in future data
collections, because in the future it will probably increase, especially
in downtown areas. In fact, many business activities are localized
downtown; they surely require more services (especially telephone,
electric and electronic equipment services), than residents.
Truck parking
In the US guide, trucks account for 10% of total vehicles parked in
the downtwon area at any time (Smith, 1975). As for location of truck
parking, although this aspect varies between cities, due to differences
in the availability of alleyways and off-street loading space, we can
distinguish between cities with alleys or not. In the first case, 60% of
deliveries are made from the curb, 30% from alleyways, 10% from
off-street service entrances. In the second case, such as in downtown
Dallas (Institute of Transportation Engineers, 1976), which has very
few alleys, 80% of deliveries are made from the curb.
In Italy, as shown in Table 5, we can distinguish four types of
parking: specific functional area, correct parking, double parking 1n

large streets, double parking in narrow streets.

 362

Table 5 - Italy: Truck parking in downtown

Type of parking Pickup Delivery

% %

Functional area 51.3 21.0

Correct parking 2.6 4.0

Double parking, in large streets 15.4 54.7

Double parking, in narrow streets 35.9 56.8

Source: CENSIS, 1987.

We can notice that while pickup stops are made in many cases in
functional area, although the second place is double parking in
narrow streets, delivery stops are principally made in double
parking, without significant differences between large or narrow
streets. This is undoubtely an important element which increases
traffic congestion and reflects a typical Italian situation. In fact, a
parking study conducted in six US cities (Staley, 1978) discovered that
only 1.5% of trucks double-parked: this value range from 0.3% in Los
Angeles to 6.2% in Chattanooga. However, cities attitudes toward
double parking show that with the increasing of city dimension also
increases the attitude to tolerate double parking.
The other element considered in truck parking is d u rat ion. In the
US guide, although there is a considerable variation in the duration of
parking, common dwell times are in the range of 15 to 25 minutes. In
Table 6 data about average of dwell times in some cities are shown.
For Italian cities the survey refers to two tables from which we can
deduce two items: stop time (with respect to travel time and total time)
and the stops number for pickup and delivery (with average of km
 363

Table 6 - Representative dwell times, US Cities

Location and Land Use Dwell Time Average

(minutes)

Dallas CBD 22

Chattanooga 19

New Orleans 56

Six City Average 31

San Francisco CBO 15

Brooklyn 11.,21

New York City, Five CBO Buildings 27

Source: Christiansen, 1979.

made every day). From these data we have Table 7.

Table 7 - Dwell times, Italian Cities

Location Dwell Time Average

(minutes)

Roma 8

Milano 9

Bologna 15

Bari 7.6
 364

Average times are generally lower than in the US cities. A possible

explanation for this difference in dwell times could be a difference in
the type of pickup and delivery. We can deduce that generally in the
US cities, goods to be transported are distributed in fewer places in
greater quantity and viceversa in Italy. This is probably true,
considering shops characteristics in the two geographical situations:
smaller shops in downtown Italian cities and greater commercial
areas in US cities. This is also confirmed by a study in the Brooklyn
area (Habib). In fact, there is a relationship between office building
size and pickup/delivery dwell time: as building size increases, so does
dwell time. Larger buildings require greater internal circulation time
and increase the probability of multiple deliveries per stop (see fig.1).

-...
CIl
Q)
40

....g
~
'-'

....E-oe
G)

20
- Q)
~
0

o ~------~--------~----
1.0 2.0
Gross Building Area (millions of sq.ft.)
Note: 1 sq.ft. = 0,09 sq.m.

Figure 1 - Relationship between office building size and

pickup/delivery dwell time, downtwon Brooklyn

Source: Habib
 365

Truck operating characteristics

The first characteristic we consider is how time is spent. For the US
situation we have only data referred to the San Francisco downtown
area (Marconi, 1975). The data were collected for 2.5-ton, 22-foot (6.7
m.) vehicles enganged in the pickup and delivery of garments and in
two different weather situations: 3 good-weather days and one rainy
day (see Table 8).

Table 8 - San Francisco CBD truck delay survey

Climatic Conditions
Truck Time: Type of Delay
3 Good-Weather Days 1 Rainy Day
% %

Delivery Delay 12.2 3.7

Loading/U nloading Goods 65.1 47.3
Traffic Delays 5.5 25.9
Running Time 17.2 23.1
Total 100.0 100.0

Source: Marconi, 1978.

To compare these data to Italian cities, we take into account only two
items: the first one includes loading/unloading goods and delivery
delay, while the second item comprehends running time - traffic
delays. We can approximate these two items with stop time and
running time, the data we have for Italian cities. Considering these
data in percentage and gathering S. Francisco data in the above
mentioned manner, we have Table 9.
In Italian cities, running time is close to S. Francisco rainy day time,
at least for Roma and Bologna. Otherwise, in 3-good weather days data
of S. Francisco CBD, running time is nearly 1/4 of total truck time and
 366

Table 9 - S. Francisco and Italian Cities truck delay

Loading/U nloading Goods Running Time

Urban Area + Delivery Delay + Traffic Delays
% %

S. Francisco 77.3 22.7

(3-good weather days)
s. Francisco 51.0 49.0
(1 rainy day)
Roma 44.7 55.3
Milano 36.5 63.5
Bologna 45.4 54.6
Bari 31.3 68.7

3/ 4 is loading/unloading goods time: this conferms the importance of

this last aspect in the goods delivery process of this US city.
With regard to Italian cities, we can see that running time is higher
in Bari than in other cities: this data must be considered together with
the number of km. made per day. In fact, in Bari the average is very
high (km. 144.4 per day) compared with the other cities, (see Table
10).
Bari data related to the hinterland of the city point out that goods
delivery involves a greater area, proportionally, as compared to the
other cities.
The second characteristic considered in truck operating is trave 1
speeds (see Table 11 for US and Table 12 for Italy).
In US cities, the speed of travel, in normal traffic conditions within
the city area, ranges from a minimum of 16 Km/hr to a maximum of
25.6 Km/hr, while in suburban areas the minimum is 28.8 Km/hr and
the maximum is 36.8 Kmlhr. In Italian cities, the speed of travel
 367

Table 10 - Km. per day

Urban Area Km.

Roma 72.6

Milano 112.0

Bologna 117.3

Bari 144.4

Medium value 107.3

Source: CENSIS, 1987.

Table 11 - Typical urban truck operating speeds (Kmlhr)

Location within City

Type of Driving
Congested City Normal City Suburban

Stem Driving 19.2 28.8 48.0

Zone Driving Avg. (non-weighted) 12.8 20.8 32.0
Minneapolis 14.4 20.8 32.0
Chicago 11.2 19.2 32.0
Chattanooga 14.4 22.4 30.4
Philadelphia 12.8 19.2 33.6
Toronto 12.8 25.6 35.2
New York 8 16.0 32.0
Newark 9.6 19.2 32.0
Wetchester Country, NY 12.8 24.0 28.8
San Leandro 12.8 22.4 32.0
Atlanta 12.8 22.4 32.0
Dallas 20.8 24.0 36.8
Forth Worth 14.4 24.0 36.8
Dayton 12.8 16.0 32.0

Source: Institute of Traffic Engineers, 1972.

 368

ranges from a minimum of 16.8 Km/hr (Roma) to a maximum of 25.6

(Bari). We notice that Italian values are similar to US values within
central area: if we could also have suburban values for Italian cities,
probably these data would be lower than US.
A more detailed comparison should be made with regard to the size of
cities in terms of inhabitans. In fact, probably it is not casual that the
Italian values increase with this parameter.
Concerning trip length, for US cities we have the values for type of
truck (light - medium - heavy). Since this subdivision is lacking in
the Italian data, to make a comparison we must consider more
aggregated values (see Table 13 for US and 14 for Italy).
The US data range from 2.88 (Pittsburgh) to 8.48 (Chicago). The
Italian data range from 2.67 (Roma) to 10.09 (Bari). There is no
relevant difference between the two cases.
Another element considered in truck operating characteristics is
origin/destination within CBD area. In fact, there is a large number
of urban trucking trips with both origin and destination in
downtown. Table 15 shows the percentage in three different US cities
and the aggregate data for Italian cities.
The principal results of this section can be summarized as follows:
- truck parking is a relevant problem in Italian cities, particularly
for delivery of goods;
- dwell times are very different in the two countries, probably due
to different commercial sizes: larger gross centers in US cities and
smaller shops in Italy; this is confirmed by loading/unloading
time compared with running time, that is in the proportion of 3 to
1 in S. Francisco and nearly under 1 and above 1 in Italian
cities;
- trip length is a comparable value, ranging from Km 3 to Km 10;
- trucking trips with both OlD in central area is a relevant value in
both cases (above 20% as a minimum).
 369

Table 12 - Medium speeds for urban transport goods vehicles

(Km/hr)

Total Travel Time (*) Running Time

Urban Area
Speeds Speeds

Roma 9.5 16.8

Milano 11.6 18.8
Bologna 13.2 24.8
Bari 16.9 25.6
Average 12.4 20.8

(*) Total travel time is all the time in which the vehicle is out of its usual
parking.

Source: CENSIS, 1987

Table 13 - Truck trip lengths in selected urban areas (Km.)

Urban Area Trip Lengths

Albuquerque 5.12
Baltimore 5.12
Pittsburgh 2.88
Richmond 4.96
Chicago 8.48
New York 3.84
City Average, Non-Weighted 5.12

Source: Christiansen, 1979

 370

Table 14 - Truck trip lengths (kIn.)

Urban Area Trip Lengths

Roma 2.67
Milano 5.26
Bologna 7.98
Bari 10.09

Source: CENSIS, 1987

Table 15 - Percent of trucking trips with both trip ends within the
Central Business District

Urban Area %

Dallas 20.0
San Francisco >50.0
Baltimore 33.0
4 Italian cities 29.7

Source: Christiansen, 1979 and CENSIS, 1987.

5. CONCLUSIONS

We have analyzed some US urban trucking characteristics trying to

make a comparison with the Italian survey. We can now point out the
 371

principal areas in which future investigations should be carried out,

distinguishing two types of research areas: freight transport and
freight transport as a component of the whole transport system.
In the first research area, the principal aim should be to carryon
enquiries on several urban areas. In addition to the elements
considered in the sample, these enquiries should include the
following aspects:
temporal variations on trucking aCtIvlty;
type of urban trucks, distinguishing between trips and Km;
- trip-purpose, including not only pickup and delivery but also
public service activity (such as telephone service, electric energy
service, etc.) and private service activity (such as
correspondence, office machine repairs, painters, plumbers, etc.);
- truck parking, both location and duration;
- how total truck time is spent (delivery delay, loading/unloading
goods, traffic delays, running time);
- number of Km. made per day per vehicle;
travel speed, distinguishing among location within city (central
area, middle area, suburban area);
- trip length, distinguishing among types of trucks (light-medium-
heavy).
For the second research area, data should be collected regarding:
- percentage of urban truck expenditure compared with total
transport expenditure;
- percentage of urban truck volumes compared with total transport
volumes; further, this percentage would be divided between CBn
line and external line. In fact, this aspect of truck volume
crossing CBn cordon line is important in US and it would be more
important in Italy, in which CBn generally identifies historical
center, with its related problems (pollution, congestion, total or
partial traffic interdiction, etc.).
A monitoring system for goods transport in the main metropolitan
 372

area would provide useful information for the improvement of

transportation and land use planning, and could greatly contribute to
the reduction of traffic congestion and other externalities.

ACKNOWLEDGEMENTS
The author is indebted to Agostino La Bella for comments and
suggestions on the paper.

REFERENCES

CENSIS (1987), Analisi degli spostamenti ed effetti suI contesto

economico delle grandi aree metropolitane. Risultati e
valutazione dell'indagine agli occupati nel settore della
distribuzione merci e dei servizi, svolto nell'ambito CNR-PFT,
Aprile.
Chicago Area Transportation Study (1977), Commodities and
commercial vehicles. 1970 Travel Characteristics, January.
Christiansen D.L. (1979), Urban transportation planning for goods
and services. A reference guide. Prepared for Federal
Highway Administration, US Department of Transportation,
June.
Habib P., Urban goods movement planning. Polytechnic Institute of
New York.
Institute of Traffic Engineers (1972), Goods transportation in urban
areas. An Informational Report.
Institute of Transportation Engineers (1976), Manual of traffic
engineering studies. Fourth Edition. Published by Institute
of Transportation Engineers.
Kearney A.T. Inc. (1976), A primer on urban goods movement.
Summary Report. Prepared for Urban Mass Transportation
Administration, April.
Levison H.S. (1975), Truck priorities and restrictions. A planning
perspective. Proceedings of the Engineering Foundation
Conference on Goods Transportation in Urban Areas, Edited
by Gordon Fisher, September, p. 322.
Levison H.S. (1978), The view from the service truck. A missing link
in urban goods movement. Proceedings of the Engineering
Foundation Conference on Goods Transportation in Urban
Areas, Edited by Gordon Fisher,. June, p. 657.
Marconi W. (1975), Commercial trucking and freight handling in the
 373

San Francisco Central Business District. Proceedings of the

Engineering Foundation Conference on Goods Transportation
in Urban Areas, Edited by Gordon Fisher, September, p. 305.
Marconi w. (1978), A case study of pickup-and-delivery truck delays
in the San Francisco Central Business District. Proceedings of
the Engineering Foundation Conference on Goods
Transportation in Urban Areas, Edited by Gordon Fisher,
June, p. 275.
Smith W. and Associates (1969), Motor trucks in the metropolis.
Prepared for Automobile Manufacturers Associations,
August.
Smith W. and Associates (1975), Bus and truck roadway systems and
truck travel restncUons. Prepared for Federal Highway
Administration, February.
Smith W. and Associates (1975), Center city transportation study.
Dallas, Texas, Phase II. Prepared for Urban Mass
Transportation Administration, February.
Staley R.A. (1978), Service trucks in the urban traffic environment.
Proceedings of the Engineering Foundation Conference on
Goods Transportation in Urban Areas, Edited by Gordon
Fisher, June, p. 653.
 ISSUES AND MODELS FOR PLANNING AND REGULATING
FREIGHT TRANSPORT SYSTEMS

Patrick T. Harker

Department of Decision Sciences - The Wharton School - University of

Pennsylvania - Philadelphia, PA 19104-6366 - United States of America

The rapid change in the United States' freight transport system since
deregulation in 1980 has forced both governmental regulatory bodies and
individual carriers to reconsider their various operational
characteristics. In particular, increased intermodal competition and a
changing domestic economy require different planning methods than have
been traditionally employed in the analysis of freight transportation
operations, investments and regulation. This paper presents a general
modelling system which is designed to address the type of "macroscopic"
issues which arise in the planning and regulation of freight transport
systems. The features and application of this model will be described,
and the paper will conclude with a discussion on the extensions of this
model and the possible use of such a system in the analysis and
regulation of government-owned freight systems throughout the world.

1. INTRODUCTION

The ability of a transportation system to affect the health of a

nation's economy is a well-understood fact. The ability to efficiently
move raw materials and finished goods has a direct impact on the
competitive stance of a nation, as well as impacting energy use,
national defense matters, etc. Given the importance of this system
within a nation's economy, careful analysis must be performed when
considering large investments in transport infrastructure and/or
changes to the regulatory and economic environment in which the
transport industry must operate.
Since the deregulation of the United States' interstate transportation
industry via the Stagger's and Motor Acts of 1980, dramatic changes
have occurred in the structure of the freight transport industry. One
major change has been the shrinking of the industry through
 375

mergers of major railroads and bankruptcies of motor carriers. This

change in the concentration of the industry has led to calls for full or
partial reregulation of the freight transport firms; e.g., the growth of
an organisation entitled Consumers United for Rail Equity (CURE) that
is lobbying Congress for partial reregulation of the U.S. rail industry
has led that industry to respond with the Committee Against Revising
Staggers (CARS) (Railway Age 1987). Such calls for reregulation
require government analysts to carefully reconsider the
government's role in freight transport policy and planning. Also,
mergers and their resulting abandonment of rail lines and motor
carrier services may have dramatic (positive or negative?) effects on
regional economies; such mergers must be carefully analyzed. Thus,
even though the freight transport industry was essentially
deregulated in 1980, the U.S. federal government and state
governments must still be actively involved in the analysis and
regulation of this system.
The deregulation of 1980 has also led firms to consider more
carefully their pricing and capital investment decisions. Increasing
competition from motor carriers places increasing pressure on U.S.
railroads to carefully analyze any investment/divestment decisions
since such decisions are typically long term in nature due to the large
sunk costs involved.
The world outside the United States does not, in general, exhibit the
same degree of free market participation in the freight transport
industry. However, some competition does exist and government
ownership and regulation of portions of the freight transport
industry does point to the need for effective analytic tools to aid in
planning and regulation. In particular, less developed countries such
as the Sudan must begin such development planning if they are to
succeed in the global economy (Saaty 1977).
Given the needs for a careful analysis of freight transport issues as
described above, it is clear that one must develop the ability to predict
 376

the response of regional and national economies to changes in the

transport industry and vice versa in order to assess the impact of
regulatory, investment and pricing decisions. Such models are very
useful in that they provide a convenient mechanism for evaluating
the system-wide impacts of freight transport policy. Such
system-wide predictive models have proven very effective in the
analysis of tax policies (Shoven and Whalley 1972), global debt
policies (Rutherford 1987), etc., and thus should prove to be a very
effective policy tool both from the perspective of the government and
of private firms operating in competitive environments.
The purpose of this paper is to present a summary of one attempt to
develop and apply a model for the analysis of freight transport
systems within the context of a spatial economy. This model, entitled
the Generalized Spatial Price Equlibrium Model (GSPEM), is described
in detail in the recent book by Harker (1987a). In this paper, the
literature involving the prediction of freight movement will be
reviewed (Section 2) and the basic structure of GSPEM will be
described (Section 3) along with its applications (Section 4). Finally,
Section 5 will discuss the future directions in the development and
application of predictive freight transport models such as GSPEM.

2. THE STATE OF THE ART IN PREDICTING INTERCITY FREIGHT

FLOWS

As was stated in the introduction, the construction of effective

planning tools for freight transport systems involves the
development of predictive models for such systems. This section
briefly reviews the literature on predicting intercity or
interregional goods movements beginning with a definition of the
system under study.
 377

2.1 Conceptual Model of an Intercity Freight Transportation

System

Figure 1 depicts the set of agent which we will consider as

comprising the freight transportation system and the interrelation
between them; let us explore this figure in greater detail. The
producers are those economic agents whose role in this system is the

MARKET PRICES
PRODUCERS CONSUMERS

MARKET PRICES MARKET PRICES

SHIPPERS

RATES
LEVELS OF SERVICE

REGULATION
CARRIERS GOVERNMENT
INFRASTRUCTURE

POTENTIAL ENTRY

POTENTIAL
CARRIERS

Figure 1: Relationship Among Agents

 378

production of goods, and the con sum e r s are those agents who
consume these goods. The economic force by which these two groups
of agents 'communicate' is the set of market prices of goods which
they are selling and buying.
By defining the producers and consumers to reside and act in
various subregions, there must be some economic agent whose role is
to coordinate movements between the various regions. The shippers
are that set of economic agents who make the decisions on the
generation of trips from an origin, the distribution of these trips to
the set of destinations, and the set of transportation firms who will
move the freight from the origin to the destinations. The shippers'
choice to move freight depends upon the supply and demand
behaviour of the producers and consumers respectively, and the
market prices associated with this behaviour.
As stated above, one of the shippers' roles is to decide by what means
the freight will be moved, the means being the set of transportation
firms which we shall call the carriers. In general, the set of carriers
includes all the various modes of freight movement. Also, a common
assumption is that the carriers behave as profit maximizing firms.
Therefore, the carriers are defined as profit maximizing firms who
produce movements of freight as their outputs.
There are two other agents which we shall consider as part of the
freight transportation system. Potential carriers are economic agents
who do not currently offer any transportation services in the market,
but have the potential to do so. They are important in discussing the
issue of freight rates due to the pressure their potential entry places
on the currently operating carriers. The government is defined as
the set of federal, state and local agencies involved in any way with
freight transportation. The two major ways in which the government
enters this system are regulation and the provision of transportation
infrastructure. Regulatory policies affect the decisions of both the
shippers and carriers, and the entry into the market of the potential
 379

carriers. By providing a large portion of the freight system's

infrastructure, i.e., the highways and waterways, the government
also becomes involved with the operations of the carriers.
Given this conceptual framework in which we shall discuss the
problem of predictive analysis of the freight transportation system,
we shall now turn to a review of the three general approaches used
for this problem: the econometric model, the spatial price equilibrium
model, and the freight network equilibrium model. Let us begin with
a review of the econometric modeling approach.

2.2 Econometric Models

The econometric modeling approach to freight trnasportation

systems analysis involves the use of time series and/or cross-sectional
data to estimate structural relationships which describe the
behaviour of a part of or all of this system. Data on the 'materials'
which are used to produce transportation services (labor, capital,
energy, etc.) are typically utilized to estimate industry-wide or
firm-specific cost or production functions. On the demand side, data
on rates, level of service attributes and demands for transportation
services are used to estimate demand functions for this service.
Typically, models which we shall call econometric do not consider a
detailed description of the transportation network. That is,
econometric models rely on very simple descriptions of the network,
ignoring for the most part the complexities of an actual
transportation system. One reason for this type of treatment of the
transportation network is that there is little data available to estimate
economic relationships on the actual network. The explicit treatment
of the complexities of the actual transportation network falls into the
realm of what we shall call network models.
The econometric modeling approach typically focuses only on the
shipper-carrier-government relationship, ignoring the other agents
 380

interrelationships shown in Figure 1. Also, this type of modelling

approach has not been used for and does not lend itself to use in
asking questions about the detailed routing of freight since it is
difficult to incorporate a detailed network representation, as discussed
above.
The econometric model does have some advantages over the network
modeling approach. First, by often working from the basic 'materials'
of production, the impacts of various policies on labour, capital, etc.,
are easily studied. Second, econometric models allow for variation in
these basic production components, and thus are easy to use in the
study of the entry and exit of firms in the transportation industry and
other studies which involve dynamic adjustments.
The work done in the areas of econometric modeling of freight
transportation can be classified into one of three categories: the
supply-side models, the demand-side models, and the integrated
models, encompassing both supply and demand behaviour. In what
follows, we will define and briefly review the major works and
conclusions of each category.
The supply-side models focus on the issue of describing the
production of freight transportation services. The major impeuts for
the development of these models was not to make predictions about
the freight trnasportation system, but rather to understand the
production/cost characteristics of the industry. The results of these
models were used in the analysis of the regulatory reform of this
industry. These models, though not mean for direct use as predictive
tools, are useful in developing such tools in that they shed light upon
the definition of potential equilibrium industry structures and output
vectors. Therefore, it is instructive to briefly review the findings of
the supply-side models.
The study of the cost characteristics of the railroad industry has a
long history. The works by Klein (1947), Healy (1962), Keeler (1974),
Griliches (1972), Caves et al (1981), Friedlaender and Spady (1981),
 381

Jara-Diaz (1982) and Daughety et al (1983) are but a few of the many
studies performed to asses the cost characteristics of the railroad
industry in the United States. As Keeler (1983) discusses, these studies
tend to support the claim that strong economies of scale and density
exist in the rail industry.
There has been relatively less work done in the area of motor
carrier, barge and pipeline costs. In the trucking industry, the
studies by Roberts (1956), Nelson (1956), Dailey (1973), Lawrence
(1976), Friedlaender (1978), and Chow (1978) appear to have shown
that there is not strong evidence to support the claim that economies
of scale exist in the motor carrier industry. In the inland waterway
industry, the studies by Case and Lave (1970) and Polak and Koshal
(1976), both find increasing returns to scale. In the pipeline industry,
Cookenboo (1955) and Harzard (1977) also show economies of scale.
However, these studies are somewhat dated in their methodologies,
and thus it is difficult to make definitive statements on the economies
of scale issue in these industries.
The demand-side models attempt to explain the demand for
transportation service as a function of the rate charged for this
service plus the level of service (LOS) offered. These models are useful
to review in that they elucidate which characteristics of freight
movements should be incorporated into predictive models of the
freight system. The groundwork for such models of freight
transportation demand is the Lancaster (1966) activity approach to
consumer behaviour in which it is claimed that consumers derived
utility from the attributes of a good , not the good itself. Quandt and
Baumol (1966) use this idea in the development of the abstract-mode
concept. In this concept, modes are defined by a vector of attributes,
such as reliability, price, etc. Therefore, the modes are abstract in the
sense that it is the attributes, not the technology used, which defines
a mode. Following Winston (1983), we may classify the demand models
as aggregate or disaggregate. In the dis aggregate category, there are
 382

the behavioral models and the inventory-theoretic models. Let us

begin with the aggregate models.
The two major aggregate models are those by Oum (1979) and the
demand study in Friedlaender and Spady (1981) which assume that the
producing firms are profit maximizers and that transportation is a
factor in their production processes. In order to better understand the
derived nature of transportation demand, researchers began to look at
the decisions made by a single firm, thus creating models in the
dis aggregate category. The behavioral models look at the decision
processes of the agents involved in making the shipping decisions.
Allen (1977), Daughety and Inaba (1978, 1981), Daughety (1979), Levin
and Winston (1981) are all examples of this class of models.
The inventory-theoretic approach to freight transportation demand
is based upon the perspective that the transportation decisions are
being made by the inventory manager of a firm. That is, shipping
decisions are modeled as resulting from inventory considerations;
examples include Baumol and Vinod (1970), Das (1974), Constable and
Whybark (1978), Chiang, Roberts and Ben-Akiva (1980), Roberts
(1976), Terziev (1976), and McFadden and Winston (1981). More
detailed reviews of freight transportation demand models can be
found in Smith (1975) and Winston (1983).
Finally, the integrated econometric models which take both a supply
and demand model and calculate an equilibrium prediction fall into
the category of econometric models. The major works in this area
those of Friendlaender (1969) and Friendlaender and Spady (1981).
Building upon the cost and demand models cited previously, they
calculated the competitive equilibrium (marginal cost pricing) for
the purpose of evaluating regulatory reform. The equilibrium
analysis done with econometric models is intended to answer policy
issues with broad impacts, e.g., deregulation, and not for detailed
routing questions. The latter question is best answered via a network
model.
 383

2.3 Spatial Price Equilibrium Models

In both the spatial price equilibrium models discussed in this section

and in the freight network equilibrium models presented in the next
section, the transportation system is explicitly represented by a
network. This type of predictive network model implicitly assumes
that a short-run analysis will be performed due to the fact that the
capital which comprises the network is not typically altered in the
analysis done with this type of model. Therefore, it is very difficult to
use a network-type model to address issues such as entry and exit from
the transportation industry, dynamic adjustments, etc. Also, as
discussed above, network models cannot easily address the issue of the
substitutability of capital, labor and energy; this issue lies in the
realm of the econometric model.
The spatial price equilibrium model takes this network approach in
looking at the interactions of the procedures, consumers, and
shippers, as shown by the top triangle in Figure 1. That is, the
interactions of the carriers, the producers of the transportation
service, are left out of the analysis in this type of approach. Instead of
the carriers, cost function are defined on the elements of the network
to represent the transportation firms.
The spatial price equilibrium model consists of a subset of the nodes
in the network being designated as producing or consuming regions
for various commodities, or as both. Links connect regions directly or
through a series of transshipment nodes, where commodities are
neither produced nor consumed. Demand functions are associated
with each consuming region, and supply functions with each
producing region. The shippers 'barter' between these regions until
an equilibrium is reached. This equilibrium is characterized by the
following two conditions:
(a) if there is a flow of commodity i from region A to region B, then
the price in A for commodity i plus the transportation cost from
 384

A to B will equal the price of commodity i in B;

(b) if the price of commodity i in A plus the transportation costs
from A to B is greater than the price of commodity i in B, then
there will be no flow from A to B.
Therefore, the demand for transportation are de r i v e d from the
market forces across regions, the demands being a result of the
equilibrium process.
The concept of a spatial price equilibrium begins with Cournot's
(1838) description of the equilibrium of prices as goods move between
New York and London. This basic concept was formalized by Enke
(1951) and Samuelson (1952). Since this basic formulation, extensive
work has been devoted to extending the basic theory, algorithm and
application of this method: Takayama and Judge (1971, 1973),
Mackinnon (1975), Florian and Los (1980), Friesz et al (1983), Pang
and Lee (1981), Bawden (1966), Kennedy (1974), and Uri (1975), to
name a few. In general, this concept has proven to be very effective
theory for the prediction of interregional flows.

2.4 Freight Network Equilibrium Models

The freight network equilibrium approach to the prediction of

freight movements is one which utilizes a network structure to
represent these movements, the characteristics of this network
approach being the same as those discussed in the beginning of
Section 2.3. The freight network equilibrium approach focuses
mainly on the actions of the shippers, carriers and potential carriers.
Thus, the work which has been done with the freight network
equilibrium approach focuses mainly on the interactions depicted in
the bottom of Figure 1.
The first significant freight network model was by Roberts (1966),
which was later extended by Kresge and Roberts (1971) and applied to
the transportation network of Columbia. Peterson and Fullerton
 385

(1975) costructed a predictive network model which implicitly

assumes that all agents in Figure 1 act so as to minimize the total cost
of transportation by use of Wardrop's system optimality criteria.
Kornhauser (1979, 1982) has developed an interactive model of the
freight system in which network cost parameters can be altered in
such a way that predicted flows are close to replicating historical flow
levels on the network. Although this model is not predictive in the
sense that it does not attempt to predict how basic assumptions of
behavior are reflected in flow levels, it has proven to be a useful tool
for decision-makers. As part of the National Energy Transportation
Study (NETS), CACI, Inc. developed a multicommodity freight network
model referred to as the Transportation Network Model (TNM) (see
CACI, 1980, and Bronzini, 1979). Shippers' behavior is explicitly
modeled, carriers' behavior is not included in the model. Other models
which have been developed along the same lines of though as those
above include the model by the U.S. Department of Transportation (see
Swerdloff, 1971), the model of coal movement by Chang et al (1981),
and the work done on western coal movement by Green (1980),
Edelling and Chang (1979) and Ebeling (1981).
In work sponsored by the U.S. Department of Energy involving the
staff of Argonne National Laboratory (ANL), Friesz at al (1981)
developed a predictive freight model called the Freight Netwrok
Equilibrium Model (FNEM). The paper by Friesz, Gottfried and Morlok
(1987) describes the conceptual framework of FNEM. This model is the
first to recognize two distinct groups of agents, shippers and carriers,
in a general predictive model of intercity freight movement. The
model assumes that shippers act on a perceived network, which is an
aggregate of the physical network on which the carriers act. The
shippers' behavior on this perceived network is modeled by
Wardrop's user optimization principle. Demand behavior was initially
treated as a set of fixed O-D demands, and then later extended to elastic
(exponential) demand functions. Once the equilibrium on the
 386

percei ved network is found, the flows on this network are

disaggregate to form carrier-specific O-D demands for service. These
demands are than routed on each carrier's sub-network by assuming
systems optimization on each sub-network. Thus, FNEM is a sequential
model, first solving the shipper sub-model, and then passing these
results to the carrier sub-models. Gottfried (1983) has applied this
model to a national-level multimodal, multicommodity example with
better predictive results, when compared with historical data, than
any other published results.
The FNEM model is the basis for the general model for freight
prediction which is developed in the next section. This model ties
together the freight network approach with the spatial price
equilibrium approach in order to encompass all of the interactions
depicted in Figure 1. Thus, GSPEM can be considered as a unification
of two major areas of research on predicting freight flows.

3. THE GENERALIZED SPATIAL PRICE EQUILIBRIUM MODEL

As we have seen in the previous section, the current models of the

freight transportation system either (a) ignore the details of the
network technology on which this system is based -- the econometric
models; (b) ignore the role of the transportation firms -- the spatial
price equilibrium models; or (c) ignore the importance of the
commodity markets in deriving the demands for freight
transportation services the freight network equilibrium models.
The purpose of this section is to summarize a model -- the Generalized
Spatial Price Equilibrium Model or GSPEM -- which attempts to
overcome these difficulties by incorporating behavioral models of the
producers, consumers, shippers and carriers into a single
mathematical statement.
 387

3.1 Model Formulation and Assumptions

Supply-Side. To begin our discussion, let us focus on the production

of transport services. The supply side of the transportation market
will be assumed to consist of a set K of transportation firms (keK) or
carrie rs. The outputs which the carriers produce are the set of moves
between various origin-destination (O-D) pairs. The level of service
offered on an O-D pair is of major importance in transportation
decisions, and hence we should associate with each O-D pair a vector
of service attributes which the carriers provide at various levels
according to their assumed profit-maximizing behavior. However, the
inclusion of such a vector will quickly make this model intractable
for large problems. Thus, we will approximate the continuum of
service levels which a carrier can offer on any O-D pair by a discrete
set of service classes; Figure 2 illustrate this concept. Thus, when we
refer to an O-D pair in what follows, we are implicitly referring to

@ ................................® SERVICE CLASS S

• •
•• •
•
@ ..... ··············.......... ···@ SERVICE CLASS s
• •
• •
• •
~. ·······························@ SERVICE CLASS 2

@ ·...... ·........ ·........ ·...... @ SERVICE CLASS

o CARRIER k'. PHYSICAL MOVE A - B @

Figure 2: Multi-Output Concept
 388

both the physical movement and the service level which is being
offered.
The set K implicitly includes multiple modes of transportation
through the definition of each carrier keK. That is, each carrier is
defined to operate a certain mode (railroad, motor carrier, barge,
etc.). Competition within and between modes is thus implicitly
considered in our discussion of competition between carriers.
The carriers will be assumed to produce their supplies of 0-0 moves
on a fixed network, which implies that a short-run static analysis is to
be done since the capital comprising the network (railways,
highways, canals) is not altered in this analysis. Therefore, our first
assumption is that
(A-I) the economic time frame which is considered in this analysis
is the short-run.
Two assumptions are made concerning the behavior of the carriers:
(A-2) each carrier is a profit maximizing firm, and
(A-3) the carriers do not collude when setting supply levels.
Therefore, we are assuming that the market consisting of the set K
of carriers can be represented by a Cournot or Cournot-Nash quantity
model (Chapter 2 of Friedman, 1976). This model assumes that each
carrier takes the other carriers' outputs (or strategies) 'as given'
when making his supply decision.
Given the costs {;.k ('tk) of producing the vector 'tk of 0-0 flows on
carrier k's network and receiving Rk('t} units of revenue (note that
all carriers are represented in the revenue function of carrier k due
to competition), carrier k's profit maximization problem becomes:

maximize Rk ('t) - C k ('tk)

'tk ~ 0

The cost function ~k('tk) is defined as the solution to the problem of

routing the 0-0 flow pattern 'tk over carrier k's network so as to
minimize the total cost of such shipments. Thus {;.k('tk} is the minimum
 389

cost of producing 'tk units of output.

The first-order necessary conditions for this problem are the
so-called system equilibrium conditions which state that all utilized
paths between any carrier O-D pair must have their marginal costs
equal to the minimum marginal costs for that O-D pair if costs are to
be minimized.
The revenue function Rk('t) can be defined in several ways via the
definition of how the transport firms price their services, Le., the
appropriate definition of a rate function. The simplest approach is
where prices are fixed at some pre-specified value: the naive
approach in Harker (1987a). This approach was extremely useful in
the United States when the Interstate Commerce Commission (ICC) had
an almost total control over the rates charged for various types of
freight movements. The rates which the ICC allowed were
distance-based, and thus it was easy to find a good pre-specified value
of the rate which was charged for a freight movement. However, as
deregulation started in the freight transportation industry, the rates
became more variable and did not follow, in general, the ICC rate
formulas. Therefore, as the freight transportation industry moves in
the direction of operating in a deregulated market, the naive
approach will become (i) more difficult to implement, and (ii) less
realistic in that the market forces which shape the structure of rates
are not taken into account.
The econometric approach to modeling freight rates consists of
estimating the rate charged for a movement as a function of the
distance of the move, the costs incurred in making this move, the
shipment size, etc. This approach does not attempt to explicitly include
the market forces at work when a carrier makes a rate decision, but
rather estimates a function which uses as its data the results of such a
decision. One such study of freight rates using the econometric
approach is the one done at MIT, the results of which are summarized
in the master's thesis of Ralph Samuelson (1977). In Samuelson's
 390

work, rate functions are estimated using waybill sample data for rail,
truck and barge, and for various commodity types. He finds that both
miles hauled and shipment size are significant in the estimation of
rates. Also, he finds empirically that 'value-of-service pricing,'
whereby higher valued goods are moved with higher rates, is a
supportable hypothesis in his data sample. However, these results are
not applicable to the current deregulated market, and thus more work
in this area is necessary if this method is to be viable in practice.
Without the proper data to estimate rate functions in a deregulated
environment, alternative approaches need to be developed. The
legal-restriction approach assumes that the rates are equal to some set
of legal limits. The Stagger's Act of 1980 did not allow unrestricted
rates. In Section 201, the Act states that a rail carrier is free to charge
any rate as long as this carrier does not have market dominance over
the transportation market to which a particular rate applies. Market
dominance is defined in Section 202 to occur when a carrier has a
revenue to average variable cost percentage ratio in the market
under consideration greater than 80%. Other legislation, both federal
and state, may also contain legal restrictions on the rate-setting
behavior of rail carriers and the other modes of intercity freight
movement. Therefore, the legal-restriction approach would assume
that carriers price up to the legal limits, and thus the model would
assume the rates are equal to these limits.
The approaches to modeling freight rates which have been
discussed above all rely on some type of a priori specification of the
rates. That is, the rate must either be specified by some specific value
or by some known functional relationship before these techniques
can be used. However, this type of approach to modeling freight can
either be very data intensive or only possible with some assumptions
which may be over-simpliciations of the freight system.
In a purely competitive economic market in which each firm in the
market perceives demand as being infinitely inelastic when making
 391

supply decisions (pp. 82-83 of Samuelson, 1947), the rates charged by

each firm would be equal to the marginal cost of an O-D pair
movement. At the other extreme from pure competition is the
assumption of a m 0 no pol y , where only one carrier serves a
transportation market. In this case, the carrier does not face an
infinitely inelastic demand curve, but rather the total demand
function for the market in question.
The problem in applying the monopoly GSPEM is that we do not
know explicitly the demand function for transportation as will be
discussed in what follows, and thus we do not know the marginal
revenue function. Harker (1987a) provides a methodology to
approximate this function which may prove useful in practice.
The final type of rate function which could emerge is again
marginal cost pricing which is due not to a large number of transport
firms, but which can occur in a market due to the potential of entry --
the so-called contestable market model (Baumol et al. 1987). Thus,
marginal cost pricing may be a reasonable model in a transport
market subject to potential entry.
Therefore, several approaches can be taken to define the rate or
price function in GSPEM which still yield a computationally tractable
model; the interested reader is referred to Chapter 4 of Harker (1987a)
for more detail.
Demand-Side. The shippers are the set of economic agents who
decide on the quantity to ship between every pair of regions and on
the set of carriers which will move the goods. The shippers must, in
general, choose a set of carriers due to the structure of the
transportation industry. A single carrier may not be capable of
servicing a move from region A to region B, and thus the shipment
must be transferred to another carrier to complete the move. Figure 3
depicts this situation in which the shipper can choose carrier I to
move his goods from A to b, and carrier 2 to move the goods from b to
their destination B. Thus, the shipper must, in general, choose a
 392

CARRIER lis NETWORK CARRIER 2 1s NETWORK

I I
I I
I I
I I

cb~~~----d<___~~
I CARRIER 3 s NETWORK I
1
I CARRIER 4 s NETWORK
1

Figure 3: Concept of a Shipper Network

sequence of carriers to move his goods. We can conceptualize the

shipper decision process by thinking of their choice of carriers as a
choice of a path on a perceived or shipper network. This network,
conceived by Friesz, et al (1981), consist of the centroids of the
regions under study plus those nodes over which the shipper has
some control, such as major rail yards, ports , etc. The arcs of this
network represent valid 0-0 moves on the carriers' network. Thus,
the demand for service on a carrier 0-0 pair can be considered as the
flow on the shipper arc corresponding to this 0-0 pair. In Figure 3,
 393

the flow on arc (A-b) would be considered as the demand for service
between carrier 1's 0-0 pair (1-2). The costs of this service along any
arc would include the freight rate plus any level of service costs such
as time delays which the shipper would experience.
Given this representaiton of the shippers' decision process, it is
assumed that:
(A-4) the shippers posses no market power in the market for
transportation service. That is the shippers take the price of
this service as given in making routing decisions.
Given this assumption, let us consider three possible descriptions of
the demand side of the transportation market.
CASE I: Single Carrier Paths, Fixed Demand
Let us assume that every shipper path between every shipper 0-0
pair consist of one and only one arc and that the total demand for
transport service between a shipper 0-0 pair is consistent. That is, the
shipper must only choose which carrier will service an 0-0 pair, and
does not have to choose a sequence (or path) of carriers. In this
special shipper network, one can analytically define a demand
function for each carrier 0-0 pair. In this case, the problem of
predicting freight movements becomes the problem of computing a
Nash equilibrium for the set of problems defined by (1) for which an
efficient techniques exists for the computation of such an
equilibrium point.
The above demand-side model has two major difficulties. First, it may
be possible to define demand functions for every carrier 0-0 pair, but
the estimation of such functions would be very difficult. Second, for
certain commodities, there is often a great deal of switching of
carriers and/or modes when moving between a particular shipper
0-0 pair, and the above approach does not incorporate the decision of
a shipper to change carriers. Therefore, although this approach
creates a model which is relatively easy to solve, it may not be
estimatible or realistic.
 394

CASE II: Multiple Carrier Paths, Elastic Transportation Demand

Let us relax the assumption that each shipper path consists of one
and only one arc. In this case, the shipper must choosen between the
alternative paths when deciding on the routing of an 0-0 pair
shipment between a particular 0-0 pair. Let us assume
(A-5) the shippers complete noncooperatively for the services of
the carriers, and
(A-6) the shippers attempt to minimize the cost of shipping goods
between every 0-0 pair.
It is well known (see, for example, Oevarajan, 1981) that the above
two assumptions, along with assumption (A-4), will lead to a flow
pattern on the shippers' network which is a well-known Wardropian
User-Equilibrium.
If it is also assumed that the demand for movement between each
shipper 0-0 pair can be stated as a function of the minimum total
costs, then the resulting demand-side model is the same as the shipper
model described in Friesz, Gottfried and Morlok (1981), Friesz, et al
(1981), and Gottfried (1983).
The demands for service on a carrier 0-0 pair are no longer simple
functions of the total cost on an arc in the shipper network, as in Case
I, but are derived through the equilibrium routing of traffic decribed
by Wardrop's principle. Thus, we have generalized the demand-side
model to allow the shipper to choose a sequence of carriers, but at the
same time, we have destroyed the simple model structure described in
Case I. Another problem with this demand-side formulation is that the
generation of trips from every region is typically held fixed and
separate trip production and attraction constraints are appended for
the type of demand function described above. To include the
generation of trips, we will introduce the notion of a spatial price
equilibrium into our conceptual framework.
Case III: Spatial Price Equilibrium
Let us assume that
 395

(A-7) the commodity markets in each region are purely

competitive. That is, the shipper take the price of the goods as
gi ven when deciding how much of each good to move into or
out of a region.
In this case, the shippers act as the equilibrating force in the spatial
market, buying and selling goods until a spatial price equilibrium is
reached. Using the above notation, the spatial price equilibrium
conditions described in (i) and (ii) of Section 2 are used to describe
the equilibrium between the regional markets.
Therefore, we have replaced the simple demand function from Case
II by a derived demand via spatial equilibrium, and in doing so have
incorporated the generation of trips into our model. One can easily
see that, of the three cases, this is the most general form of model. We
next address the issue of integrating the demand - and supply-side
models.
Integration of Supply and Demand.
The simplest case of integrating the supplies and demands for
transportation is that described in Case I. By simply defining a
demand function on each carrier O-D pair, the problem of predicting
freight flows and freight rates becomes one of solving a classical
Cournot-Nash equilibrium problem. The computations involved in
such a problem are not difficult, as Harker (1984) shows, so that this
model can be applied to large-scale problems.
However, the assumption that shippers choose the same carriers to
initiate and terminate a shipment may not be realistic. Extensive
interlinings and transshipments are often made, especially with
long-distance shipments. Therefore, we would like to be able to treat
the situation described in Case II. Also we would like to incorporate
the producers and customers of goods into our model so that the
generation, distribution, modal split and assignment of trips can be
simultaneously predicted. Thus, we will focus on the integration of
the supply-side model with the demand-side model described in Case
 396

III.
In order to create a computationally tractable model, the rate
function concept was introduced. This function provides an exact
model in the case of purely competitive or contestable markets, and is
an approximation to imperfect markets via the legal-restriction
approach, econometric approach, etc., described earlier. Thus,
carriers are assumed to price according to the a priori specification of
the rate function in GSPEM.
In summary, GSPEM is a modelling framework that includes all of
the interactions depicted in Figure 1 in a consistent and simultaneous
framework. Harker (1987a) provides the mathematical formulation of
this model and establishes the theoretical conditions for the existence
and uniqueness of a solution.

3.2 Theoretical Extensions

One major flaw in the GSPEM framework is the assumption that the
regional commodity markets are purely competitive and that no
errors exist in the data defining the supply and demand relationships
in the various regions comprising the study area. In a series of
papers, these assumptions have been relaxed by the author.
The assumption that the regional commodity markets are purely
competitive is clearly inappropriate for goods such as coal, steel, etc.
Harker (1986b) presents an oligopolistic market model for the spatial
economy which extends the spatial price equilibrium model to the
case of noncooperative competition. In the case where collusion
among regional suppliers may be present, Harker (1987a) presents a
cooperative game-theoretic model which employs the core as a
solution concept. Such a model is useful in two respects. First, some
commodities such as steel may be best represented via a collusive
markets model. Also, such a model is useful as a stability check for the
purely competitive and non-cooperative model in that it provides a
 397

measure of the likelihood of collusion between producers via the

payoffs to such coalitions. Both of these models could easily replace
the demand-side model presented in Case III in order to provide a
more realistic depiction of the commodity markets.
The other difficulty in the original formulation of GSPEM is that it
assumes perfect information on the supply and demand functions in
each region. Clearly, such data is far from perfect in most
applications. Harker (1987 a) has provided a modelling framework for
spatial price equilibria which allows for such errors and "corrects"
them via calibration parameters. Again, this new model can easily be
placed within the GSPEM framework.

3.3 Computational Algorithms for GSPEM

Algorithmic approaches to solving GSPEM are in essentially two

categories: equivalent optimization algorithms and variational
inequality algorithms. In this section, the pros and cons of these two
approaches will be discussed.
In the case of the equivalent optimization approaches, the GSPEM
model can be solved with modifications to existing traffic
assignment/spatial price equilibrium algorithms (Friesz et al 1984,
Harker 1986a, Lawphongpanich and Hearn 1984, LeBlanc at al 1975).
These algorithms require that the GSPEM representation of the
problem can be stated as an equivalent optimization problem. In order
to attain this representation, several simplifying assumptions must be
made. First, the rate function must be identically equal to marginal
costs; i.e., pure or contestable transport markets must be assumed.
Second, the demand, supply and transport cost and delay functions
must exhibit no cross elasticities; i.e., they are a function of only one
variable. These assumptions rule out the use of demand systems such
as one would have when modelling energy flows (coal, oil, natural
gas). Finally the time delay function on the shippers' network must
 398

obey several restrictive assumptions.

When the above assumptions are violated, one must employ general
variational inequality algorithms such as Newton's method,
diagonalization (Pang and Chang 1982) and simplicial decomposition
(Lawphongpanich and Hearn 1984, Pang and Yu 1984). These
algorithms essentially solve a sequence of optimization problems such
as those described above. Therefore, the relaxation of any of the
above assumptions will have a significant impact on the size of
problem to be addressed due to the increase in the computational time
necessary to solve the model.
The interested reader is referred to Chapter 5 of Harker (1987a) for a
thorough discussion of these algorithmic approaches to solving
GSPEM.

4. APPLICATIONS OF THE GSPEM METHODOLOGY

As described in Section 2, the Freight Network Equilibrium Model

(FNEM) is the precursor to the general GSPEM framework. While not
as theoretically appealing, FNEM has proven to be a very effective
tool in transport planning. Thus, the first "applications" of GSPEM to
be discussed in this section are those for which the original FNEM
model was employed.
FNEM was developed by Argonne National Laboratories and by the
staff at the University of Pennsylvania under the direction pf
Professor T.L. Friesz. The original model was used to evaluate the
impact of increased coal usage in the Northeastern United States on
the transportation of coal and other commodities (Friesz et al 1981).
Since this initial applications, several other uses of the FNEM model
and associated software have been made in the United States for both
regional analysis (the Florida coal study) and national goods
movement studies; the paper by Friesz et al (1987) and the dissertation
 399

bu Gottfried (1983) describe these applications.

Several U.S. governmental agencies have recently begun to use the
FNEM software system in the analysis of goods movements in Africa
for the purposes of planning transport investments and in the
analysis of security issues. The initial evidence from these
applications is that this modelling framework is extremely useful in
identifying key components of the transport system for further
analysis.
In order to illustrate the power of the more general GSPEM
framework described in this paper, a software system was developed
ar Argonne National Laboratory for the solution of the full model
(Case III) and an application to Argonne's coal database was
performed. This database consisted of 181 regions which represent
the coal supply/demand regions, 18 carriers as listed in Table 1,
which create a network of 7688 arcs and 4245 O-D pairs, and an
aggregated shipper network composed of 6993 arcs and 1238 O-D pairs;
Table 2 summarizes this database. Thus, this database represents an
application of the GSPEM methodology to problems of realistic size and
complexity.
Several scenarios were run using this database as described in
Chapter 6 of Harker (1987a). CPU time on an IBM 3033 for each
scenario's solution was approximately 30 minutes, which is excellent
given the complexity of the model. The model also appears to replicate
fairly well the historical data, although the input data is fairly
suspect.
In summary, the applications of GSPEM point out three important
conclusions about the model and its associated optimization-based
solution algorithm. First, GSPEM is applicable to large-scale problems.
Many models which incorporate complex interactions are not
solvable for problems of realistic size. However, GSPEM, with all of its
interrelatedness, was able to solve very large problems in a
reasonable amount of computer time. Second, even with very poor
 400

data, the results obtained by GSPEM in the base year run were very
much 'in the ballpark.' The results were not grossly different from
historical data. With better data, GSPEM should be capable of fairly
accurate predictions. Last, GSPEM can be a very useful policy tool.
Issues of port expansions, mergers, etc. can all be dealt with by
GSPEM. The complexity of the problems which can be addressed by
GSPEM is very broad, and they can be addressed within a reasonable
computational budget.

5. CONCLUSIONS AND FUTURE RESEARCH DIRECTIONS

This paper has summarized the work in developing and applying a

model of freight transportation which takes into account the complex
interactions between the transport firm and the producers and
consumers of goods via their intermediaries -- the shippers. As it
stands, the GSPEM framework is the most complete theory for
analyzing the impacts of freight transport on the regional commodity
markets to date. As the applications of GSPEM illustrate, it is also
capable of being applied to problems of realistic size. However,
several extensions of this model are needed before it can be put into
wide usage.
First, the modelling of shipper and carrier behaviour must extended
to incorporate more flexible economic assumptions. On the shipper
side, choice models such as a logit function should be employed to
better represent the stochastic choice of carriers (a path in the
shipper network). On the carrier side, an explicit model of
oligopolistic competition should be used to replace the rate function
concept and ideas from the marketing literature should be used to
better represent the price/level of service decisions which the
carriers must make in this marketplace.
On the modelling of the regional economy, the GSPEM framework
 401

should be extended to allow for input-output representations of supply

and demand functions and for general equilibrium (Rutherford 1985)
between all commodities considered in the models and their
relationships to tax, fiscal and import/export quota policies of the
regions.
The above extensions greatly complicate the solution of GSPEM.
Thus, more research is needed on the efficient solution of large-scale
variational inequalities before such extensions will be practically
useful.
Finally, more applications of the GSPEM methodology are needed to
ascertain its usefulness and effectiveness in planning situations. Two
applications of current interest involve the planning of port capacity
changes and in railroad pncmg policies from the railroad's
perspective. Such applications should help extend the GSPEM
methodology so that a wider range of planning issues can be
addressed.
 402

TABLE 1

CARRIER DESIGNATIONS AND NETWORK SIZES

Carrier No. Carrier Name No. Arcs No. Nodes O-D Pairs

1 Santa Fe RR 410 132 158

2 New England RR.s 30 13 24
3 Burlington Northern R.R. 816 269 410
4 CSX Corporation 1160 334 530
5 Conrail 878 238 474
6 Denver and Rio Grande
RR. 16 8 12
7 Illinois Central Gulf RR 462 146 204
8 Kansas City Southern RR 82 32 20
9 Missouri, Kansas, Texas RR 142 57 42
10 Pacific Railway 654 220 276
11 Norfolk and Western
and Southern R.R 982 291 434
12 Southern Pacific R.R 216 83 100
13 Chicago Northwestern R.R. 288 90 230
14 Milwaukee RR. 290 104 160
15 Soo Line 32 19 8
16 Florida East Coast R.R 10 5 4
17 *Inland Waterway 992 456 341
18 *Deep Draft Waterway 208 80 818

TOTAL 7668 2577 4245

 403

TABLE 2

SUMMARY OF THE DATABASE

Carrier Network
Number of Carriers 18
Number of Nodes 2577
Number of Arcs 7668
Number of O-D Pairs 4245

Shipper Network
Number of Nodes 960
Number of Arcs 6993
Number of O-D Pairs 1238

ACKNOWLEDGEMENTS
This research was supported by the National Science Foundation
under Presidential Young Investigator Award ECE-8552773.
 404

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 ANALYSIS OF REGULATION EFFECTS IN THE TRUCKING
INDUSTRY: A TECHNOLOGICAL APPROACH

Robert Gagne

Departement de sciences economiques and Centre de recherche sur

les transports, Universite de Montreal, P.O. Box 6128, Station A,
Montreal (Quebec) Canada H3C 3J7

This paper concerns the methodology used to analyze the technology of

the trucking industry and also its theoretical background. After having
presented the theoretical background, the methodology itself and its
particular application to the trucking industry are described. We also
present three possible uses of this methodology: the analyses of returns
to scale, productivity growth, and beneficiaries of regulation.

1. INTRODUCTION

In recent years, deregulation in transport industries has been an

important issue in North America. The U. S. airli ne industry
experienced large scale deregulation in 1978 and, since 1980, the
trucking industry operates in a more competitive environment. In
Canada, large scale deregulation of the transport industries has not
yet been implemented. However, since 1984, a certain political will
toward deregulation has been observed at the provincial and federal
levels of government (Axworthy, 1984, and Transport Canada, 1985).
Deregulation usually means the removal of the obligation by a
transportation firm to own a permit in order to operate in a given
territory. This permit, granted by a transport commission, fixes the
rates, the network and also the frequency of services for a particular
carrier. For example, in the province of Quebec, trucking firms must
obtain a permit from the Quebec Transport Commission to carry goods
across the province. This permit fixes the rates the carrier may
charge, the kind of goods he may carry, the routes he may use, the
markets he may serve, as well as the frequency of service he must
 410

offer. In a deregulate environment, carriers are free to charge the

rates they want, carry the goods they want and serve the markets of
their choice.
Deregulation in Canada faces opposition by certain influential
groups. For example, in the airline industry, opposition to
deregulation mainly comes from labour unions, since workers seem to
be the main beneficiaries of regulation (Trapani and Olson, 1981). In
fact, the absence of rate competition in the Canadian airline industry
leads carriers to compete on other grounds, such as quality of services
offered (flight frequency, quality of meals, etc.). This kind of
competition was leading to a higher use of workers, hence the
opposition by labour unions to deregulation. In the trucking
industry, though the main beneficiaries of regulation seem to be the
workers in the industry (Moore, 1978, and Kim, 1984), opposition to
deregulation comes especially from the owners of trucking firms.
They maintain that the trucking industry is characterized by an
increasing ret~rns to scale technology and that deregulation would
mean cut-throat competition by the large carriers, leading to the
monopolization of the industry.
On the other hand, many studies investigating the technology of
trucking firms concluded, in spite of ambiguous results, the absence
of increasing returns to scale. Some authors came to the conclusion
that the trucking industry is characterized by weakly decreasing
returns to scale when a proper specification of the cost function is
used (Spady and Friedlaender, 1978, 1981).
The main purpose of this paper is to present the methodology used to
analyze the technology of the trucking industry and also its
theoretical background 1. This methodology is particularly useful
when investigating the questions of returns to scale, beneficiaries of
regulation and productivity growth in the trucking industry. In the

1 For a review of methodologies used for the airline industry, see Dionne and
Gagne (1986)
 411

first section of this paper, the theoretical background of the

methodology is presented. In the second section, the methodology
itself and its particular application to the trucking industry are
described. The third section is devoted to the possible use of this
methodology regarding returns to scale, productivity growth, and the
beneficiaries of regulation. Although this paper concentrates
primarly on the application of the methodology to the trucking
industry, we must emphasize the fact that it can be used for other
regulated industries such as the airline industry, electric utilities and
the rail industry (Spady and Friedlaender, 1981; Caves, Christensen
and Tretheway, 1984; Christensen and Greene, 1976).

2. THEORETICAL BACKGROUND

2.1. Primal Approach to the Analysis of Technology

A trucking firm produces various outputs (Yl' Y2' ... , Y n ) from a

variety of inputs (x l' x 2' ... , X m)' Therefore, we are looking for a
relationship to establish the possible physical combinations of inputs
and outputs. The relationship needs not only to represent the possible
physical combinations but also the efficient ones. A natural way to
represent this relationship is to set out a production (or
transformation) function:

T(y,x) = 0 [1]

where y is an nxl vector of outputs;

x is an m x 1 vector of inputs;
T a function.
This production function (1) establishes which combination of
inputs and outputs are possible and efficient. By efficient, we mean
that the production function restricts the set of possible outputs to the
 412

vectors of maximum outputs for given vectors of inputs. For example,

in figure 1, where x 1 is an input and y 1 an output, both A and B are
possible, but only B is efficient, while C is neither efficient nor
possible for a given level of input (x 1 ).

A •I
I
I
I
I

Figure 1: Production function

In order to simplify this, let us suppose that we are using m inputs

for the production of only one output
y =j(xl' x2' ... , xm) [2]
where y is the output (from now on a scalar measure);
Xl' ... , xm are the inputs;
f is a function.
Like production function [1], relation [2] establishes the set (y, Xl'
x2'"'' xm) of possible and efficient combinations of inputs and output.
From this production function, we can define the following concepts:
Definition 1 - Constant returns to scale
A technology is characterized by constant returns to scale if
the following equality always holds:
j(txl' tX2' ... , txm ) = tj(xl' x2' ... , x m ), for t> 1.
In this case, f(x 1 ' x2' ... , Xm) is a homogeneous function of
 413

degree one.
Definition 2 - Increasing returns to scale
A technology is characterized by increasing returns to scale if
the following inequality always holds:
j(txl' tX2' ... , txm ) > tj(xl' x2' ... , xm) , for t> 1.
Definition 3 - Decreasing returns to scale
A technology is characterized by decreasing returns to scale if
the following inequality always holds:
j(txl' tX2' ... , txm ) < tf(xl' x2' ... , xm) , for t> 1.
In a regulated industry, the choices the firm faces regarding its
production plans are limited. In the trucking industry, rates are
usually fixed by a transport commission, therefore exogenous to the
firm. Also, the firm does not have the freedom to determine its level of
output because the permit it holds forces it to respond to the totality of
demand in the markets served. Finally, most of the inputs used by a
trucking firm are bought or rented in competitive markets where the
firm does not have the power to influence the prices of these inputs.
Considering these institutional and market constraints, the firm does
not have a wide variety of choices regarding its production plans. In
most cases, the only choice left to the firm is the choice of inputs that
it will be using and a limited choice regarding its output since the
firm must request additional permits in order to expand it.
With the help of a simple model, we can formulate the choices faced
by the firm subject to the above constraints. Let us consider a case
where the firm faces exogenous rates, usually fixed by a transport
commission, and bought or rented inputs on competitive markets. In
this case, the firm maximizes its profits subject to the technological
constraint: 1

1 In numerous cases, the firm cannot respect the equality of this constraint.
For example, a regulated trucking firm may faces empty backhauls because
its permit does not allow it to carry goods over some directions. We may sub-
stitute for this constraint the following one: f (x) ~ y. However, with this new
constraint we accept non-efficient, although possible, combinations of inputs.
 414

Max jiy - w'x [3]

subject to y = I(x)
where ji is the exogenous rate;
y is the level of output;
w is an mx 1 vector of inputs prices;
x is an mx 1 vector of inputs;
is for exogenous variables.
From the first order conditions of [3], we can derive the supply
function of the firm and also its inputs demand functions:
y = g(ji, w) (supply) [4]
Xs = hs(ji, w) (inputs demand), s = 1,2, ... , m . [5]
Hence, from this model we can draw interesting conclusions
regarding the deregulation debate in the trucking industry and· in
other industries. as well. Thus, the question of the beneficiaries of
regulation could be analyzed with the supply and input demand
functions. Moreover, the knowledge of the production function (j(x»
could be very useful in investigating the question of returns to scale.
But, the application of this model cannot take place without going
trough the econometric estimation of the production function. For
example, let us suppose that we do have information (Le., a sufficient
number of observations) about input utilization and output level.
From this information and under the hypothesis of a Cobb-Douglas
technology, we can estimate the following relationship:
y.;. 0. 0 + alln xl + 0.2 In ~ + ... + am In xm + e [6]
are the parameters of the production
function to be estimated;
e is a disturbance term with zero mean and finite
variance.
In general, if there is no correlation between the right-hand side
variables of [6] and the disturbance term, the estimation of [6] by
ordinary least squares would give unbiased estimates of 0. 0 , a I' ... , am.
 415

Unfortunately, in most cases, there is correlation between the

right-hand side variables of [6] and the disturbance term. For
instance, suppose that the manager of a firm observes some variables
which influence his input choice, but these variables are not
observed by the analyst who tries to estimate the production function.
The effects of the leftout variables on output are found in the
disturbance term. Since the choice of inputs is partly related to these
variables, and since the disturbance term is partly a function of these
variables, the correlation between the input variables and the
disturbance term will be different from zero, thereby introducing a
bias in the estimation of the a. 's (Varian, 1984). For example, if the
manager observes a variation in the quality of some inputs, he
modifies the input combination in accordance with this variation.
Also, the effect on output level of the quality variation of some inputs
(that we do not observe) is taken into account by the disturbance
term. Hence the correlation between the explanatory variables and
the disturbance term, leading to the invalidity of the estimation.
In real life situations, there are strong reasons to believe that a
firm's manager observes some variables ignored by the analyst
conducting a study on technology. For this reason, direct estimations
of the production function are invalid and an alternative method of
analysis must be used.

2.2. Dual Approach to the Analysis of Technology

In this section, instead of considering the problem of profit

maximization by the firm, we will considerate the problem of cost
minimization. 1 The theorem of duality (Shephard, 1953) allows us to
infer the technology of a firm in terms of relations between
quantities (the primal problem) or in term of relations between

1 The problem of cost minimization is equivalent to the problem of profit

maximization.
 416

prices (the dual problem) as long as the firm is cost minimizing. The
problem of the firm is now
Min w'x [7]
subject to I(x) = Y
From the first order conditions, we can find the cost function
C = C (w, j), i.e. the minimum cost of producing y with inputs prices w.
Applying the theorem of duality, we can infer directly from the cost
function the structure of technology of a firm.
From a theoretical point of view, the cost function has many
properties: t
Property 1: C (w, y) is a non-decreasing function in w. Therefore, if
Wt ~ Wo then C(wl' Y) ~ C(w o ' Y) •
Property 2: C(w, y) is a homogeneous function of degree t in w.
Therefore, C(tW, Y) = t C(w, y) for t~O.

Property 3: C(w, y) is a concave function in w. Therefore, C(tWo +(I-t)

wl'Y) ~ t C(wo'Y) + (l-t)C(wt,Y), for Os~1.
Property 4: C (w, y) is a continuous function in w.
Applying Shephard's lemma, from the cost function we can induce
the conditional inputs demand functions. Thus, if C (w , y) is
differentiable and if ws > 0 then

s= 1,2, ... ,m [8]

where x s is the conditional demand function of input s.

The four properties of the above cost function involve the following
properties for the conditional inputs demand functions:

Property 5: Since C(w, y) is non-decreasing in w, then

xs(w, y) ~ 0, for s = 1,2, ... , m.

1 For proofs of those properties, see Varian (1984), chap. 1.

 417

Property 6: C(W, y) is homogeneous of degree 1, therefore the first

derivatives of the cost function with respect to iii s (s 1,
2, ... , m), the conditional input demand functions, are
homogeneous of degree 0 in w.
Property 7: Since C (w , y) is concave in w, then the matrix of the
second derivatives of the cost function with respect to w,
the matrix of the first derivatives of the conditional input
demand functions, is a negative semi-definite matrix.
This implies that the own price-effects are nonpositive,
therefore

a2 C(w, )1)
~ 0, s = 1, ... , m
j ~2
(J w s

since the diagonal elements of a negative semi-definite

matrix must be nonpositive.
Since the theoretical basis of the cost function has been presented,
we may investigate the technology and cost structure of the trucking
industry. Let us see firstly how the cost function methodology can be
applied to this industry.

3. TOWARD THE ESTIMATION OF A COST FUNCTION FOR THE

TRUCKING INDUSTRY

The preceding section has established the foundation of the cost

function, the arguments (iii, 51) it contains and also its properties.
However, we still do not have information about the functional form
of this function. For econometric estimation purposes, knowledge of
the functional form is necessary. Usually, an approximation of the
function is used. In technology and cost structure analyses, a second
 418

order approximation of the cost function is used most of the time. 1

This kind of approximation permits the testing of several hypotesis
regarding technology, it is flexible, and permits several kinds of
returns to scale, homo the tic and non-homothetic type of technology
and also variable elasticities of substitution between inputs. Finally,
such an approximation allows the introduction of multi-outputs type
of production structure (Spady and Friedlaender, 1976). In this section
we will derive a translog approximation of a function and show how it
can be used for a cost function in the trucking industry. We will also
discuss, at the end of this section, the restrictions to impose to the
translog approximation of the cost function in order to take into
account the theoretical properties (P 1 to P4) presented above.

3.1 Translog Approximation of a Function

We can approximate 'a continuous function h(x) with a Taylor series

expansion around a point x 0: 2
n 1 n n
h(x)=h(xo)-+;Lh i (xo)(xi -x;o)+-2.L ,L hi'j,(xo)(Xi -Xio)(X,· -xjo) [9]
1=1 l =1, =1

+ higher order terms

where hi(x o ) and hi/x o ) are respectively the first and second
derivatives of h(x) with respect to x
evaluate at x 0;

x is the vector (nxl) of the arguments of function h.

Usually, higher order terms are assumed to be very small and then
considered to have a zero value. Therefore the approximation of h(x)
resume to a second-order approximation of h(x) given by

1 Some authors have used a third order approximation of the cost function for
technical change analysis (Friedlaender et Schur Bruce, 1985).
2 Those who are not familiar with the Taylor series expansion are referred to
Chiang (1984), chap. 9.
 419

n 1 n n
h(x)=h(xo)-+;Lh i (xo)(xi -Xio)+-2.L .L hii(xo)(Xi -Xio)(XJ' -x.JO·) [10]
1=1 l=lJ=l J

Consider now the second-order approximation of In g(z). We have

g (z) = g ( e In z) [ 11 ]
In g(z) = In g(e ln Z) = h(ln z) [12]
From [10] and assuming that x = In(z), we have
n
heX) = h(ln z) = In g(z) = h(ln zo) + L. hi(ln zio)(ln zi - In Zjo) [13]
i= 1
1 n n
+ - L
2 i=l j=l

If we approximate In g(z) around 1, we are falling on the classical

translog function, since at Zo = (1,1, ... , 1) we have In Zo = (0,0, ... , 0),
then [13] can be rewritten as
n 1 n n
In g(z) = h(o) + L hi(o) In zi + - L L h ..(0) In z·I In z·J [14]
IJ
i=1 2 i=l j=l

which is
n 1 n n
In g(z) = 'Yo + L 'YI. lnz I.+ - L L. 8IJ.. In z·I In z·J [ 15]
i= 1 2 i=1 j=1
if 'Yo = h(o)
'Yi = hi(o)
8IJ.. =h IJ.. (0)
The translog approximation of the cost function as presented by
equation [15] could be a poor approximation of the real cost function
if its arguments (input prices and outputs) have values far from 1. For
this reason, it is more convenient to approximate the cost function
around the arithmetic mean of the arguments rather than around 1.
Thus, with zi the arithmetic mean of z i' we approximate the function
In g( z) around the mean of its argument by the following
relationship:
 420

n
In g(z) = ex o + l: ex ,. (In ,
z· - In z.) ,
i= 1 [16]
1 n
+ - l: A ..
p'}
(In z.I - In zI.)(In z· - In z.)
J }
2 i=1 j=1

3.2 Cost Function for the Trucking Industryl

In order to approximate a cost function for the trucking industry,

we can already use relationship [16]. First, let us separate thez vector
in [16] into two different vectors 'I' and w (z = ('I', w». The 'I' vector
represents the n different outputs produced by the firm, therefore 'I'
is a nx 1 vector. The w vector represents the m different input prices
faced by the firm, therefore w is an mx 1 vector. The cost function can
therefore be approximated as follows: 2
n m
In C('I', w) = ex 0 + l: ex pn 'l'i - In 'l'i) + l:
i=1 s=1
1 n n
+ - [l: l: Ai/In 'l'i -In 'l'i)(ln 'l'j -In 'l'j)]
2 i=1 j=1
[17]
1 m m
+-[l: l:
2 s=1 t=1
n m
+ l: l: Cis(ln 'l'i -In 'l'i)(ln Ws -In ws )]
i=1 s=1
where C ('I', w) is the total cost of the firm;
'l'i is the measure of output i;

1 Although the theoretical background refers to a firm, the analysis of

technology is normally undertaken at the industry level because of
insufficient data with only one firm. In order to have a sufficient number of
observations, one must use a cross-sectional sample of data from several
firms. But, in doing this, we are accepting the hypothesis that the
parameters of the cost function are the same for all the firms within the
sample.
2 We have already imposed symmetry upon the interaction term (Cis = C si)'
though the term 112 disappears.
 421

Ws is the input price s;

A ij' B st' Cis are parameters.
Measuring the level of output in transport industries is very
difficult. Most of the time, available statistics are limited to aggregate
measures of output for each firm in the industry. In passenger
transport services, the most common measure of output used is the
number of passenger-kilometers, while in freight transportation
services the most common measure is the ton-kilometers carried.
However, in both cases, the use of a single measure of aggregate
output introduces serious difficulties. For example, in freight
transportation, two firms with the same level of output (ton-
kilometers) could have incurred different total costs if one firm is
specialized in less-than-truckload shipments over short distances
while the other is specialized in truckload shipments over long
distance. In order to take these characteristics into account, Spady
and Friedlaender (1978) have introduced measures of output qualities
into the cost function. 1 First, let us fix Y i as a measure of the i' th
output and qki as the quality k of the i'th output (i=I, ... , nand k=I, ... , r).
Spady and Friedlaender then use a hedonic function which aggregate
the measures of outputs and their qualities:
[18]
where qi = [q1i' q2i; ···,qri]
Usually, it seems preferable to assume that the function <P i has the
following properties (Spady and Friedlaender, 1976, p.42):
i) <Pi (0, qi) = 0 and <Pi (Yi' qi) > 0 for Yi > 0 and qi > 0;
ii) <P i (y i' q i) is a homogeneous function of degree 1 in Yi for a
given q i;
iii) <P i (y i' q i) is a monotonic function non-decreasing in q i·
The hedonic function [18] can take many functional forms. In their
1978 paper, Spady and Friedlaender have used the following translog

1 The most common measures used are: average length of haul, average
shipment size and average load per truck.
 422

approximation:
r
In Vi = In Yi + L G ki (In qki -In (fki)
k=l [19]
1 r r
+- L L H kl.i (In qki - In 'iki)(ln ql.i - In (fl.i)
2 k=l l= 1

where G ki and H kl.i are parameters.

However, in order to keep down the number of estimated
parameters, we could use a Cobb-Douglas form of the hedonic
function, as Spady and Friedlaender have done in their 1981 paper:

r
In 'II i = In Yi + L L ki In qki [20]
k=l

where L ki is a parameter.
Both functions [19 and 20] have the desired properties under the
assumptions that G ki ~ 0 and L ki ~ 0 for all k, i and l. In imposing
restrictions on the parameters of [19] or [20], we can find, as a
particular case, the standard translog cost function [17] 1.
Furthermore, Spady and Friendlaender (1981) have introduced a more
general cost function which takes, as particular cases, the standard
and hedonic translog cost functions. Thus, under the hypothesis that
a firm minimizes costs (then maximizes profits), we have now the
following problem
Min w'x [21]
subject to f(x, 1) = 'II
where 'II is the hedonic measure of output;
"{ is a vector (zx 1) characterizing the technological
constraints faced by the firm (e.g., size and density of
network);
x is the vector of inputs;
w is the vector of input prices.

1 G ki = 0 and H kl.i = 0 for [19] and Lki = 0 for [20].

 423

Here, the firm faces input prices and technological constraints and
determines its optimal level of hedonic output in order to minimize
costs. Again, by duality, we know that we can characterize technology
in terms of relations between prices. Therefore, from the first order
conditions of problem [21], we can obtain the following cost function:

c = c ('If, w, t) = c (<I>(Y, q), w, t) = C(y, q, w, t) [22]

This cost function (the technological cost function) can be
approximated by the following translog function:

n m

i=1 s=1
z 1 n n
+ I. Yp(ln tp - In tp ) + - I. I. A i/ In 'If i-In ij1 i)( In 'If In ij1j) r
p=1 2 i=1 j=1
1 m m
+- I. I. B stUn Ws - In W sHIn Wt - In W t)
2 s=1 t=1
n m
+ I. I. C is(ln 'If i-In ij1 i)(ln Ws -In w s) [23]
i=1 s= 1
1 Z Z
+ - I. I. D pv(ln tp - In tp)(ln tv - In tv)
2 p=lv=1
n Z

+ I. I.
i=1 p=1
m Z

+ I. I.
s=1 p=1
with 'If i = <I> i(Yi' q i)'
The standard translog cost function [17] and the hedonic translog
cost function ([17] with [19] or [20]) are nested into the technological
translog cost function. Hence, when the proper restrictions are
imposed upon the technological cost function, it is easy to derive the
standard or the hedonic cost functions. It will then be possible to
determine, from tests on restrictions, which form of the cost function
(standard, hedonic or technological) is the better suited for the
analysis of technology.
 424

3.3 Properties and Restrictions of the Translog Cost

Function

From section 2, we know that if the firm has a cost minimization

behaviour, the cost function possess four properties. The first
property stipulates that the cost function is non-decreasing in w (the
input prices), that is: ~ ~ O. However, since ---.!.£. = ( 0 In C ) C
o Ws o ws 0 In wsw s
and, since ~ is always positive, we must verify that olnC is
o In Ws

nonnegative. __o_l_n_C_ as we will see in Section 3.4, corresponds to

o In Ws
the share in the total cost of factor s. To verify property 1, we must
check, for all the observations within the sample, if the fitted factor
shares are nonnegative.
Property 2 stipulates that the cost function is a homogeneous
function of degree 1 in w (the input prices). Homogeneity of degree 1
implies the following relationship:

C(V, AW, t) = A C(V, w, t) [24]

In logarithmic form [24] becomes

In C(V, AW, t) = In A + In C(V, w, t). [25]

From [23] and setting In Wi = 0, In Ws = 0 and In ~ = 0, we have

n m
In C(V, AW, t) = <Xo + L <X.I In V·I + L
i=1 s=1
1 n n
+ f 'Yp In tp + - L LA
•
.. In V·I In V·J
IJ
[26]
p=1 2 i=1 J=1
1 m m
+ - L L B st(ln A + In ws)(ln A + In w t)
2 s=1 t=1
n m
+ L L Cis In Vi (In A + In w s)
i=1 s=1
 425

1 z z
+ - I. I. D pv In tp In tv
2 p=l v=l
n z
+ I. I. E ip In 'IIi In tp
i=1 p= 1

+ ~ f Fsp (In A + In w s ) In tp
s=1 p=1
which could be rewritten as
m
In C("" AW, t) = In C("" w, t) + I. ~s In A
s=1
m
m
I, B st [(In A)2 + (In A In Wt) + (In Ws In A)] ] [27]
I,
t= 1
s=1
n m z m
+ C is In 'II i In A + I, I. F sp In tp In A.
I. I,
i=1 s=l p=l s= 1
m m
The last two terms of [27] equals zero when I, Cis = 0 and I, F sp = o.
s=l s= 1
Furthermore, we can write the third term of [27] as

~[(In A)2 ~
2 s=1 t=1
m
I, Bst+ln
m
A I,
s=1 t=1
m
I, Bstlnwt+ln A I,
m m
I.
s=1 t= 1
Bstlnw s
]
[28]

Equation [28] equal zero when

m
s= 1, ... ,m [29]

m
I. B st= 0 t= 1, ... ,m. [30]
s=1
Moreover, since the B matrix is symmetric (by the rule of derivatives)
m n
we have I, B st = I, B st. This implies
s=1 t=1
m n
I, I, B st = 0 [31 ]
t=1 t= 1
Finally, homogeneity of degree 1 implies this last restriction
 426

m
2. ~s = 1 [32]
s=1
To summarize, homogeneity of degree 1 of the translog cost function
implies the following restrictions:
m
i) 2. ~s=1
s=1
m
ii) 2. Bst=O t=l, 2, ... , m
s=1
m
iii) 2. C·IS =0 i = 1,2, ... , n
s=1
m
iv) 2. Fsp=O p = 1,2, ... , z
s=1
Moreover, by symmetry, we have
v) B st = B ts

vi) A··=A··
'J J'
vii) Dpv=Dvp
Finally, to insure concavity of the cost function, the Hessian matrix
of this function (the matrix of the second derivatives of the cost
function with respect to w (hereafter the H matrix» must be a
negative semi-definite matrix. A sufficient condition for negative
semi-definiteness is that the signs of the principal minors of the H
matrix must alternate with the first one being negative.
Unfortunately, we cannot use the Hessian matrix of the translog cost
function, the B matrix (which contains the B st parameters), since the
B st parameters are related to the logarithmic value of the cost
function. In order to derive the true Hessian matrix, we must translate
the Hessian matrix of the translog cost function into the Hessian
matrix of the cost function. This is done in the Appendix.
 427

3.4 Econometric estimation of a cost function

In Section 2, we saw that when the firm is minimizing costs, we

could infer from Shephard's lemma the conditional input demand
functions

a C(\jI, w, t) s = 1,2, ... , m . [34]

a Ws
Then

a In C(\jI, w, t)
----- s = 1,2, ... , m. [35]
a In Ws a Ws C C
Applying [35] to the trans log cost function [23] we obtain the input
share equations
wsxs 1 m n
= ~s +- L B st (In w t - In iii t) + L C is(ln \jI i-In Wi)
C 2 t=1 i= 1
z
+ L F sp(ln tp - In fp) S = 1,2, ... , m [36]
p=1
To estimate [23] and [36], we must add to each of these equations
disturbance terms. Let us call them Ec and Es(S = 1,2, ... , m).One may
think that E c and E s (s = 1, 2, ... , m) are correlated for a single
observation (a firm). Therefore, in order to take into account this
correlation, we may use a simultaneous approach in the estimation of
m m
[23] and [36].1 However, since L = 1 we have
s=1 C
Therefore, the variance-covariance matrix of the disturbance term
(0) is a singular matrix and, in order to avoid this singularity, we
should drop an input share equation. 2

1 It seems that the simultaneous approach improves the results (Christensen

and Greene, 1976).
2 Barten (1969) has shown that the results are independent of the input share
equation dropped for maximum likelihood estimates.
 428

4. SOME POSSIBLE USES OF THE TRANSLOG COST FUNCTION

REGARDING REGULATION ANALYSIS

4.1 Returns to Scale

From estimates of the translog cost function, many interesting

analyses concerning the deregulation debate can be done. One of
them is the analysis of returns to scale. The question of interest here
is to determine if the trucking industry operates with increasing
returns to scale. The opponents to deregulation in the trucking
industry maintain that this industry is characterized by increasing
returns to scale technology and, therefore, that deregulation will
allow large carriers to practice low prices competition in order to
eliminate small carriers, leading to the monopolization of the
industry.
In Section 2, we defined returns to scale in terms of relations
between input quantities. We saw that when an increase in inputs
leads to a more than proportionate increase in outputs, the
technology is said to be characterized by increasing returns to scale.
In terms of relations between prices (the dual approach) we can do a
similar analysis. Thus, we will say that a technology is characterized
by increasing (decreasing) returns to scale when an increase in
output will lead to a less (more) than proportionate increase in costs.
Moreover, we will have constant returns to scale when an increase in
output will lead to a proportionate increase in costs. From an elasticity
point of view
i) if e c'l' < 1, the technology is characterized by increasing
returns to scale;
ii) if e ql 1, the technology is characterized by constant returns
to scale;
iii) if e c'l' > 1, the technology is characterized by decreasing
returns to scale.
 429

a In C('II, w, t)
where EC\j1 = -------------- , the elasticity of costs with respect to out-
a In'll
put. 1 In terms of the translog cost function [23], the elasticity of costs
with respect to output is
m

z
+ :2: E\j1p (In tp - In tp). [37]
p=l
Thus, with average output, average input prices and average
technological constraints, returns to scale are simply defined by the
parameterex",. We cannot globally characterize returns to scale from
the parameter ex \j1 since it only defines returns to scale for the
average firm. For this reason, it is often more interesting to draw
results concerning returns to scale from the average cost function.
From the average cost point of view, returns to scale are said to be
increasing (decreasing or constant) when average cost decreases
(increases or stays constant) with respect to output, where average
cost is defined as the ratio of total costs over output
AC = C('II, w, t)
[38]
'II
Using logarithmics, [38] can be written as
In AC = In C('II, w, t) - In 'II [39]
We can thus define returns to scale in terms of the average cost
function as

i)
a In AC < 0, increasing returns to scale;
a In 'II
a [nAC
ii) = 0, constant returns to scale;
a In 'II
iii)
a In AC
-------- > 0, decreasing returns to scale.
a In'll

1 From now on we will consider that there is only one hedonic output (n= 1).
 430

a InAG
From [39] we obtain the following relationship for
a In 'II
a In AG = a In C("" w, t) _ 1 = E _1
[40]
a In 'II a In 'II c'"
Therefore, for average input prices and technological constraints we
have

d InAG
= (a", - 1) + A",,,, (In", - In \ji) . [41]
d In",
The shape of the average cost curve depend on the values of
parameters a", and A",,,,. Table 1 presents all possible outcomes
regarding the shape of the average cost curve for different values of
a", and A",,,,.
Table 1: Possible shapes of the average cost curvel

A """ > 0 A """ = 0

a",< 1 a",= 1 a",> 1 a",< 1 a",= 1 a",> 1

Shape exponen- exponen-

of U shape U shape U shape tially constant tially
he curve decreasing increasing

Minimum
at 'I' >'If '1'='1' 'I' <'I' - - -

For example, in Figure 2 we present an average cost curve with A",,,,>O

and a", = 1. In that case, for 'II < \ji firms operate at increasing returns
to scale, while at 'II = \ji firms operate at constant returns to scale and at
decreasing returns to scale for",> W. From this specific example, we
could conclude that smaller firms (those for which 'II < \ji) operates at
increasing returns to scale, while large firms operate at decreasing
returns to scale. We can also see from this example why it is not

1 The case where A",,,, < 0 is irrelevant since it has no economic significance.
 431

possible to globally characterize returns to scale, but only over

certain ranges of output.

AVERAGE
COST

It' (OUTPUT)
Figure 2: Average cost curve with AW > 0 and <X.'I' = 1

4.2 Productivity Growth

It is well recognized in the economic literature that regulation

procures benefits for certain groups or individual agents. Usually,
three major groups can be identified as beneficiaries of regulation:
the owners of stocks, the owners of production factors and the
consumers. In the transportation literature, mainly the airline
industry and the trucking industry, most of the authors agree on the
fact that regulation confers benefits to the owners of factors. 1 For
example, Trapani and Olson (1981) have shown that regulation of the
airline industry in the U.S. benefited aircraft manufacturers, fuel
suppliers and other inputs suppliers. In the trucking industry, Moore
(1978) for the U.S. and, later, Kim (1984) for Canada, have shown that
regulation in this industry has benefited labour suppliers. In both
cases, benefits take the form of over-utilization of inputs in
producing a given level of output.

1 See next section for more details about the beneficiaries of regulation.
 432

Since regulation seems to imply a sub-optimal utilization of

resources, productivity should be lower under regulation than it
would have been in its absence. Hence, in comparing productivity
trends in an industry which experiences regulatory changes or in
comparing productivity trends of different segments of an industry
facing different regulatory environments, we should be able to
determine the effects of regulation on the productivity of
transportation firms.
In order to measure productivity growth in the trucking industry,
we can use a modified version of the above translog cost function.
Following Friedlaender and Schur Bruce (1985), let us first assume
that the cost function has the following form:
c = q"" w, t, 1) [42]
where C, '" ' w, t have their preceding meanings and T
represents time.
To measure productivity growth, we introduce time into the translog
cost function. In doing so, we use a truncated third-order translog
approximation of the cost function [42] in which we drop the
third-order terms which do not involve the time variable. Therefore,
our translog cost function now takes the following form: 1
n m
In q"" w, t, T) = ex 0 + I. ex;(ln '" i-In ijI) + I. ~ s (In ws - In W s)
s=1 s=1
z
+ I. 'Yp (In tp - In ~) + 01 T
p=1
1 n n
+ - I. I. Aij (In "'i -In ijI}(ln "'j -In W}
2 i=1 j=1
1 m m
+ - I. I.
2 s=1 1=1
n m
+ I. I. Cis (In "'i -In "'i)(ln Ws -In ws )
i=1 s=1

1 The usual symmetry and homogeneity conditions must be imposed in order

to ensure cost minimization.
 433

n z
+ I. I. E ip (In 'l'i -In 'iii)(/n tp -In tp) [43]
i=1 p=1
m z
+ I. I. F sp (In Ws - In 'Hi s)(ln tp - In fp)
s=1 p=1
m 1 2
+ I. G sT (In Ws -In Ws) T + - [Itt T ]
s=1 2
n
+ I. HiT (In 'l'i - In Wi) T
i=1
z
+ I. IpT (In tp - In fp) T
p=1
1 m m
+ - I. I. KstT(Inws-Inws)(Inwt-Inwt)T
2\ s=1 t=1
m z
+ I. I. L spT (In Ws - In W s)(ln tp - In tp)T
s=1 p=1
m n
+ I. I. MsiT(Inws-Inws)(ln'l'i-In'iii)T
s=1 i=1
1 Z Z
+ - I. I. N pvT (In tp - In tp)(ln tv - In fv) T
2 p=l v=1
z n
+ I. "I. 0piT(ln tp -In fp)(ln 'l'i -In Wi) T
p=1 1=1
1 n n
+ - I. I. P iiT (In 'l'i - In 1j7';)(ln 'I' "- In W") T
"1"1
2 1= J= J J J

where 'l'i = <I> (Yi' qi)"

Differentiating [43] with respect to time gives us an expression that

can be divided into pure productivity effect, input effect, output
effect, and technological constraints effect:
a In C n m
- - - = Bt + Itt T + I. HiT (In 'l'i -In Wi) + I. G sT (In Ws -In w s )
aT i=1 s=1
z 1 m m
+ I. I pT(ln tp -In fp) + - I. I. KstT(ln ws-In Ws)(ln wt-In Wt)
p=1 2 s=1 t=1
 434

m z
+ 2. 2. L spT (In Ws - In ws)(ln tp - In tp )
s=1 p=1
m n
+ 2. 2. M siT (In w s - In ws)(ln 'l'i - In Vi) [44]
s=1 i=1
1 Z Z
+ - I 2. N pvT (In tp - In tp)(ln tv - In tv)
2 p=1 v=1
z n
+ 2. .I 0 piT (In tp - In tp)(ln 'l'i - In 'if i)
p=1 1=1
1 n n
+ - 2. ~ P ijT (In 'l'i - In 'ifi)(ln 'l'j - In 'if} .
2 i=1 )=1
The pure productivity effect is given by the change in costs with
respect to time at w = W, t = t and 'I' = 'if, that is
a InC [45]
--- = St+Jtt T .
aT
The input effect [46], the output effect [47] and the technological
constraints effect [48] are obtained by differentiating [44] with
respect to In w s ' In 'l'i and In tp:
a2 In C 1 m z
= G sT + - 2. K sIT (In wI - In W t) + 2. L spT (In tp + In tp )
aT a In Ws 2 t=1 p=1
n
+ 2. M siT (In 'l'r In Vi) [46]
;=1
a2 InC m
= H iT + 2.
a T a In 'l'i s=1

n
+ 2. 0pIT (In 'l'i - In 'l'i) [48]
;=1
The expressions [46], [47] and [48] measure the effect of a change in
input prices, output or technological constraints upon the rate of
change of costs, while expression [45] measures the residual rate of
 435

change in costs not explained by changes in input prices, output or

technological constraints. This residual effect is associated to
producti vity.
For regulation analysis purpose, it is the productivity effect [45] that
matters. From econometric estimates of the time augmented translog
cost function [43], we can induce productivity growth by evaluating
for each time period (T = 1, 2, ... , N) the value of B + Itt T. Then, by
comparing productivity effect upon costs obtained by this method to
regulatory changes, we should be able to determine the effect of
regulation (or regulatory change) on the productivity of trucking
firms.

4.3 Beneficiaries of Regulation

Government regulation of many industries exist mainly to protect

the interests of consumers. However, some authors (Stigler, 1971, and
Peltzman, 1976) argue that regulation is often undertaken in response
to demand by special interest groups and that it serves the interests of
the most powerful groups. Therefore, if the government decides to
regulate an economic activity where the consumers cannot exercise a
certain power, the effects of regulation may not benefit them. In this
case, regulation will not achieve its goal.
At a relatively aggregate level, three major groups can be identified
as beneficiaries of regulation: the owners of factors of production,
the owners of stocks, and the consumers. In the trucking industry,
many studies conclude that the regulatory regime leads to fares
higher than those corresponding to the absence of regulation (see,
for example, Sloss, 1970; Maister, 1978, and McLachlan, 1972).
However, it seems that higher fares do not necessarily mean higher
profits. Rather, it is possible that regulation induces over-utilization
of the factors of production and thus higher fares.
In investigating this hypothesis, Moore (1978) found that "three-
 436

quarters or more of the cost to shippers and ultimately to consumers

of trucking regulation take the form of income transfers to labor and
capital involved in trucking" (p. 342).
Assuming that the Canadian trucking regulatory regime, in
imposing route structure (network), fares, etc., leads to a sub-optimal
production structure, Kim (1984) introduced "conditions induced by
the regulatory regime that directly affect the production technology
and consequently the costs of producing regulated trucking services"
(p. 228). Regulation can affect the production structure of the
trucking firms in many ways. Empty backhauls, excess circuitry,
under-utilization of capacity (because of the restrictions on the type
of commodities that may be hauled) are some of the consequences of a
regulatory regime. In order to take into account the effects of a
regulatory regime on the production structure of the carriers, Kim
used what he called a vector of regulatory-induced technological
conditions (our technological constraints). These regulatory-induced
conditions are the average length of haul (H), the average shipment
size (S), and the level of capacity utilization (C U). All these variables
were proxies for taking into account the effects of regulation on the
production structure of the carriers. The author assumed that in the
presence of regulation, H, Sand C U are lower than they would be
otherwise.
The methodology used by Kim in order to determine if the factors of
production benefited from regulation, start from the estimates of the
translog cost function and the corresponding factor share equations.
From these estimates, it is possible to evaluate the elasticity of the
demand for a factor (say s) with respect to a technological constraint
(say p), that is: 1
Fsp
e = y + ---- [49]
sp p ~s

1 See Appendix for a derivation of relation [49].

 437

where asp is the elasticity of demand for factor s with respect

to technological constraint p;
'Yp is the parameter of the linear term t p in the cost
function;
Fsp is the parameter of the interaction term (w s' t p ) in
the cost function;
~s is the fitted factor share evaluated at w = w, 'I' = 'I'
and t =1.
From these evaluations of e sp (s = 1, ... , m, and p = 1, ... , z) one can
determine if a technological constraint has an effect upon the
demand for inputs and, knowing that regulation affects the
technological constraints, one can determine whether or not inputs
benefit from regulation. Moreover, this method allows the
determination of which inputs benefit from regulation and which do
not.
The only weakness of this methodology is that it ass u m e s that
regulation negatively affects the technological constraints. To our
knowledge, no author has yet developed a methodology to measure the
impact of regulation upon the technological constraints. A complete
analysis of the beneficiaries of regulation would have to take place in
a two-stage procedure: the first stage determining the effect of
regulation on technological constraints and the second measuring
(with relation [49]) the effect of technological constraints on factors
demand.

5. CONCLUSION

The aim of this paper was to present a procedure for the

investigation of trucking technology. From a theoretical model of
costs minimization, we have introduced the translog cost function and
show how it can be used to analyze the technology in the trucking
 438

industry. Also, in this paper, we have established a link between

technology analysis and economic regulation. In this regard, we have
shown how to use technology analysis in order to investigate the
questions of returns to scale, productivity growth, and the
beneficiaries of regulation. However, the methodology itself is not
free from criticisms. The main problem is that the translog cost
function is only an approximation of the true underlying cost
function. But, without any knowledge of the functional form of the
cost function, the use of a second or third-order Taylor series
expansion seems to be a reasonable compromise. Finally, in using a
translog function, we are imposing the logarithmic form to the cost
function. Instead of logarithms, Box-Cox transformations of the
variables could be used. These transformations could improve the
econometric results without imposing an a priori functional form.
 439

REFERENCES

Axworthy L. (1984), Canada's new air policy. Department of Transport

Ottawa.
Barten A.P. (1969), Maximum likelihood estimation of a complete
system of demand equations. European Economic Review
1(1):7-73.
Caves D.W., Christensen L.R., Tretheway M.W. (1984), Economies of
density versus economies of scale: why trunk and local
service airline costs differ. Rand Journal of Economics
15(4):471-489.
Chiang A.C. (1984), Fundamental methods of mathematical economics.
Third edition McGraw-Hill Book Company New York.
Christensen C.R., Greene W.N. (1976), Economies of scale in U.S.
electric power generation. Journal of Political Economy
84:655-676.
Dionne G., Gagne R. (1986), Models and methodologies in the analysis
of regulation effects in airline markets. Centre de recherche
sur les transports publication #486 and Departement de
Sciences economiques working paper #8638 Universite de
Montreal.
Friedlaender A.F., Schur Bruce S. (1985), Augumentation effects and
technical charige in the regulated trucking industry,
1974-1979. In Analytical studies in transport economics
Daughety AF (Ed.) Cambridge University Press Cambridge.
Kim M. (1984), The beneficiaries of trucking regulations revisited.
Journal of Law and Economics 27(1):227-241.
Maister D.W. (1978), Regulation and the level of trucking rates in
Canada: additional evidence. Transportation Journal 1
8(2):49-62.
McLachlan D.L. (1972), Canadian Trucking Regulations. The Logistics
and Transportation Review 8(1):59-81.
Moore T.G. (1978), The beneficiaries of trucking regulation. Journal of
Law and Economics 21(2):327-343.
Peltzman S. (1976), Toward a more general theory of regulation.
Journal of Law and Economics 19(2):211-248.
Shephard R.S. (1953), Cost and production functions. Princeton
University Press Princeton New Jersey: 102 pages.
Sloss J. (1970), Regulation of motor freight transportation: a
quantitative evaluation of policy. Bell Journal of Economics
and Management Science 1(2):327-366.
Spady R., Friedlaender A.F. (1976), Econometric estimation of cost
functions in the transportation industries. C.T.S. report
number 76-13. M.I.T.
Spady R., Friedlaender A.F. (1978, Hedonic cost functions for the
regulated trucking industry. The Bell Journal of Economics
9(1):159-179.
 440

Spady R., Friedlaender A.F. (1981), Freight transport regulation. M.LT.

Press Cambridge.
Stigler G. (1971), The theory of regulation. Bell Journal of Economics
and Management Science 2(3):3-21.
Transport Canada (1985), Freedom to move - a framework for
transportation reform TP 6678. Departement of Supply and
Services Ottawa.
Trapani J.M., Olson V.C. (1981), Who has benefited from regulation of
the airline industry. Journal of Law and Economics 26:75-93.
Varian H.R. (1984), Microeconomic analysis. 2nd edition W.W. Norton
and Company New York.

APPENDIX

1. Translation of the Hessian matrix of the translog cost

function into the Hessian matrix of the cost function

We may state the first derivatives of the cost function as follows:

a C a InC C s=l, ... , m. (A-I)

From (23) in the text we can rewrite

a C as
a Ws
a C 1 m n
[~s + -2 I. B sl (In wI - In wI) + I. C is (In 'Vi - In 'V i)
1= 1 i= 1

z _ C
+ I. F sp (In tp - In tp )] - , 8=1, ... , m. (A-2)
p=l Ws
We are looking for the matrix of the second derivatives of the cost
function, therefore
a2c I c [ a In C ] aC 1 8=1, ... ,m
[A-3]
= "2 BSI +
alnws aWl Ws 't=I, ... ,m.

which can be rewritten as

 441

a2 c
awtaw s
with
C
---- [
wtw s
~ B" +
a In C a In C
a In Ws a In w t J s=l, ... ,m
t=l, ... ,m,
[A-4]

a In C a InC 1 m n
= ~s +- L B spn w t - In Wt) + L C is(ln 'II i-In \j! i)
a In Ws a In w t 2 t=1 i= 1
z
+ L F sp (In tp - In tp ) [A-5]
p=1
It is important to note that it is not sufficient to verify concavity for
the average firm size; it has to be done for each firm within the
sample.

2. Elasticity of demand of factor s with respect to

technological constraint p.

From the definition of elasticity, we have

s=l, ... ,m
[A-6]
p=l, ... ,z.

ac
Since x s = ---(from Shephard's Lemma), then
a Ws
ac a In C C s=l, ... ,m. [A-7]
xs=--=---
a W s a In Ws
Differentiating [23] with respect to In Ws gives us
1 m n
xs=[~s+- L Bst(lnwt-Inw t)+ L Cb(ln'l'r1n\j!i)
2 ~1 ~1
z C [A-8]
+ L F sp (In tt - In tp )] - s=l, ... ,m.
p=l Ws
Now, differentiating [A-8] with respect to tp yields
 442

z aC I s=I, ... ,m
+ L F sp (In tp - In tp» - - --] , [A-9]
p=l a tp Ws p=I, ... ,z.

aC a In C C we may sub.
Moreover, since - - = - - - --, stltute th.IS ~lor -a-
C- 10
.
a tp a In tp tp a tp
[A-9] which gives

[A-IO]

tp
Multiplying [A-IO] by - we find the following expression for 9 sp
Xs
evaluates at 'Hi = w, W= 'I' and t = f:

aXs tp C C s=I, ... ,m

9 sp = - - -- = F sp + J3 s Y p - - [A-ll]
a tp Xs wsxs wsxs p=I, ... ,z.
Since we are evaluating 9 sp at the average firm size, we must
substitute into [A-ll] the average fitted factors share, that is
wsxs
- - = J3 s (at w = 'Hi, 'I' = 'I' and t = 1). s=I, ... ,m [A-12]
C
Substituting [A-12] into [A-ll] gives us the following expression for
9 sp :

Fsp s=I, ... ,m

9 sp = - - +Yp , [A-13]
J3 s p=I, ... ,z.
 EVALUATING THE ECONOMIC IMPACT OF TRANSPORTATION
INVESTMENT: AN INPUT-OUTPUT APPROACH

Domenico Campisi, Agostino La Bella

Istituto di Analisi dei Sistemi ed Informatica del CNR. Viale Manzoni.
30 - 00185 Romo -Italy

Investment in freigth transportation has implication at many levels and

is closely related to the overall socio-economic system. In order to assess
the relations between socio-economic variables and transportation
networks and consequentely to determine the amount and direction of
investment. therefore. we develop a specific computational tool. Such a
tool should relate data on regional production and demand to the
transportation costs and trade flow patterns.
We present a model based on a multiregional Input-Output system which
allows the explicit representation of the wide range of substitution
effects which may be triggered by non-marginal changes of the
transportation system, while mantaining ·the advantages of the 1-0 tables
with respect to the description of the complex relations between
economic growth and transportation supply.
The model is aimed at identifying possible bottlenecks in transportation
infrastructure which hamper development possibilitier. for some regions.
We show how, from the short run perspectives, diseconomies due to the
mismatch between the spatial structures of production and consumption
can be calculated and decomposed into components associate.
respectively, with location and transportation.
From the long run perspective. the formulation of the model as a dynamic
multiregional Input-Output system allows an analysis based on the
particular structure of the technological coefficient matrix. the capital
coefficients matrix. and the interregional trade matrix.
Our results are mainly related to the economic impact of the topological
structure of the trade patterns. as determined by the system of regional
productions and demands and by the supply of transportation. The topic
is furtherly developed by considering the sensitivity of the balanced
growth rate to changes in transportation supply and trade patterns.

1. INTRODUCTION

The magnitude of transportation expenditures as a quota of national

income in both developed and developing countries has recently
stimulated a large interest in the analysis of the relationships
between the supply of transportation and economic growth. Actually,
the bulk of the literature is concerned with two main issues: optimal
 444

investment planning, and the modeling of the socio-economic impact

of large transportation projects. However, the techniques usually
utilized are borrowed with little or none modifications from other
fields of public and private decision making, without including in the
analysis the particular characteristics that make transportation
investments strongly connected with the development path of the
economy. Among the conceptual scheme which have been used there
are: the theory of spatial general equilibrium (Tulkens and Kioni
Kabantu, 1983); the Input-Output model (Liew and Liew, 1984a and
b,1985); the household production function approach (Sasaki, 1983);
the econometric approach (Blum, 1982); the mathematical
programming approach (Prastacos and Romanos, 1987»; the welfare
economics approach (Adler, 1971; Anand, 1975).
A formulation of the evaluation problem general enough to allow
for a full economic appraisal of transportation plans has been
proposed in La Bella (1986) and Campisi and La Bella (1987a). The
model (whose fundamentals are summarized in section 2) is based on a
multiregional multisectoral scheme and permits taking into account
both elastic demand functions and the two main classes of instrument
variables available to planning authorities, i.e. changes in the
transport network and the pricing system. Moreover, the complex
relations of inter-industry purchases and inter-regional trade flows
may be represented in the model structure, together with the wide
range of substitution effects triggered by non-marginal changes of
the transportation system.
In section 3 it is showed how the above approach can be applied in
the short-run, by using a goal function which allows a treatment of
an evaluation problem in terms of mathematical programming. Many
characteristics of the transportation system can, therefore, be
introduced in the form of constraints and the dual equations can be
used to explicitly introduce transportation costs. Diseconomies due to
the mismatch between the spatial structures of production and
consumption can also be calculated and decomposed into components
associated respectively with location and transportation. Regional and
sectoral indicators can be defined to draw an "inefficiency map" of
 445

the current location and transportation patterns.

In practice, the model can be used for developing and testing
comprehensive strategies for interregional transportation planning.
The emphasys on the relations between the spatial and structural
characterics of the economy and the performance of the
transportation sector makes the model particularly suitable in the
evaluation of large transportation plans.
As far as the long run impact of large transportation investment is
concerned, in section 4 it is shown how our model can be applied to
analyse the impact of transportation supply on the dynamic
equilibrium properties of a multi regional system. We explore the
conditions on the technical coefficients matrix A, the capital
coefficients matrix B and the interregional trade matrix T considered
together, under which the multiregional Leontief dynamic model has
a balanced growth solution. In mathematical terms, the existence of
that kind of solution is related to the eigenvalues of the matrix
U = (/ - TAr 1T B. It can be proved that, if U is irreducible, a balanced
growth solution exists and the multiregional economy grows at a
common rate, which is a function of the Frobenius eigenvalue of U
along a ray emanating from the origin and having non-negative
direction cosines, given by the corresponding eigenvector and
establishing the ratios among the various regional/sectoral
productions. We will give necessary and sufficient conditions on A, B
and T so that U is irreducible (conditions for the existence of a
balanced growth have been previously established by Szyld, 1985).
The conditions will be based on zero-nonzero structure of the
matrices, and therefore will be derived considering the topological
properties of their associated graphs. This allows us to give particular
evidence to the spatial structure of trade patterns as determined by
the system of regional productions and demands. A sufficient
condition for the existence of a balanced growth solution in the case
of reducible U is discussed in section 5.
Finally, the problem of evaluating the sensitivity of the eigenvalues
associated to U is tackled in section (6). The main results are
summarized in section 7, which concludes the paper.
 446

2. A MULTIREGIONAL I/O MODEL

In this section we introduce the structure of the multiregional

Input-Output model which will be utilized in the sequel as the basis
for our analysis. The model can be built according to the three
different approaches (see Batten and Martellato, 1984):

- the first is the straightforward extension of the Leontief national

model under the assumption that the sectoral and geographical
origin of each delivery can be specified (!sard, 1951);
- the second is based on the theory of demand for products
distinguished by place of production (Armington, 1969);
- the third is centered on the idea that the regional origin of goods is
as irrelevant to users as their regional destination to producers,
bringing about the concept of trade pool (Leontief and Strout,
1973).

The first approach implies the use of coefficients representing the

pattern of interindustry shipments between production units located
in different areas. Models with this structure have been called "ideal"
by Riefler (1973) because the trade pattern- is perfectly specified at
both origin and destination. However, besides being virtually
inoperable with currently available data (only recently the use of
information theory and related techniques made the implementation
possible; see Batten, 198.3) they need the very strong assumption of
stability of both the technical and trade coefficient. In its turn, the
trade pool (gravity)' approach allows an explicit link between trade
flows and transportation costs introducing spatial interaction
coefficients, with a drastic increase in the number of equations
(Oosterhaven, 1981). For the above reasons our model is based on the
explicit representation of the share pertaining to each competing
product, classified by origin within every regional market.
Therefore, given the product mix in sector i, the corresponding
market share in region r for the production in s is represented by
f/. The resulting dynamic Input-Output model can therefore be
 447

written as:

(1)

where xr is the vector of sectoral production in region r at time k, A r

is the technological matrix related to region r, Br is the capital
coefficients matrix in region r and Trs is the diagonal matrix of trade
coefficients t?:

(f ....................... 0 .................. 0
o .............. f~ ...... 0 .................. 0
1'"3 = .......................................•
o ............................ f;3 .............. 0
o ........................... 0 ............... ~3

It follows from (1) that the following condition holds:

v s,V i (2)
The model in equation (1) is closed, i.e. non-investment final
demand is assumed to consist only of personal consumption and
households are treated like any other sector with consumption as its
inputs requirements. In addition, it is assumed that no technical
change takes place. It is certainly possible to conceive a more general
formulation with time-varying coefficients; however, the study of
long-run equilibrium is here intended more as a mean to explore the
structural properties of system (1) than as a forecasting exercise.
Moreover, all the coefficients are supposed to be exogeneously given,
so that our problem could be reformulated as that of finding the
optimum transportation pattern corresponding to a set of fully
specified regional technology options. The regional coefficients can
be either estimated using various survey and non-survey methods
(see for instance, Batten and Martellato, 1984), or determined on the
basis of future scenarios or planning goals whose consequences
should be simulated. An example of a regional Input-Output model
based on a system of social accounts at the regional level can be found
 448

in Maid (1980 and 1982). Also, a new technique has been proposed for
creating regional Input-Output models on the basis of national
technological coefficients (Stevens et aI., 1982; Treyz and Stevens,
1985). The estimation of the capital coefficient matrix B is more
problematic; moreover, since it is usually singular (many sectors do
not contribute capital goods) it poses serious questions on the
possibilities of solving equation (1) forward in time. This problem will
be discussed in detail in the next section.
Another central problem in the above model is the estimation of
matrix T. Rarely does information on regional trade flows allow a
direct estimate of the coefficient matrix T. If sporadically little or no
direct information is available, one usually resorts to a statistical
approach such as the principle of minimum information. It is not the
purpose of this paper to dwell on this type of problems; here, we focus
on the conditions that T should satisfy in order to make system (1)
able to substain a balanced growth process.

3. SHORT·TERM EVALUATION OF TRANSPORT PLANS

In this section we show how the multiregional Input-Output model

introducted in the previous section can be utilized as the basis for
short-run evaluation. Since no changes in production levels are
assumed to take place in the short run, from equation (1) we get:

(3)

As far as regional prices are concerned, the dual equations of model

(3) can be written as:
T ~ ~ tST T (pS .IT) r r (4)
Pi = L.r--j j aji j +9 + an+l,i Pw

where Pi r is the price of good i in region r and c r is the unit

transportation cost from s to r; ~ is the unit wage in region r.

We assume that an overall objective function may be defined

depending on regional production and prices, trade flows, and
 449

transportation costs:

U=U(x,T,p,e) (5)

where x is the vector of regional and sectoral productions, T the

matrix of inter-regional coefficents and p and e vectors of regional
price and transportation costs, respectively.
Function (5) is not intended as a welfare or social preference
function, but rather as as an explicit representation of the planning
goal, in terms of regional specialization, trade and transportation
costs. User behaviour is assumed to result in the explicit maximization
of the same function (5) and requires that U be twice differentiable.
Within this framework, investment in transportation infrastructure
and/or service influence the spatial pattern of production and trade
flows through variations in transportation cost for each commodity.
In the short-term the resulting economic state can be calculated
solving the following optimization problem:

max U= U(x,T ,p,e) (6)

where the optimum is sought over all feasible values of {x~.}, {tfs },
{erS }, {PD.
The optimization of transportation costs in presence of
an adeguate set of constraints gives the optimal allocation of the
available budget among the various modes a,nd routes. Accordingly,
new patterns of regional production, prices, and trade coefficentes
are determined. Prices of regional resources are supposed to be given
and the following constraints hold:
"iIi,r (7)
"iIi,s (8)
"iIj,s (9)

"iii (10)
"i., c? f:s ("i. .€i. x~. + /;) s (l's "iI r,s (11)
'" J'l'l ,
o Sx'iSX~ "iI i,r (12)
,
e t '? ,
~s "iIi,r (13)

"iI i,r (14)

"iIi,r,s (15)
 450

where, in equation (9) the term with the costs of primary inputs per
unit of outputs must be considered as included in the sum. Constraints
(10) result from the linear approximation of a budget constraint of
transportation investment. Assuming transportation cost as a
function of investment on each mode between every pair of regions
we get:

c~S = 1[s (I'l) (16)

with i e M k' the set of commodities assigned to mode k, and obviously

iJ(s/iJI'i/<O, iJ 2jf sliJ 2II s>0. Given a budget constraint of the kind
Ik IT IiksSB , using equation (16) one can easily find the correspon-
dent cost lower bounds (equation (10». A further lower bound on
u ni t transportation cost for each commodity between every
origin-destination pair (equation (13» can be estabilished on the
basis of technical consideration on !is (Jk). Constraint (11) gives an
upper bound on transportation expenditure between every pair of
regions. On the basis of equation (6-15) it is possible to derive a
Lagrangean function (see Campisi and La Bella, 1987a) whose
associated multipiers allow the total net benefit of an investment in
transportation to be quantified as the sum of four main components
related to:

- the effect on regional production,

- the change in interregional trade flows,
- the variations on regional prices,
- the reduction of transportation costs.

The above conceptual frame can also be transformed into a linear

programming problem, whose solution provides some insight on the
relationships between transportation patterns and the optimal
location of regional productions. As an example, assuming given
product prices, the total value added over the multi sectoral system can
be used as a (linear) goal function:
 451

U {x,T,p,c )=Li Lr~¢T tr (Ljaij XJ +yt )(pf -cis)

-L; Lr~#' tr (Ljaij Xl +y[ )pi (17)
+Li Llrr (Ljail xJ +y[ )p[ - Li "£,.tr "4~ xJ p[

where the terms on the right-hand side represent total export, total
import, total local sales and total local industry purchases,
respectively. A similar objective function has been used by Lin and
Hanson (1976) in a different approach .aimed at examining the
sensitivity of different industries to transportation cost.
For semplicity sake we tackle the problem of maximizing value added
(17) subject to (8)-(15) from the short run point of view, on the basis
that, in the short run, the multi regional regime of productions can be
considered as given. Therefore after some straightforward
calculations, we get the following linear programming problem:
(18)

s.t.
Ls hftfS= x{ 'V i,r (19)

'V r,s (20)

'V i,r,s (21)

where:

with:
S _ { 1 if r=s
,r 0 elsewhere

MI = L.af. x! + y.s
J IJ J I

MS
I
= (L s a~IJ. .rlI + yf)
I
cIrs

arranging coefficients d'!

I'
h!
I'
b Irs' x!
I.
and Q Irs properly into
appropriate arrays d, h, B, x, q enables equation (18) - (21) to be
rewritten in compact form:
 452

Max dTT (22)

s.t.

HT=x (23)

BT~q (24)

T~O (25)

The solution of this LP problem not only provides the optimal trade
flows pattern but also, through its associated dual problem, supplies
useful information on optimal location pnd transportation investment
policies.
The dual problem associated to equations (22)-(25) can be written as:

(26)

s.t.

,,~o (29)

Since the solution of the primal is bounded, the solution of this

problem will also be bounded. Its optimal solution { *u~ },{ *,,;} yelds
the shadow prices of production and transportation as:

*u[ can be interpreted as the diseconomy associated with the

location of a unit of production i in region r; since it is not
constrained in sign, it can also result negative, and therefore
a benefit;
*\Irs can be intrerpreted as the diseconomy associated with the
current expenditure on transportation between the origin
destinati(,)n pair (r ,s).
Equation (27) therefore states that the benefits associated with trade
cannot exceed the diseconomy due to unmatched spatial patterns of
production and consumption, while the dual objective function (26)
consists of the minimization of total spatial diseconomies.
It follows that indicators can be formulated, based on the dual
 453

solution, able to estabilish regional priorities for decisions of

investment in reducing transportation costs andlor for locating new
productive capacities.

4. CRITERIA FOR LONG·RUN EVALUATION

We are interested here in exploring the existence of positive

solutions x(k) to equation (1). We assume that the technological
matrix A and the capital coefficient matrix B are fixed over time. This
implies that there is no changes neither in technology nor in the use
of capital goods by sectors. Moreover, the trade coefficient matrix T is
also assumed constant over time, implying that there is no change in
trade and transportations patterns. Obviously, we are however
interested in analyzing different solutions corresponding to different
T matrices. It will be proved that, if the diagonal elements at A are less
than unity and the column sums are at most one, with a least one of
them less than one, the inverse of (I-TA) exists and is non-negative.
Moreover, the Hawkins-Simon condition holds (all the principal
minors of A are positive; Nikaido, 1968).
It can be realistically assumed that the above conditions are verified
in our case, after a transformation of matrix A, if necessary, to an
appropriate set of units. Therefore, since T is stochastic, we can
conclude that there are no restrictions in assuming the existence of
an inverse matrix for (I-TA) as well. The extension to the
multiregional case, therefore, creates no problem under this respect.
Then, equation (1) can be rewritten as:

(/ - TA + TB) x (k) - TB x (k +1) (30)

whiCh can easily be solved backward in time (see for instance

Luenberger and Arbel, 1977). The possibility of solving it forward in
time (Duchin and Szyld, 1986) is often hindered by the singularity of
matrices B corresponding to empirical observations. Nevertheless
even if B is singular, i.e. contains entire rows of zeros corresponding
to regional sectors which do not produce intermediate goods
 454

(agriculture and services, for example), non-negative solutions for

(1) might exist and the study is related to the eigenvalues of matrix
U=(l-TAr1TB (Szyld, 1985). It is hower interesting to investigate the
balanced growth properties of the linear dynamic system (1). We
recall that a sequence of vectors x(k) is said to trace out a balanced
growth path if the ratios of its components remain unchanged over
time. Therefore such a sequence moves on a certain ray emanating
from the origin and having non-negative direction cosines. Since
both (/-T A r 1and TB are non-negative, so is their product U. If in
addition U is irreducible, it satisfy the hypothesis of the
Perron-Frobenius theorem (Horn and Johnson, 1986; Seneta, 1980)
stating that there exist a simple dominant eigenvalue A. * of U, with a
corresponding eigenvector v *, which determines the balanced
growth solution of (1).
The dynamic equilibrium of system (1) and its economic
implications will be furtherly discussed in the next section. Here we
want to explore some properties arising from the peculiar structure
of matrix T related to the irreducibilily of U. A similar problem has
been tackled in the literature with reference to the traditional
dynamic Leontief model. For instance, to make U irreducible, Leontief
(1977) assumed that both A and B were irreducible. Meyer (1978)
relaxed the conditions on B, assuming its singularity and reducibility
under the hypothesis of irreducibility of matrix A. Szyld (1985) firstly
relaxed the conditions on the single matrices A and B, investigating
the irreducibility of (I-A) -1 B on the basis of the topological
properties of their associated graphs, whereas the multiregional
extension was investigated by Campisi and La Bella (1987b) who
proved the following theorem :
THEOREM 1: Let T, A and B be respectively the trade coefficient
matrix, the block diagonal matrix of regional technologies and the
block diagonal matrix of regional capital coefficients. Assume also
that each componentt matrix has at least a nonzero entry for each
column (this condittion is verified for T by definition), then
(I-TAr1TB is irreducible if and only if the graph G(T)UG(A)UG(B) is
strongly connected.
 455

This theorem means that even if A, Band T are reducible, (/- TAr 1T B
may not be, if some suitable conditions on the nonzero structure of
the three matrices are satisfied. What we require, basically, is that:

1) every sector in each region has at least one input and one output
from and to other sectors in the same region; and
2) every sector in each region has a capital input from at least
another sector in the same region.

These assumptions seem to be realistic. In the case of the

technological matrix A, condition 1) automatically holds if the model
is closed with respect to consumption. As far as condition 2) is
concerned, it may seem very restrictive to assume that capital inputs
must come from the same region. It must be noted, however (Campisi
and La Bella 1987b), that such condition has been posed only to
guarantee that TB has at least one nonzero entry for each column. Por
our purpose it would be sufficient to assume directly that the latter
holds. This is quite reasonable, since it is equivalent to assume the
existence of at least one capital input for each activity, no matter of
its provenence. Besides being realistic, this condition is also crucial
because otherwise U would have an entire column of zeros.

s. CONDITIONS FOR BALANCED GROWTH

In the previous section we have discussed some necessary and

sufficient conditions for the irreducibility of matrix U. As observed
before, if U is irreducible, being also by construction non-negative,
the Perron-Probenius theorem holds and there exists a simple
dominant eigenvalue A. * of U, with a corresponding positive
eigenvector v*.
We shall explore here the relations between the properties of U and
the balanced growth solution of system (1). We start observing the
equivalence between the following two eigen-problems:
 456

Uv = AV (31)
Hu = JlTBu (32)
where H = I-TA +TB and the eigenvectors of (32) are solutions at (1). It
is not difficult to see that problems (31) and (32) share their
eigenvectors and that
'Vi (33)

It follows that in the long run all sectors in all regions grow up at
the same rate Jl *= ( A * + 1) I A* and propotions among them are
established according to the components of eigenvector v*. Note that
the irreducibility of U is only a sufficient condition for the existence
of a balanced growth path for system (1). We shall discuss now the
case of reducible U matrices. and show that conditions can be given
for the existence of balanced growth. If U is reducible. it is well
known (Gantmacher. 1959) that. after a suitable permutation p. it can
be written in its normal form:

U 11 0 0 0
0 U 22 0 0

pUpT _ Ugg 0 (34)

Ug+ ll Ug+ 12 Ug+ 1g 0
U s1 U s2 Usg Uss

where the diagonal blocks are irreducible matrices. and in each

row Uf l' Uf 2....... · Uf g-l' with f = g+l • .... z. at least one matrix is
different from zero. It can be shown also that the normal form of a
matrix U is uniquely determined to within a permutation of the blocks
and permutations within the diagonal blocks (the same for rows and
columns). Making use of the normal form. it can be proved
(Gantmacher. 1959) that a balanced growth solution exists also in the
case of reducible U if and only if each of the square matrices U 1 l' U 2
2' .... U g g has A* as the dominant eigenvalue and none of the matrices
 457

U g+ 1 g+ l' .... U z z has this property. It follows from the proof of the
above proposition that under the same conditions we get A. *" < A. * for
k=g+l, .... , z (Gantmacher, 1959). In economic terms this amount to say
that balanced growth is possible if the various groups of isolated
regional sectors all have a common balanced growth rate, whereas
the groups that deliver goods to regional sectors in other groups
have, as isolated groups, a different growth rate. The latter would be
higher since (1+A. *,,)/A. *e (1 + A. *)/A. *.

6. EIGENVALUE SENSITIVITY

In this section we analyze the impact of changes in interregional

trade coefficients on the dynamic behaviour of system (1). Our aim is
that of estabilishing a formal relation between changes in selected
t [I coefficients and the corresponding changes in eigenvalues of
matrix U. In order to proceed with the discussion, we introduce the
following definitions:
Def 6.1 The partial derivative of an eigenvalue of matrix U with
respect to an element trof matrix T is termed sensitivity coefficient
and is denoted as follows:

'r;f i,r ,s,k (35)

where Ale' k=I, ...... ,n are the eigenvalues associated with matrix U.
Def 6.1 The Kronecker product (also known as left-direct product or
tensor product) of X(mxn) by Y(pxq) is the (mp)x(qn) matrix whose
a~-th submatrix is the (pxq) matrix xa~ Y, a=I, ...... m; ~=I, ..... n and is
denoted as x0 Y.
Def. 6.3 The pack of the m x n matrix X is the m n x 1 vector P (X)
arranging the columns of X one after another in a longer column
P(X)=(xll,x21'''' x m l,x12 ...x m 2'· ..xl n ' .... x mn )·
The S~rl elements are sought in order both to understand why the
system behaves as it does and to point to critical elements whose slight
variation could alter the system behaviour. In order to make use of
previous results, it is worthwile to rewrite (35) as:
 458

(36)

The first component at the right hand side of the above equation
gives the eigenvalue sensitivity with respect to the elements of
matrix U, while the second component permits taking into account
the effects of changes in trade coefficients on the elements of matrix
U. Calculating the first component is not an easy task, but recent
results in system theory (Starr et aI., 1986) allow an expression of
aA. k Iau h,1 as product of a constant matrix and a vector representing
paths on the system graph.
For calculating the second component, the following theorem
provides a general result:
THEOREM 2: Let A,B and T be square matrices of order n, and
U=(I-TAr]TB, with (I-TAr] nonnegatively invertible. Then
aUIOT=[(I-TAr 1 @IJ P(I) [P'(B)-P'(A)(U@I)].
The proof of the above theorem can be found in Campisi and La Bella
(1987c). It is therefore possible to provide a general expression for
the sensitivity coefficients S~rs' This formulation is particularly
useful because the first component shows the influence of system
structure, taking into account the overall properties of matrix U,
while the second component explicitely represents the structural
impact of changing transportation patterns.

7. CONCLUSIONS

In this paper we have dealt with the problem of evaluating the

economic impact of changes in transportation supply within a
multiregional, multisectoral system. Our aim has been twofold: first to
provide a computational tool to interpret data on regional production,
demand and transportation costs for estimating the trade flow pattern
and assisting the decision-maker on devising location and
transportation policies; second, to provide a general method for
identifying possible bottlenecks in transportation infrastrutture
which hamper developmeznt possibilities for some regions andlor
sectors.
 459

Our results are mainly related to the economic impact of the

topological structure of the trade patterns, as determined by the
system of regional productions and demand and by the supply of
transportation, and are only partially concerned with the quantities
traded. This leaves room for further contributions. Our main
conclusions can be summarized as follows:

- a general framework based on a multiregional I/O model can be

built for the overall evaluation of investment in transportation
infrastructure and/or service;
- diseconomies due to the spatial structures of production and
consumption can be decomposed into a "location component" and a
"transportation component";
- regional and sectoral indicators can be defined to draw an
"inefficiency map" of the current location and transportation
patterns;
- the existence of a balanced growth. path requires a transportation
network able to generate a trade pattern whose associated graph
G(T) makes G(T)UG(A )UG(B) strongly connected; in other words,
that means that every sector receives its inputs and sends its
outputs from and to each other sector (directly or indirectly);
- a balanced growth path can exist even if G(T)UG(A)UG(B) is not
strongly connected; in this case, however, some rather
cumbersome conditions on matrix (I-TAr 1TB must be satisfied;
- a formal relation can be established between changes in trade
coefficients and the corresponding changes in the dynamic
behavior of the system;
- the same conceptual framework can be used to design optimal
investment policies.
 460

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 RAIL TACTICAL PLANNING: ISSUES, MODELS AND TOOLS

Teodor Gabriel Crainic

Departement des Sciences Administratives - Universite du Quebec a

Montreal, C.P. 8888, succ. A, Montreal, Quebec, CanadaH3C 3P8.

The objective of this lecture is to review the main issues relative to the
tactical planning of freight rail transportation and the principal models
addressing these problems. We also present a general modeling
framework, based on network optimization ideas, that may be used to
build a comprehensive tactical planning model. Algorithmic issues and
the design of an integrated tool for tactical planning are also discussed.
We conclude by delineating a number of interesting and promising
research problems in rail tactical planning.

1. INTRODUCTION

Freight transportation is one of today's most important economic

activities and the rail mode still claims a fair share of it. Railroads
have, however, been faced for some time now with fierce competition
and decreasing market shares. Also, the expansion of container
utilization and intermodal transportation, together with the general
deregulation of the transportation industry, force the railroads to
rapidly ajust their operating policies to new environments.
Rail freight transportation has to be economically efficient,
operationally flexible and has to offer reliable and high quality
services. The constant improvement of the methods and tools used for
the planning of the development and utilization of the rail system is
one of the main ways to insure this economic efficiency and this
quality of service.
Rail freight transportation systems, on the other hand, usually have
quite complex organizations, displaying intricate relationships and
trade-offs among the policies affecting their different components.
These are also systems where acquisition of resources and changes to
 464

the infrastructure require large investments and generally long

delays. It is thus imperative to be able to anticipate these changes and
to analyse their impact on the operation and performance of the
system.
The planning process of such systems reflects their complexities
and generally has an important component of scenario evaluation.
This is especially the case at the level of the medium to long term
planning of operations, also called tactical planning. Accurate,
efficient and flexible tools are therefore needed to help the planner
in his task. In this context, a combination of operations research
models and computer science techniques may be of considerable help
by supplying tools to facilitate and enhance the various planning
activities, and thus the performance of the system.
The objective of this lecture is to review the main issues relative to·
the tactical planning of freight rail transportation and the principal
models addressing these problems and to present a general modeling
framework that may be used to build a comprehensive tactical
planning model. In Section II we recall the main stages of
transporting freight by rail and the associated planning problems. A
two dimensional classification grid of the various planning issues
underlines the importance of tactical planning. Operations research
tactical models are then reviewed. We formulate in Section III a
conceptual tactical planning model based on network optimization
ideas and review the literature pertinent to the representation of the
various subsystems of the rail freight transportation system. Some
algorithmic issues are discussed in Section IV leading to the need of
integrated planning tools for tactical planning. We conclude by
delineating interesting and promising research avenues in the area.
 465

2. THE TACTICAL PLANNING PROBLEM

In this section we rapidly survey the main steps of transporting

freight by rail and the corresponding decision and planning issues.
Tactical planning is thus defined in the larger context of managing
the rail system and the possible contributions of operations research
methods to tactical planning are underlined. Finally, we review the
main network optimization models that aim at tactical planning
problems in rail freight transportation.

2.1 The Rail Freight Transportation System

The underlying structure of a rail system consists of a rather

complex network of large and small classification yards, pick-up and
delivery stations and junction points, all connected by rail tracks. At
any given moment, a large number of railcars (more than 100.000
cars in the case of the Canadian National Railways, for example) are
present in that network, loaded or empty, sitting idle or being
manipulated in yards or, as part of trains, moving between stations.
The traffic on the lines of a rail network thus represents car and
train movements, while, at nodes, operations are performed on both
vehicles and convoys.
Here follows a brief description of the main steps of transporting
freight by rail. First, an order for a number of empty cars is issued by
a client. At the concerned yard, the cars are selected, inspected and
then delivered to the loading point. Once loaded, the cars are moved to
the origin yard where they are sorted, or classified, and grouped into
a block. A block is a group of cars, with possibly different final
destinations, arbitrarily considered as a single unit for handling
purposes from the yard where it is made up to its destination yard
where its component cars are to be resorted. Rail companies use
blocks as a mean to take advantage of some of the economies of scale
 466

related to full train loads and to the manipulation of longer car

strings in yards.
The block is eventually put on a t r a in and this signals the
beginning of the cars' journey. During the long haul part of this
journey, the train may overtake and be overtaken by other trains
with different speeds and priorities. When the train travels on
single-track lines, it may also meet trains traveling in the opposite
direction. Then, the train with the lowest priority has to give way and
wait on a side line, or sid in g , that the train with the higher priority
passes by.
At the yards where the train stops, cars and engines are regularly
inspected. Also at yards, the block of cars may be transfered: taken off
one train and put on another. When the block finally arrives at
destination, it is taken off the train, its cars are sorted and those
arrived at their final destination are directed to the unloading station.
Once empty, the cars are prepared (cleaned, inspected, etc.) for a new
assignment: either a loaded trip or an empty movement.
One source of complication in rail freight transportation is the
complex nature of yard activities and, as we shall see, the modeling of
yard operations and of their interactions with the rest of the system is
a critical component of any comprehensive rail model. Here follows a
brief look at the main operations performed in a rail classification
yard.
When a train arrives for classification at a yard, it is first directed to
the receiving area, where engines are disconnected, inspected and
taken away, blocks are separated and cars are inspected. The cars are
then directed to the sorting area, each car being assigned to a
classification track according to its outbound (or classification, or
blocking) destination, together with other cars sharing the same
classification destination. Physically, this operation may be
performed in two ways: (i) by a switching engine, in a flat yard; (ii)
by rolling cars down an incline (or a hump) and automatically
 467

switching them to the rail track allocated to the block, in a hump

yard. Most modern, large classification yards are hump yards. Once
sorted, cars on the same classification tracks form blocks that next
have to wait for the designated outbound train. Following one last
inspection of the whole train, the journey may begin. It is
noteworthy that not all trains arriving at a yard are thus totally
classified. Trains may stop at a yard for inspection, to change crews,
to refuel, to leave or to pick up blocks of cars. Thus, the total workload
of a yard is larger than that defined only by its main operations: the
classification of cars and the forming of trains. It is interesting to
note that, as a general characteristic of most rail systems, cars spend
most of their lifetime in yards: being loaded and unloaded, being
classified, waiting for an operation to be performed or for a train to
come or, simply, sitting idle on a side track.

2.2. Planning Issues

To control these activities and to make the best possible use of the
system's resources, several policies have to be defined and
implemented. These policies and the associated modeling problems are
generally classified into three groups corresponding to the following
three planning levels:
a) Strategic (long term) planning typically involves the highest
level of management and usually requires large capital
investments for resource acquisition over long time horizons.
Strategic decisions determine the general development policies for
the company and broadly shapes the operating strategies of the
system. Prime examples of decisions at this planning level are:
• Physical network design and upgrading; Track abandonment;
• Facility location: of yards on the physical network and of major
handling facilities (e.g. classification, intermodal transfer, etc.)
within yards;
 468

• Resource (motive power units, rolling-stock, etc.) acquisition;

• Definition of broad service and tariff policies.
b) Tactical planning aims to ensure, over a medium term horizon, an
efficient and rational allocation of existing resources to improve
the performance of the whole system. At this level, data is
aggregated, policies are somewhat abstracted and decisions are
sensitive only to broad variations in data and system parameters
(such as seasonal changes in traffic demand) without
incorporating the day-to-day changes in the environment and
performance of the system. Tactical decisions need to be made
concerning the following issues:
• Service network design: The selection of the routes (origin and
destination yard, physical route and intermediate stops) on
which train services will be offered and the determination of
the characteristics of each service: its mode (rapid, normal, unit,
etc.), speed-priority, train length and frequancy;
• Traffic distribution: The specification of the routing for the
traffic of each origin-destination pair (usually according to the
specific commodity): the train services used and the terminals
passed through;
• Terminal policies: The general rules specifying for each
terminal the blocks into which cars should be classified
(blocking policies), the trains that are to be formed and the
blocks that should be put on each train (make up policies), etc.
An efficient allocation of the classification work among yards is
an important terminal policy objective.
c) Operational (short term) planning is performed by local
management (yard-masters, for example) in a highly dynamic
environment where the time factor and detailed representations of
cars and engines, facilities and activities are essential. Important
operational level decisions are:
• Scheduling (timetable generation) trains, maintenance
 469

activities, crews, etc.

• Dispatching engines and trains into, out of and in yards, as well
as on the lines;
• Allocating yard (train receiving, car classification and train
make up tracks, for example) and line (e.g. priority rules for
train meetings and overtakes) resources;
• Engine scheduling: planning the daily distribution of motive
power units to trains;
• Empty car distribution to satisfy demand and to rectify
imbalances in car availability due to uneven traffic.
The preceding list highlights a first type of relation found among
the various decisions: the vertical or hierarchical relation specifying
how the data flows and the policy guidelines are set: the strategic
level sets the general policies and guidelines for the decisions taken
at the tactical level which, in turn, determines goals, rules and limits
for the operational decision level which regulates the transportation
system. The flow of data follows the reverse route, each level of
planning supplying information essential for the decision making
process at higher planning levels. It is this hierarchical relation that
forbids the formulation of an unique model for the planning of rail
freight transportation systems and generates the need for different
model formulations addressing specific problems at specific levels of
decision making.
This hierachical structure is quite common to industrial
organizations above a certain critical size and complexity level (see
Assad, 1980b· and references therein). Often, a second type of relation
may be observed among the various decision problems that make up a
planning level: the horizontal or interdependent relation reflecting
the mutual impacts and interrelationships among the policies
established to respond to different problems at the same planning
level. This type of relation is particularly strong among tactical
problems in freight transportation planning in general and for the
 470

rail mode in particular (Crainic and Roy, 1988). Indeed, all tactical
planning issues have network-wide impacts and are strongly and
complexly interconnected in both their economic aspects and their
space-time dimensions.
As an example, when certain rapid train services, bypassing
intermediate yards, are operated, some possible consequences are: a
decrease of the congestion in some yards and thus lower delays in
those yards, lower transportation times (at least theoretically) for the
traffic using the new services, but higher transportation costs. On the
other hand, a higher number of rapid trains might imply higher
congestion on the lines, causing higher transportation times for
lower priority trains, generating additional delays and costs for some
traffic, etc.
Thus, the strategies developed for one problem interact, influence
and are influenced by those established for the other tactical
planning problems. Furthermore, trade-offs have to be made between
the operating costs implied by a certain policy and its impact on the
quality of service as measured, in most cases, either by the delays
imposed on both freight and rolling-stock, or by the respect of
predefined performance targets. These trade-offs are important when
a single problem and decision is considered and even more so when
the relationships among decisions for different problems are
contemplated. Therefore decisions should be made globally, network-
wide, in an integrated manner.

2.3 Tactical Planning Models

Tactical planning thus appears as a vital link in the planning

process of rail freight transportation. Its output consists of a series of
rules and policies that affect the whole system and that often are
collected in a transportation plan. These rules and plan are then used
to determine the day-to-day policies that guide the operations of the
 471

system. The same tactical transportation plan is also a privileged

evaluation tool for "what-if" questions raised during strategic
planning.
The main objective of a tactical planning model is to reflect the
principal tactical level decision making problems, their network-
wide interrelationships and trade-offs. It is aimed at enhancing the
planning process and the performance of the rail transportation
system through an efficient generation, evaluation and selection of
global operating strategies. It generally covers only the major yards
and stations of the network and the demand is aggregated
accordingly.
A number of efforts have been made toward the formulation of
models aimed at tactical planning problems. Network models, that take
advantage of the structure of the rail system and which integrate
policies that affect several yard and line operations, are most widely
developed. These formulations may be classified into the, by now
classical, two groups: network simulation models and network
optimization models.
Simulation models are being developed and used for and by rail
companies for quite a long time now (Assad, 1980b). Models of this
type simulate the movements of trains and cars through the rail
network, given a set of operating policies for the· yards and lines of
the system and a set of train schedules. The user has to input the
classification and train formation policies at each yard, a complete set
of train schedules and traffic demand information, among other data.
The results are detailed cost information, an evaluation of the
occupation of each facility (yards and lines) in. the network and,
sometimes, an estimation of the transit times for traffic. Based on
these results, the user may evaluate a given operating policy in detail.
The main limitation of this approach is that simulation models are
not able to generate new operating strategies based on a network wide
analysis of their impact on the various components of the rail system
 472

and on the evaluation of a number of apparently conflicting

objectives. Also, simulation models usually require quite prohibitive
data input and running times, which makes their repeated use, with
different sets of operating policies, impractical.
Network optimization models, on the other hand, are less detailed but
offer the advantage of the fast generation, evaluation and selection of
integrated, network-wide operating strategies with respect to some
objective function, usually involving both operating costs and
service criteria. Network optimization models are the object of this
paper. The rest of the section is dedicated to a brief review of the main
contributions to the domain.
The Railcar Network Model (Petersen and Fullerton, 1975) is a prime
example of this class of models. The object of the model is to find the
optimal traffic routing minimizing the total car delay: the sum of
delays in yards and on the lines of the system. The model is composed
of three major modules: The line module computes the average time to
tra.verse a link as a function of the traffic intensity and the line
characteristics (see Section 3.2); The yard module derives the average
delays for the yard operations by means of queueing models that
consider the yard characteristics and the car flow through the yard
(see Section 3.3); The system module integrates the line and yard
modules and ajusts the traffic distribution according to delays and
congestion effects that the two modules indicate. The model does not
consider operating costs, nor different car or product types. Several
train service types may, however, be considered in the line module.
The number of trains to be run is determined from the traffic flow
using a constant number of cars/train ratio. If the delay functions
are all convex, the problem has the structure of a multi-commodity
flow problem with convex costs and is solved by a primal-dual
algorithm (Petersen, 1975) based on successive linearizations of the
objective. Schwier, Ganton and Macdonald (1976) document the
computer codes for the models. Although tested in the context of
 473

Canadian railways, the model is not actually in use. The Railcar

Network Model constitutes nevertheless a major contribution to the
modeling of freight transportation by rail, particularly by the
comprehensive study of yard and line components of the system that
it generated. This research effort has also been the starting point of
many other studies on rail freight transportation both at Queen's
University and elsewhere.
The work of Thomet (1971) constitutes another important milestone
in the development of rail network optimization models. Its main
contribution is the introduction of service objectives and the
demonstration of their importance while optimizing the system.
Thomet compares, and shows that the second may be advantageous to
both shippers and railroad, the, so called, traditional approach where
only operation costs are considered, to an user-oriented policy; in this
case, the user impact of the level of service offered, as measured
mainly by the delays that the shipments encounter during transit
through the rail system, is accounted for and compared to the cost of
providing the service. Thomet addresses the train routing problem
and uses a cancellation heuristic to replace direct train services
between all yards by a series of connected trains so as to minimize the
combined service (delay) and operating cost.
Assad (1980b) proposes a model that integrates the train routing and
make-up decisions. Its goal is to reduce the delays due to congestion in
yards by means of direct trains bypassing the intermediate yards on
their routes. Assad uses a route structure defining all the direct
services for the application at hand. Cars travel on that structure,
connecting when the destination of the service is not the destination
of the traffic. Every time a service reaches its destination, the traffic
traveling on it goes through a classification process. The objective
function considers line and yard operating costs and yard delay costs.
Different "fixed-charge" type formulae are suggested for the
classification delay as a function of the yard throughput and the train
 474

composition. The model has then the structure of a multicommodity

mixed-integer flow problem with certain nonlinearities in the
objective function. An efficient solution technique has not yet been
proposed for this model. The formulation proposed by Assad
constitutes an important stage in the development of rail network
optimization models because it was the first to emphasize the need to
oj

explicitly model the integrality of the number of trains operated on

each route, even if this number is simply computed by using a
car/train ratio on each route and rounding the result up to the
nearest integer. In the same paper, Assad (1980a) also adapts to the
context of freight transportation by rail the hierarchical taxonomy of
planning and modeling issues. Our classification (see Section 2.2) is
based on this taxonomy.
Crainic (1982) and Crainic, Rousseau and Ferland (1986) propose a
network optimization model, called the Rail Tactic Model, that
integrates the service network design and traffic routing problems
with general terminal policies. Its goal is the generation of global
strategies to reduce the total operating and delay cost of the system. It
uses a service network, defining the feasible train services (routes,
stops, modes, etc.) between the classification yards, and itineraries
that specify the feasible traffic routes (multiple products and car
types are allowed) through the service network. Integer variables are
used for service frequencies. Queueing models are used to derive yard
classification and connection delay functions; over-the-road delays
reflect the congestion and characteristics of the lines. The model has
the structure of a nonlinear, mixed integer, muhimode,
multicommodity flow problem and is solved by an efficient heuristic
algorithm (Crainic and Rousseau, 1986) based on decomposition,
column generation and "steepest descent" techniques. This approach
has been succesfully applied to problems from the Canadian (Crainic,
1984) and French (Crainic and Nicolle, 1986) railways. It has also been
adapted with considerable success to the multi mode less-then-
 475

truckload trucking problem (Roy, 1984; Roy, 1985; Delorme, Roy and
Rousseau, 1987). An interactive-graphic planning system is actually
being built based on this methodology (Crainic and Mondou, 1986;
Crainic and Roy, 1988).
We consider this to be the most comprehensive model of tactical
planning for freight rail transportation proposed yet. It also is very
flexible and may be easily adapted to a large gamut of real situations.
In fact, it may be shown that, under the appropriate hypotheses, it
yields the previous tactical planning models as special cases. Our
presentation is therefore largely based on this modeling approach.

3. A CONCEPTUAL TACTICAL MODEL

We present in this section a general modeling framework, based on

a network optimization model, for the tactical planning level decision
making problem. Algorithmic issues and their impact on model
formulation are not explicitly considered in this section; instead, we
want a formulation as comprehensive and as general as possible.
First, we present the general model. Then we review the principal
models for the yards and line components of the rail system and
examine how these models may be used to derive terms for the
objective function of the formulation. The last part of the section is
dedicated to the examen of several additional modeling issues related
to the making and utilization of the tactical model.

3.1 The General Modeling Framework

Let G = (N ,L) represent the physical network. Then, the nodes of the
set N represent the classification yards and, eventually, the stations,
the loading and unloading facilities and the junction points selected
for the particular application.
 476

We identify the set of classification yards as Y,Y.c. N. The set L is the

set of links representing the physical rail tracks connecting the
points in N. On this network, the transportation demand is defined in
terms of tonnage and number of cars of a certain commodity c to be
moved from an origin yard 0,0 e Y, to a destination yard d, deY. To
simplify, we refer to the market or traffic-class m = (o,d,e) with a
positive demand of gm = g:J:J cars to be transported. The set M will
identify the set of all markets.
Cars are transported by trains that move through the physical
network following certain routes and transportation modes defined
by the service structure S. A train service or, simply, a service, St e S
has an origin yard 0t' 0t e Y, where it is formed, and a destination yard
d t' d t e Y. where it terminates its journey and is broken down.
Between these two points, the train follows a route rt , defined as a set
of links that form a path in G from 0 t to d t' and may eventually stop at
some of the yards on this route to leave or pick up traffic. The set (J t

contains these intermediate stops. It is convenient to identify the

subpath between each two consecutive stops i, j on the service route,
iJ e C Y, as the service leg p ijt. We denote by X t the set of service
(J t

legs making up the service St. Consequently, when the service has no
intermediary stops, Xt contains only one service leg corresponding to
the entire service route. The service is also characterized by its
service class t t' defining its speed, priority and other service features
(e.g., if it is a unit train or not) and its capacity k t that indicates the
maximum load of a train of the service. The capacity usually depends
on the service class (the speed that has to be maintained, the number
of engines pulling each train. etc.) and on the physical
characteristics of the rail tracks on its route. Consequently, different
capacities k pt • p e x t and kit. I e r t C L, may be defined for each
service leg of the service and each physical track segment on the
route of the service. respectively. Of course,
 477

kt = min {k pt = min {kit}}'

peXt lerpt
where rp t represents the set of links making up the route of the
service leg p eXt. Finally, last but not least, each service operates at a
certain frequency ft, specifying how often the service is run during
the planning period. The length of the planning period is denoted lp.
The set of all train services forms a structure with network-like
properties that materialize into the service network Gs = (Y, A), where

A = { a \ a =Pt' Pt eXt, for a given service St }

represents the set of all non-stop transportation services offered

between the yards of the rail system.
Traffic moves following predefined paths that specify the physical
route, the train services to use and the yards where operations have
to be performed. For a given traffic-class, one or several such paths
may be used, according to the level of congestion in the system and
the service and cost criteria of the particular application. One may
thus have a physical definition (as r{' the path in G from 0 to d) and
r.
a service definition (as X the path in G s from 0 to d) of the various
product paths. It is more conceptually convenient, however. to define
an itinerary for a given traffic-class as a sequence of yards, where
the cars of the traffic-class are classified during their journey. and
the respective sequences of train services used to travel between such
two consecutive yards.
For a given market m eM. there are several possible itineraries; the
set 1m contains them. For each itinerary k e 1m • we have:

"Ktm "" {j e Y Icars on itinerary k e 1m classify at yard j }

't'f = {j e Y I cars on itinerary k e 1m change service at node j}

oT = {j e Y I cars on itinerary k e 1m are on service St when it
stops at yard j e 0 t. and no work is done on these
cars}
 478

1tT = { a e A I service leg P ijt is used by itinerary k e 1m }

while the volume of traffic that moves on the itinerary is noted vT .

The frequencies and itineraries are central elements of the model.

Fixing the values of the frequencies determines the design of the
service network, the level of service and the feasible domain for the
traffic distribution problem. On the other hand, the selection of the
best itineraries for each traffic-class solves the traffic distribution
problem and also determines the workloads and the general
classification and make-up strategies for each yard of the system. The
model may then be stated as follows:

Minimize 'I' (v,j) = L

meM
L
ke/ m
'Pt (v,j) + L
St e S
El if) + II (v,j)

Subject to tTmeM
'v'm eM
ft ~ 0 and integer, 'v'St e S

where,

vr Quantity of flow from the traffic class m traveling

on its itinerary k;
J, Frequency of service s t;
v Vector of flows for the whole system;
f Vector of frequencies;
<If' (v,j) Total (operating and delay) cost of using the
itinerary k for the traffic class m; The sum
represents the "variable" cost of transporting the
flow v by a service network operated at level f;
St if) Total (operation and delay) cost of operating the
service s t; The sum represents the "fixed" cost of
offering transportation services at level f;
II (v,j) Special terms modeling specific relations (such as
train capacity, performance targets,etc.) as "delays".
 479

The objective function principally represents the total system cost:

traffic and itinerary related costs plus the cost of offering the
transportation service. It is a generalized cost, in the sense that both
operating costs and service (delay) costs are included. It is at the level
of this objective function that the relationships and trade-offs among
the various system and policy components are considered by the
combination of the operating costs and delays encountered by trains
and traffic, in yards and on the lines of the system, due to congestion
and the operating policies.
The operating costs represent the real costs of handling and moving
freight, cars and trains. As for delays, the usual and most direct way
of including them in the objective function (an alternative is
examined in Section 3.4) is to transform them into delay costs,
compatible with the operating costs, via user-defined unit time costs
for each traffic-class and type of train service. These costs are usually
based on equipment depreciation values and goods inventory costs.
Yet, they may also advantageously be used to reflect time-related
characteristics, such as priorities or different degrees of time
sensitivity for specific traffic-classes.
The terms most likely to appear in the objective function are those
that reflect the average delays due to passage through classification
yards and to traveling on the lines of the system, plus the associated
operating costs. Thus, we typically have:

~: (v ,/ ) I m c~ + I c; + 1m c:;,. + c~
= [
je k k J je": lerk

+ I CiJ~(v)+ I (X,.t (v)+ I {fit (v '/)+ I

• mJ . m m J Ir
le't k leak pe 'ltk e PI

and
 480

C1. jt (V ) )] It

where
6 Handling cost for a car that classify at yard j e Y;
J

1 Handling cost for a car that transfers at yard j e Y;

clJ Cost of making-up a train at yard j e Y;

d!J Cost of breaking down a train at yard j e Y;

chit Hauling cost for a train of service class t on link I e L;

c7m Hauling cost for a car of traffic-class m e M on link I e L;

~ Delay cost for a car of market m eM;

4 Delay cost for a train of class t.

~ (v) Mean classification delay at yard j e Y;
rot"} (v) Mean transfer delay at yard j e Y;

mJt (v,/) Mean connection delay on service Stat yard j e Y;

aIt t (j) Mean over-the road delay on link I e L for a train of
service S t of service class t;
Mean stoping time for service Stat yard j e Y.

The precise terms included in the objective function, as well as the

particular functional forms of these terms, are application specific.
In the following sections we review the formulations most usually
found in actual tactical models, and the principal methodologies that
may be used to develop terms for the objective function of a tactical
planning model. We focus on delay terms, since their derivation
generally involves a more delicate modeling effort. In general, we
search for closed form formulae that present the usual continuity and
differentiability characteristics required by standard mathematical
programming algorithms. This facilitates the development of
 481

efficient algorithms and allows a better representation and

understanding of the relationships and trade-offs among the various
elements of tactical planning.

3.2 Line Delays

Line models aim principally at analysing and forecasting the

performance of moving trains on the lines of the rail network. They
are used to investigate the line capacity, identify the bottlenecks and
evaluate dispatching policies, meet and overtake priority rules for the
trains traveling over the track sections of the line.
The capacity and performance of a rail line may be evaluated
through the delays that trains encounter under different operating
assumptions: the number of service classes, the number of trains of
each class traveling (in both directions if it is a single track line) on
the line, the signalling system, the disposition and size of the siding
tracks, the distribution of the train departures, etc.
Several line models have been proposed (Assad, 1980b; Petersen and
Taylor, 1982), most of them being directed at detailed analyses of
operational policies. This is the case of the various line simulation
models used in the rail industry. Analytic models have also been
developed and this class of models offers formulations suitable for
inclusion in tactical models.
Petersen (1974, 1975) develops analytical models of interference
delays over a single track line and a partially double-tracked line. The
expected delays are derived considering priority rules for meets and
overtakes for three classes of trains (passenger, rapid freight and
normal freight) and assuming that, for each service class, trains are
independently and uniformly distributed over the planning period.
The mean running times for each service class are then obtained by
solving a set of linear equations. English (1977) further refines these
results by developing detailed formulae for the expected delays due to
 482

multiple meets and overtakes of trains on a single track line with

signalized sidings. These models are used to predict over-the-line
delays as a function of the traffic intensity on the line and are
included in the Railcar Network Model (Petersen and Fullerton, 1975).
These models are accurate in low to moderate congestion situations
only. When traffic intensity is high, trains tend to accumulate at
yards waiting for the line to become available. Thus, dispatching
delays increasingly affect the train running times due to the yard
queues. Franck (1966) proposes one of the first analytic models aimed
at a simplified (equally-spaced sidings and one train speed) version of
this problem. Petersen (1977a) extends this model to more complex
situations including switching times, headways, variable section
lengths, etc. Queueing models are used to represent these dispatching
delays. Petersen then combines his two models, these efforts resulting
in a comprehensive framework to simulate rail line operations and
evaluate train performance. (Petersen and Taylor, 1982; Petersen,
1984). The method for calculating the capacity of a single track
railroad system developed parallely by Elbrond (1978; see also Elbrond
and da Costa, 1970) is another example of an approach that combines
delays due to meets and overtakes with delays (derived from queueing
formulations) due to loading, unloading and dispatching in yards.
Network models generally use one of the following alternatives
when integrating over-the-road delay terms:
1. The constant option, where the time needed to travel over a link
is a link specific constant: 9 1t V' I e L, V' t. Usually, these
constants are derived from histo:ic~l data and reflect observed
delays due to congestion. This approach is found in several
models (the SNCF's MASUP model (Payraud, 1981), for example)
and is appropriate when the first objective of the model is to
reproduce existing results. The constant option is not very well
suited, however, to the analysis of scenarios exploring different
operating and congestion environments.
 483

2. The black box approach, of which the Railcar Network Model is

the prime example, where an exogeneous line model computes
the values of the delays and passes them to the network model
which defines the context parameters. Very detailed line models
may then be used but we loose some analytical tractability and
algorithmic efficiency.
3. The models of the third approach use closed form delay formulae
that are derived from the line models by using simplified or
"average" values for the physical and operational
characteristics of the line: priority rules, meet and overtake
interference delays, etc. These values are obtained from
historical data and by using a line model. It is a "compromising"
option that gives very satisfactory results (Crainic, 1984).
In simple situations, where there is but only one class of train
service and trains travel at a constant speed in each direction of the
link I, I E L, the model of Petersen (1974) offers a simple analytic
formula for the average over-the-road delay in each direction of the
link:

al + (f ) = FKT 1 + +dm 1 +,1 - * FKT 1 - * t 1 - - dm 1 - ,I + * FKTI + * t 1 +

1- (dm l + d - * t l _ +dm l _ 1+*t l +)
,
where the two links 1+ and r represent the two directions of travel on
the single track rail link I, 1 ELand where,
a1+ (f) Over-the-road delay on link 1+;
CAP1 Capacity of link I, I E L;
FRT[+ Free running time on link 1+;
F RTr Free running time on link r;
t 1+ Total train flow on link 1+;
t[+ = L B[+t *it
St E S
Bfl 1 if 1+ E r t' 0 otherwise;
tr Total train flow on link Z-;
 484

tr = I. 8(1 *It
St e S

'Ort 1 if r e r t, 0 otherwise;
dm 1+ ,r: Delay incurred by a train traveling on link 1+ when
meeting a train traveling in the opposite direction r;
dm r ,1+: Delay incurred by a train traveling on link r when
meeting a train traveling in the opposite direction 1+;
When trains traveling in both directions of the line meet with the
same meet delay, this formula further simplifies to the familiar
expression:
91 +(j) = FKI'I + * CAP I +(FKI'I_ *t l _ - FKI'I + * tl +)
CAP I - (t l _ +t l +)

where the capacity of the line, CAP I' limits the total train traffic
traveling in both directions.
In more complex situations, more intricate formulae may be derived
from the line models described above, such as the functions calibrated
by the Canadian National Railways (Crainic, 1982):
91 t (J) = K 1 * FKI'I (tj)
t

where the n service classes operated on the network (passenger, fast

freight, unit, normal freight, etc.) are ordered in descending order of
priority, t 1 < t2 < < tn' K l' K 2 and K 3 are calibration
constants and dOl (t j' t k) represents the delay incurred by a train of
service class t j when overtook by a train of service class t k' Note that,
the line capacity and operating policies (priority rules, minimum
headways, siding distribution, etc.) are concealed in the average
values of the meet, dm r ,/+' dm 1+ ,r' and overtake, do I' delays.
 485

3.3 Yard Models

Yard models analyze the operations and performance of a given

classification yard or of one of its subsystems. Yard models are mostly
concerned with the estimation of the average delays that cars
encounter when passing through the various subsystems of the yard.
They are used to evaluate operating costs and to identify bottlenecks
and congestion effects due to the physical characteristics of the yard,
the traffic intensity and the specific yard and system operating
policies. Generally, each subsystem of the yard is treated individually,
the yard model specifying the relationships among them.
While in a rail yard for classification, a car passes through five
basic stages, encountering and accumulating delays:
• reception and inbound inspection;
• classification;
• connection;
• train assembly or make up;
• outbound inspection and departure.
Descriptions of various yard designs, yard operations, their
interrelations, and yard production functions may be found in
Petersen (1977b, 1977c), Assad (1980b) and others. In this section we
only recall the role and general operation of the principal yard
subsystems corresponding to these five stages. Note that we analyze
yard operations from the point of view of the individual car, as
contrasted to the perspective of the whole train as used by Petersen
(1977b), for example. We think, as do Turnquist and Daskin (1982),
that a "car" approach allows greater flexibility and accuracy to the
modeling and analysis of yard operations and delays.
A railcar arrives at the receiving tracks of a yard either as part of
an inbound train, or as part of a block left by a through train (i.e. a
train that stops at the yard to drop off or pick up traffic), or as a
newly loaded (at the yard's or the client's loading facility) and
 486

delivered car. There, trains and, possibly, blocks are decomposed and
each car is inspected.
Once inspected, cars are ready and queue for classification. During
this stage, cars are sorted into specified blocks and placed on
classification tracks. When classification is over, the blocks are ready
either to be assembled into outbound trains or to be added to a through
train.
Assembly operations are performed by yard switch engines and
their disponibility may generate queueing phenomena. In general,
however, delays at this stage are most commonly generated by the
schedule of the departing trains: the cars have to wait for the
"arrival" of the designated train, hence the name "connection", given
to these delays. Engines are attached to the assembled blocks, when
new trains are formed, cars and engines are individually inspected
and the train is ready for departure.
Numerous yard simulation models have been developed over the
years and rail companies use them actively both for training
purposes and for detailed analyses of yard operations and
performance (Belshaw, 1986). Assad (1980b) reviews this class of
models.
Queueing formulations have been the main analytical approach to
modeling delays in freight terminals and are of particular interest
for tactical planning models. Queueing models are used to evaluate
yard performance through the estimation of a number of important
system characteristics: average total waiting time in _ the system,
average queue length, probability distribution of the waiting time,
probability to overload the system, etc. We refer the reader to
Kleinrock (1975) for details concerning queueing systems
terminology, theoretical properties and solution algorithms and to
Assad (1980b) for a review of early applications of queueing models to
yard subsystems.
Models based on queueing theory treat the yard as a composite
 487

facility and model each of the main yard operations described above
as a queueing system. To integrate these models in a comprehensive
formulation of yard operations, one then has to examine the
interrelations between these subsystems to determine their degree of
independence and if either parallel or series queueing models have to
be used. Of the previous stages, reception, departure and inspection
are generally not considered as being bottleneck operations. The
modeling of classification, assembly and connection delays have
therefore received most of the attention.
It should be noted, however, that closed form delay formulae are not
easily derived from queueing models. Thus, the model M IGII (Poisson
arrival process, general service distribution, one service chanel) may
be easily solved for determininistic (D), exponential (M) and Erlang
(E k) service distributions, since the expressions are in closed form.
All other queueing models require, however, that the roots, within
the complex plane, of a characteristic equation, obtained by using
transform techniques, be numerically determined, which is difficult
in all but the simplest limiting cases. This explains the observed trend
toward more efficient numerical algorithms for solving complex
queueing models and toward the development of accurate closed form
approximations for the performance measures of these models.
Petersen (1977b, 1977c) proposes for the classification and assembly
operations queueing models of the form M IGls, where M denotes a
Poisson distribution for the train arrival process, G is a general
service time distribution and s is the number of service chanels. If
the two operations use the same resources, as in a flat yard where the
same switching engines and, eventually, tracks are used, a common
nonpreemptive priority queueing system with unequal service rates
(assembly has priority over classification) M;1G;1s (N P P R) is
postulated. Independent queueing models are formulated when the
operations use separate resources, as in most modern yards based on
hump sorting technology.
 488

Petersen (197la, 1977b) presents the connection delay as the time a

railcar waits from the end of the classification operation till the start
of the assembly operation and models it as the mean delay in a
MIE k [<XJI1 bulk service queue, where cars arrive randomly according
to a Poisson distribution, the interservice time intervals are
independently and identically distributed according to an Erlang
distribution of order k and the batch size is constant. The service
frequency of the system is the departure frequency of the train and
Erlang distributions may model a wide range of interservice times:
from completely random (exponentially distributed, k = 1) to
completely regular with constant headways (k = 00). The batch size is
the constant train lenght <x. Petersen (1971 b) also generalizes his
results to the random batch size (model M IE k [YJ 11) and to different
block priority cases.
In a subsequent paper, Petersen (1977c) relates the service rates of
the classification, assembly and connection queueing models to the
traffic handled and to the physical characteristics of the yard:
number and configuration of classification tracks, the available yard
engines, the blocking policies. These models are used to estimate yard
delays for the Railcar Network Model (Petersen and Fullerton, 1975).
Petersen's work is pioneering and among the most comprehensive
on the subject. It is interesting to note, however, that in Petersen's
models, trains queue for service both at the classification and the
assembly stages: the incoming trains queue to be classified, while the
outgoing trains queue to be assembled. Thus, the "customers" within
these queueing models are the trains processed at the yard, not the
individual railcars; thus service times are the average times requested
to classify and assemble a train, respectively. In our opinion, this
hypothesis is reasonably accurate for the classification operation, for
many real situations. Some attention should be paid, however, to the
cars arriving to the classification process from through trains, that
drop off blocks at the yard, and from newly loaded cars. In these
 489

situations, a car batch arrival process would probably be a better

representation.
For the assembly operation, on the other hand, assuming a train
arrival process is, in our opinion, less appropriate, since it
emphasizes the physical switching operation, to the detriment of the
connection between the classification operation and the outgoing
train service. A number of studies of the U.S. railroad system (see AAR
(1977), Folk (1977b) and Reid et a1. (1972) for example) indicate that in
many cases the principal source of delay following classification is
not the limited availability of yard switch engines to assemble trains,
but the schedule of the outbound trains on which the cars are to
depart. In such cases, the service process that has to be modeled is not
the physical assembly of outbound trains, but their service
frequency. This approach has the additional benefit of allowing more
elegant and precise model formulation for tactical planning models.
We examine this aspect momentarily.
Starting from the work of Petersen, but using the "car" perspective
and the preceding assumptions on the relative importance of
connection and assembly delays, Turnquist and Daskin (1982) propose
bulk queueing models for the classification and connection delays.
Their aim is to derive expressions for the mean and variance of delay
times and to use these expressions to draw inferences regarding the
efficiency of various yard policies.
Turnquist and Daskin propose a random batch size, bulk Poisson
arrival, general service, one server queueing model for their
classification delay. The model is denoted M [X]/G 11, where X is the
random variable that represents the batch size corresponding to the
train length. By using a result developed by Burke (1975) based on
transform techniques, the average wait time for classification is
E (D l ) = (112J.l) [(1/(1 - P»«~/Ll) + pJ.l2 ci-) - 1]

and the variance in classification delay is

 490

where
A. Mean arrival rate of trains;
~ Mean classification service rate (cars/unit of time);
02 Variance of service time distribution;
Ll Mean train length (cars);
L2 Second moment, about the origin, of the train length;
P Traffic intensity

C probability that the train is of length j;

J
~ (z) Laplace-Stieltjes transform of the service time
distribution:

'Y l' 'Y 2 are the first and second moments about the OrIgin of the
distribution whose transform is G(z) = ~ [1 - B(z)] / L1 z, and ~1' ~2 are
the first two moments of the distribution whose transform is
W (z) = (1 - B(z»/L1 [1 - ~(z)].
In the general case, these formulae cannot be solved analytically
and numerical methods have to be used. The authors then examine
two particular situations leading to more tractable models: first, the
case of extreme variability in both train lengths (a geometric
distribution· is assumed) and service times (assumed to follow a
exponential distribution); secondly, the case of extreme regularity,
where constant train length and deterministic service times are
assumed. These cases correspond to "worst" and "best" case analyses
leading to the computation of upper and lower bounds on the mean
and variance of classification delays in "real" situations. Based on
these results, the authors further investigate the sensitivity of the
mean and variance of classification delay and conclude that these
 491

measures are weakly sensitive to variations in service times and more

strongly related to the variability of train lengths.
For the connection delay, Turnquist and Daskin propose a Poisson
arrival, infinite batch size, bulk service queueing model M /G [00]/1.
The relaxation of the train length restrictions yields a more
analytically tractable model. This allows the authors to show that both
the mean E (D 2) and the variance V (D 2) of the connection delay
depend on the mean E (S) and variance V (S) of the service
distribution:
E (D ) = E (S) + V (S )
2 2 2E (S )
3
V (D ) = E (S ) _ [E (D )]2
2 3E(S) 2

where S is the random variable representing the interservice time

modeling the train departure headway, or the time interval between
successive outbound trains, for a given block of cars. The analysis of
this class of models shows that the average and the variance of the
delay are strongly affected by the distribution of the train service
frequencies; in fact, both the mean and the variance increase with
the irregularity of the service.
The contradiction between the "logical" consequences, on the train
dispatching policies, 'of the opposite impacts of the service
distribution variability on the classification and connection delays,
indicate some of the trade-offs that have to be achieved when
planning rail freight transportation operations. This further
emphasizes, in our opinion, the need for comprehensive models and
tools to enhance the tactical planning process.
In the same paper, Turnquist and Daskin also examine the issue of
the modeling of the train arrival process by a Poisson process. They
argue that, since generally trains arrive from several points in the
network, the resulting process may be reasonably assumed to follow a
Poisson distribution, even through the individual processes are
 492

scheduled or semi-scheduled. Data from a major yard in the Midwest

region of the United States support this assumption. This is an
important conclusion for the utilization of queueing models for
tactical modeling purposes. We would like, however, to point out again
that the arrival of cars from transfers and loading operations should
also be considered in the entry process to the classification operation.
Hence, a batch car arrival process might be more appropriate.
Powell (1981, 1986a; see also Powell (1986b) and Powell and Humblet
( 1986» studies bulk arrival, bulk service queues and their
applications to modeling delays in transportation terminals, and
proposes efficient numerical methods for the computation of the
mean and variance of the waiting time in a queueing system of that
type. For queues with Poisson or compound Poisson arrivals, the
procedure finds the distribution of the queue length at the epochs of
the inbedded Markov chain, by using an iterative "convolutions"
algorithm that numerically computes the probabilities, according to a
number of vehicle dispatching strategies. The expected waiting time
in the queueing system and some other performance measures are
then derived from these results. To compute the waiting time
distribution for queues with non-Poisson arrivals, Powell proposes
another iterative numerical procedure, based on the discretization of
the interarrival and service time distributions for the customers that
queue for service. No vehicle dispatching strategies are considered in
this case. The numerical results reported demonstrate that these
methods are both accurate and efficient. Powell's numerical
algorithms for computing queue performance measures for bulk
arrival, bulk service queueing systems represent an important
development in the field of queueing theory. Yet, they cannot be used
to derive analytic closed-form formulae for the mean and variance of
the classification and connection delays.
Network models, when integrating yard delays, reflect this state of
the art and use one of the following alternatives:
 493

1. The black box approach, already mentioned in relation to line

models, used in the Railcar Network Model. Note that utilization of
Powell's numerical methods could greatly enhance this
alternative.
2. The simplified model approach where complicating restrictions
are relaxed (e.g. train lengths) and simplifying hypotheses (e.g.
regular service) are assumed. The MAS UP model (Payraud, 1981)
and the Railcar Tactic Model (Crainic, Ferland and Rousseau,
1984) are in this category.
The Rail Tactical Model assumes, for example, a M 1M 11 queueing
model for the classification operation. Hence, for a yard j we find:
s·* lp
ro'].~)=----'--------
lp - S j * Vj

or, if one notes that, usually, the average service time is computed
from the yard capacity as S j = lp I CAP j'
lp
roo (\I ) = - - - - - -
'] CAP j - Vj

where,
Vj Volume of traffic being classified at yard j E Y:

Vj = I. I. 8.m/c \I;'
meM kelm J

8j m/c 1 if j E ~ ; 0 otherwise;
Sj Average service ("classification" or put-through) time
for yard j E Y;
CAPj : Capacity of yard j E Y.
Both models assume an infinite batch size bulk service queue with
Poisson arrivals and deterministic (regular) service for the
connection operation. This gives an average connection delay of
!if;t( v, f) ... lp 12ft for the traffic going out of yard j E Y on service St.

Note that, in the Railcar Tactic Model the service capacity restrictions
 494

are considered in a delay-penalty term (see Section 3.4).

These formulations generally give very satisfactory results (Crainic,
1984; Crainic and Nicolle, 1986). More accurate and elegant model
formulations could, however, be obtained by using bulk service and
arrival queue models.
Bulk service and arrival queues arise naturally in transportation as
a result of the consolidation of freight in vehicles (railcars) and of
vehicles in convoys (trains). Yet, there are few examples of
applications of bulk queues formulations and results to models for the
planning of transportation systems. The absence of closed form
formulae for the main queue characteristics is one of the reasons
most often invoked to explain this situation. We know of two attempts
at ··correcting this situations through the development of approximate,
closed form formulae for the moments of bulk queues.
Gendreau (1984) examines, in an urban transit planning context,
scheduled departure bulk service queues with fixed batch size (K) and
Erlang (M IE k[Kl/1) or deterministic (MID [Kl /1 ) service distributions.
He analyses their characteristics and deducts, through analytic
manipulations and innovative utilization of numerical results, several
approximations for the mean waiting times in these queues. He also
shows that the fixed batch size approximations may accurately and
efficiently be used for the variable batch size models, M I K k [YJ 11 and
MID [Yl/1, when the average batch size is not too small. Thus, for the
mean waiting time in the queue, W q' of a scheduled departure, fixed
batch size, bulk service queueing system, MID [K 1/1, the best
approximation is the hyperbolic formula:

w: [1 = + P
K (1 - P)
)

where
A. Mean arrival rate;
1/ J.l Average interservice time arrival;
 495

K Batch size;
p Utilization coefficient p = /.../(K ~).
For the model with variable batch size, M /D [Y]Il, the average batch
size, E (Y) replaces the fixed batch size K in the hyperbolic
approximation.
Crainic and Gendreau (1986) extensively test this approximation and
show that it is accurate over a wide range of batch sizes and
utilization coefficients. They then apply approximation to the mean
yard connection delay, assuming regular (deterministic) service:

C Ah
CO (v '/) =Wq lp
=2/ [ 1+
jt

where
VJ Total number of cars that take service St out of yard j E Y;

t m
Vj = l: l: 0jtmk v k
meM kel m

0jtmk: 1 if j E Kff' u t{'and St E n'k ; 0 otherwise;

-'t
Vj Volume of traffic already on service S t' Le. traveling on
Stboth before and after the stop at yard j E Y;
~It Capacity of the service S t;
~p.t Residual capacity of service S t before taking traffic at
J
yard j E Y: I(p . t =
J
J;
~ It - V
Mean car arrival rate for service Stout of yard j E Y;

Headway (constant) of service St at yard j E Y:

-1 =lp-
J.l:t /t
J
K~ Batch size
J

K·J
t k p.t,
 496

Crainic and Gendreau (1986) integrate this connection delay

formula to the Rail Tactic Model (Crainic, Ferland and Rousseau, 1984)
and report very satisfactory results. Unfortunately, equivalent results
for the classification delay are not available yet.
Powell (1986) takes a different approach to develop closed form
formulae for performance measures in bulk queues. He uses bulk
queueing theory to solve exactly a very large number of randomly
generated problems and then fits approximate expressions for the
moments of the queue length, by using regression techniques. More
precisely, Powell first derives the moment formulae for the queue
length at departure instants by using transform methods. These
formulae combine the moments of the vehicle capacity (service batch
size) distribution and those of the distribution of the number of
arrivals, to two "unknown" functions that depend on these
distributions. These functions may, however, be computed by finding
the zeros of a particular equation in the complex plane and, once
exactly solved, the results are used by the linear regression.
Powell assumes Poisson arrivals of groups, constant or Erlang
service time distributions and random group sizes (shifted negative
binomial distributions) and vehicle capacities (shifted binomial
distributions), and generates 526 problems covering a wide range of
values for the parameters. The problems are exactly solved and, by
using linear regression, approximate formulae are obtained for the
moments of the queue length at departure instants. The mean, for
example, is approximated as:
E(Q) = [V2 + Y2 + (VI - YI )(1 + 2(V I -K» - (VI - YI)2] 12(Vl - YI )

+ [ - 0.4358 + 0.6804Y 1 - 0.8862ff+ 0.4155(y3)113

+ 0.9925C - 0.4775V 1 - 0.1892(y 1)21 VI }
where indices 1, 2 and 3 indicate the mean, variance and third
moment of the distributions of the vehicle capacity (V) and arrival
rate (Y). C is the maximum vehicle capacity. A similar, but more
complex, expression is derived for the variance. These expressions are
 497

then used to determine the first two moments of the queue length in
continuous time and the mean waiting time in the system. The
average formula seems to be very accurate over a broad range of
values for the parameters, while the variance approximation formula
works better in situations where the standard deviation of the queue
length is expected to be over five customers.
We are not aware of results of tactical models that include delays
based on Powell's approximate formulae. It would be interesting to
compare the two approximation methods, especially concerning their
impact on the performance of tactical models, as measured by their
accuracy and computation times.

3.4 Additional Modeling Issues

There are a number of relations among the components of the rail

system and various restrictions on the utilization of their resources
that are not represented in the yard and line models discussed
previously. The modeling of these relations and restrictions is the
object of this section. The resulting formulations usually make up the
terms that we designated by n (1I, f) in the conceptual tactical model
described in Section 3.1.
A prime example of this type of relations is given by the capacity
relations between the services and the quantity of freight they may
transport. These relations are generally formulated as strict capacity
constraints, especially when modeling operational problems, such as
the routing and scheduling of pick up and delivery vehicles. For a
tactical model, however, one is generally less concerned with the
specific vehicle capacity, the emphasis rather being on establishing
the frequency of the service, which determines its capacity, and the
distribution of the freight traffic, which specifies how this capacity
is to be used. Hence, the assignment of some traffic to a particular
service, in excess of its capacity, may indicate either that the
 498

frequency of the service should be increased, or that some other

traffic, probably less important in terms of priority or delay costs,
should pass to another service. The formulation of strict capacity
constraints would prevent, however, an easy detection and
manipulation of such a situation. It is thus more natural, in this case,
to model the capacity restrictions as utilization targets, where
overcapacity assignment is permitted at the expense of additional
costs and delays.
We have thus represented these relations as additional delays to the
traffic, computed by penalty terms on the quantity of flow assigned
over and above the predesignated (possibly, service, link and
commodity specific) capacity of the service. Specifically, for a service
s t' the capacity-penalty delay on one of its service legs pte 1t t is
computed as

p ;a
t
p 1 L [minimum
e rp
{Q,Vp - k It It }]2
t
t

where V Pt
m eM
L
ke/m
L 0tmk vr represent the volume of traffic

traveling on service leg Pt of service S t (5 tmk = 1 if Pt e 1'itcm ), and p~;p

is the associated penalty cost.

This modeling approach presents an additional benefi t, besides the
conceptual elegance we just discussed. It permits to address in an
algorithmically efficient way relations that otherwise would have
created significant computational difficulties. Particularly, the
introduction of explicit constraints, modeling the service capacity
restrictions, significantly alters the "decomposability" of the
constraint matrix on which the solution algorithm is based. More
complex and less efficient algorithms would then have to be found.
Consequently, we have adopted this penalty approach and applied it to
modeling of a large variety of relations: yard capacities, maximum
block sizes, service objectives, etc.
An interesting application of the penalty modeling approach is the
 499

representation of service performance targets (Roy, 1984; Delorme,

Roy and Rousseau 1987). These terms are particularly important for
the planning of operations of less-than-truckload motor carrier
companies, which often advertise service performance objectives for
specific markets (such as, service from city A to city B in less than 24
hours) backed up by precise (your money back if not in time)
financial engagements. In this case the mean and the variance of the
total transportation delay, for the specific traffic class, are computed
and compared to the service performance target, via penalty terms in
the objective function:
r r c~ [minimum {Q,Sm - E (Tkm ) - n a(Tkm )}]2Vkm
meM ke/ m

where
Sm Service performance target for traffic-class m EM;
cfm Service penalty cost for traffic-class m EM;

'If' Total transportation delay for traffic-class m EM, on its

itinerary k;

Publicized service performance targets are not yet widely used in

the rail industry and, thus, service penalty terms do not appear in rail
tactical models. This situation may rapidly evolve though, as railroads
struggle to compete and regain some of the terrain lost to the truck
mode in recent years. Despite the very satisfactory results it permits,
both from a modeling and an algorithmic point of view, two
cautionary remarks have to be made about the penalty approach.
First, the penalty cost has to be chosen with some care: too low a
figure and the restriction is unoperative, too high and it overrides all
other terms in the objective function. The penalty cost may be, and
often is, based on real cost values, such as the penalty paid or an
evaluation of the revenue lost due to loss of credibility in the
company's reliability. Yet, penalty costs may also be used to represent
the relative weight of the service quality and realibility as compared
 500

to the cost of operating the service. Interesting sensitivity analyses

are then possible.
Secondly, the penalty approach is particularly appropriate for the
modeling of upper bound type of restrictions (e.g. capacities); it does
not work properly, however, for lower bound type of relations, such
as the minimum service load. This condition may be written as the
following set of constraints (Crainic and Nicolle, 1986):

where at represents the minimum load required to run trains on the

service St.

Including this type of restrictions in the objective function by

using penalties does not work properly, mainly because:
1. The algorithms used are of the network design type (see Section
IV), which implies that, from the beginning of the solution
procedure, all services are available (positive frequencies) even
if no traffic is assigned yet. Consequently, the penalties are
strongly present for most of the services for most of the solution
process. This does not contribute any meaningful information.
2. For a minimization problem, an action that lowers the value of
the objective function by going to a nonfeasible solution may
still be the most attractive even when a penalty has to be paid for
the nonfeasibility.
Note that these reasons, especially the first one, still hold if
different approaches (e.g. Lagrange relaxation methods) are used to
substitute terms in the objective function to the constraints. In these
cases, we propose a postoptimization heuristic approach:
1. Solve the model without the restrictions;
2. Compute for each service s tits unfeasibility measure F t;
 501

Ft = maximum {( at it - V Pt ) I <'Pt ) }
Pt E'Tt t

where l( rP t) represents the length of the route of the service leg.

3. Find the service s _ such as K = maximum {F }.

t t S eS t
t
If F t ~ 0 then stop.
Otherwise, find an alternative service path to transport the
freight of service s t' move the traffic and set it O. Reoptimize
the traffic distribution and go to the first step.
Note that it is easy to introduce "cost" considerations in this type of
postoptimization procedure, which is akin to the well-known greedy
heuristics and to the work of Thomet (1971). This allows an easier
estimation of the cost and impact on the system operation of these
lower bound restrictions and, thus, a more educated decision on
exactly how much enforced these restrictions should be. Interesting
sensitivity analyses are again possible.
Service reliability is a major planning issue that is rarely directly
addressed by tactical models. The variance of delays, both in yards and
on the lines of the system, represents a good measure of the
reliability, and thus the quality, of service (see, Bullot (1985). for
example). Yet. with the exception of the penalty terms modeling
service performance targets, the variances of the delays are not
usually included in the objective function of tactical models. In our
opinion, their inclusion, either as part of service penalties or as
terms that added up to the mean delays form the delay costs, would
significantly improve the quality and credibility of tactical models. It
should also be noted, that both service penalties and delay costs may
concurently be used in the same model: not all markets have service
performance objectives defined but, for all such markets. the quality
and reliability of service should be optimized.
Finally. we want to briefly address the backhauling, or empty
vehicle movement, problem. It is a particular problem for
 502

organizations offering freight transportation services, that arises

from imbalances in the flows of goods, generating the need to move
empty vehicles to satisfy the demand (Dejax and Crainic, 1987). One
way of considering this problem in a tactical planning problem is,
first to compute an empty vehicle demand matrix and, then, to
consider empties as a commodity in the tactical model. The
computation of this matrix may be done, for example, by using a
gravity model (Coutu, 1978). This procedure is adequate for the
requirements of a tactical model of rail freight transportation and it
is used, for example, at Canadian National Railways.

4. PLANNING TOOLS AND RESEARCH AREAS

The formulation described in Section III, yields a non-linear,

mixed-integer, multimode, multicommodity flow model with a
particular structure: explicit constraints bind only the continuous
variables and the resulting matrix constraint has a block-diagonal
form. Each block is a one row matrix, that corresponds to the flow
conservation constraint for a given traffic-class. This structure is
particularly amenable to solution algorithms based on decomposition
principles.
Crainic and Rousseau (1986) detail such an algorithm that works
alternatively on the following subproblems:
1. Service network design: Given a fixed traffic distribution, modify
the frequencies to improve the value of the objective function. If
this is not possible, stop. A method of finite differences is used to
determine the frequencies to be modified.
2. Traffic routing and distribution: For a given level of service,
determine the optimal traffic distribution. The problem is solved
by a decomposition procedure which cyclically considers each
traffic-class, while the traffic distributions of all the other
 503

traffic-classes are kept fixed. For each subproblem, a new

itinerary is first generated by an algorithm based on
shortest-path principles, using marginal costs as unit costs. Then,
the traffic distribution is reoptimized by using a modified steepest
descent algorithm.
We successfully experimented this algorithm with data from
Canadian (Crainic, 1984; Crainic and Rousseau, 1986) and French
(Crainic and Nicolle, 1986) railways.
The mathematical structure of the objective function of the tactical
model and the algorithm method used to solve it, imply that one
cannot determine the optimal solution to the problem, in the
mathematical programming sense. Besides, several different solutions
may usually be found with pratically the same objective function
value. The solutions differ in their configurations and levels of
service and thus, evidently, in the associated traffic distributions and
terminal policies. Yet, different relative weights for the operating
and delay components of the total system cost generate the same value
for the objective function. The final choice among these "equivalent"
operating strategies has then to be made according to criteria
difficult to include into classical economic or operations research
models.
One could, of course, add more constraints and details to the model to
try to answer these problems and reflect more closely the reality. One
would have to accept, however, the consequent loss of flexibility and
efficiency of the model and algorithms. Besides, it would be utopic to
think that 'one model may integrate all the aspects of the rail system
and planning process, that it could represent all the written
regulations and all the unwritten rules and traditions that usually
affect the operations of a freight rail transportation system.
An efficient and elegant alternative is to built around the tactical
model and algorithms an integrated planning system. This option is
facilited by:
 504

• The modularity of the formulation of the objective function,

which allows flexibility in both the choice of the particular
terms (representing activities, delays, costs, etc.) to be included
and their specific functional forms;
• The modularity and flexibility of the algorithmic approach,
which allows the inclusion of procedures tailored for a specific
application;
• The efficiency of the solution procedures, which facilities the
exploration of alternative strategies, the analysis of "what-if"
situations and the conducting of post-optimal studies.
The system combines a data bank together with procedures to access
and analyze it, problem modeling and scenario defining facilities,
optimization algorithms and post-optimal procedures and, most
important, interactive-graphic capabilities to display and help
analyse data and results. We are currently developing these types of
procedures as well as experimenting with various data structures,
representation models and display schemes (Crainic and Mondou,
1986).
Several research area related to various aspects of rail tactical
planning are still open and could have a significant impact on the
development and acceptance of tactical models. We mention a few.
The study of approximation methods yielding closed form formulae
for the various delays, especially in yards, should be continued and
expanded. The use of more complex models combined with accurate
approximations could greatly enhance the realism and efficiency of
tactical models. These approximations should be validated by
comparing them to the original models and to actual rail data. More
specifically, the utilization of bulk-service, bulk arrival queueing
models for the modeling of yard classification and connection delays
should be further investigated. The study of the accuracy of the
modeling of a car bulk arrival process as a Poisson process is
especially important in this context.
 505

The variability of delays, as a measure of reliability and quality of

service, should be integrated into tactical formulations. Additionals
real-life preoccupations should also be considered in tactical models.
Fleet size constraints, for example, are an important planning issue
that is not currently included in tactical models. We think that the
delay-penalty modeling approach is appropriate for this problem, but
the issue should be further investigated.
Increased efficiency could be pursued for the various algorithms
that compose the solution procedure. Parallelly, "exact" algorithms
should be developed to allow a more rigorous evalutation and
validation of the heuristic methods. Postoptimization procedures
should also be developed and integrated to the planning system.
Finally, we want to emphasize that recent advances in operations
research methods, computer science software and hardware, artificial
intelligence and decision support systems open up new and exciting
research possibilities for transportation science in general and rail
tactical planning in particular. So, it is possible now to build
comprehensive interactive-graphic planning systems that run on
microcomputers and thus, to put impressively powerful computational
and planning means within easy financial reach of practically every
transportation related organization. Also, the combination of
traditional optimization models and algorithms and expert system
techniques or interactive optimization methods may yield very
interesting results for the development and utilization of tactical
planning models for freight rail transportation.
 506

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 MOTOR-CARRIERS OPERATIONS PLANNING MODELS:
A STATE OF THE ART

Louis Delorme
Centre de Recherche sur les Transports - Universite de Montreal- C.P.
6128, Succ. A, Montreal (Quebec) - Canada H3C 3J7

Jacques Roy
Departement des Sciences Administratives - Universite du Quebec a
Montreal- C.P. 8888, Succ. A, Montreal (Quebec) - CanadaH3C 3P8

Jean-Marc Rousseau
Centre de Recherche sur les Transports - Universite de Montreal- C.P.
6128, Succ. A, Montreal (Quebec) - Canada H3C 317

This paper examines the nature of planning in the motor-carrier

industry. Then, existing planning models are reviewed with special
attention given to those addressing the tactical level of planning of
intercity freight transportation systems. Finally, future research
directions are suggested.

1. INTRODUCTION

The trucking industry plays an important role in the North-

American economy as it earns the majority of all freight
transportation revenues which, according to Taff (1978), represent
close to 10% of the Gross National Product in the United States. In the
recent years, this industry's particular environment has become
much more competitive. As a result, motor-carriers' transportation
services are now more specialized and service levels more selective
than before, thereby increasing the need for better operations
management in the industry.
The purpose of this paper is to review existing models that can
provide assistance to motor-carriers' operations managers in their
decision-making process. Section 2 examines the nature of planning
in the motor-carrier industry at three different levels: strategic,
 511

tactical and operational. In Section 3, existing planning models are

reviewed with special emphasis being placed on those that can be
used at the tactical decision level. Finally, Section 4 concludes with an
outline of promising research opportunities.

2. THE NATURE OF PLANNING IN THE MOTOR-CARRIER

INDUSTRY

2.1 Motor-Carrier Operations

Intercity trucking companies are generally specialized in the

transportation of one of the following type of shipments:
1) truckload or TL freight;
2) less-than-truckload or LTL freight;
3) parcels (Roy, 1984).
TL freight is characterized by individual shipments which require
an entire trailer - i.e. one per shipment. This freight does not require
sorting and handling as it moves directly from shipper to consignee.
As a result, investment in terminals and in specialized city pickup and
delivery equipment is not necessary in this case (Barker, Sharon and
Sen, 1981).
An L TL carrier typically hauls shipments in the range of 100 to
10,000 pounds! - 50 to 4500 kg (Powell and Sheffi, 1983). Since a trailer
can hold 30,000 to 50,000 pounds depending on the density of freight,
it is necessary for the carrier to consolidate many shipments to make
economic use of the vehicle. This requires the establishment of a
large number of terminals to sort freight. These terminals might be
either end-of-line terminals, which correspond to points of origin
and destination of freight, breakbulk terminals which perform

1 LTL carriers also often provide TL services.

 512

exclusively consolidation of freight, or a combination of these two!.

End-of-line terminals have to maintain a fleet of small trucks for
handling pickups and deliveries in the city.
For a better understanding of LTL carrier's operations, Figure 1
represents the typical flow of shipments (Wyckoff, 1974). The cycle
starts with a pickup demand which is seldom known in advance and
may vary significantly from one day to another. Demand for
transportation services also varies according to seasonal variations
and type of traffic. For example, early spring and fall are peak
periods in the garment industry. Shipments are generally collected in
the afternoon and then delivered to the origin terminal where they
are unloaded and verified against the information appearing on the
documentation (bill of lading) prepared by the shipper: weight,
dimensions, number of pieces per shipment, type of traffic, etc.
Tariffs are determined and a waybill is prepared. The waybill is the
documentation that accompanies the traffic and is used to verify it in
subsequent handling operations. Once unloaded and verified, freight
is loaded into a linehaul trailer and moved to the nearest breakbulk
terminal if the origin terminal does not perform the sortation
function. Otherwise, freight is sorted according to its destination and
then moved to its loading area where it awaits loading into linehaul
trailers. Traffic addressed to other points in the origin city is directed
to loading zones for local delivery (normally the next morning). As
mentioned earlier, it is not always possible to economically dispatch a
trailer for each destination where traffic is addressed. Freight is then
consolidated into trailers for an intermediate terminal (i.e. a
breakbulk terminal) where it will be loaded with other traffic for
movement to its final destination. In the worst case, traffic will once
again be unloaded, sorted and reloaded at the transfer terminal.

1 In the United States, most trucking companies make a distinction between

end-of-line terminals and breakbulk terminals - see for instance Powell
and Sheffi (1983) - which is not always the case in Canada.
 513

PICKUP
DEMAND

DELIVERY
TO
TERMINAL

.....
LlNEHAUL MOVEMENT

rI '------,-_~ CONSQ.IDATION
AND LOADING
UNLOADING I
I

ISORt I
I ~,

I SORTING
I
I
I
I
Iuol'OG I
~,

I LOADING LOADING
I INTO INTO
~ LINEHAUL ~~ DELIVERY
TRAILER UNITS

ORIGIN TERMINAL TRANSFER TERMINAL DESTINATION TERMINAL

(BREAKBULK)

UNEHAUL MOVEMENT J ~,

DELIVERY TO
CONSIGNEE

Figure 1: Typical flow ofLTL shipments (Roy and Picard, 1984)

However, it is sometimes possible to keep this traffic in the "nose" of

the trailer and add some more traffic to it, in which case the handling
costs are considerably reduced. At the destination terminal, traffic
will once again be unloaded, verified, sorted, coded and moved to a
loading area for local delivery to its consignee. Note that linehaul
movements occur mostly during the night, so that freight can be
 514

delivered to consignees in the morning (Roy and Picard, 1984; Roy,

1984).
Carriers specialized in the transportation of parcels small
shipments of less than 50 pounds, such as UPS in the United States and
Canada Post Corporation, share many points in common with an LTL
carrier. More particularly, they must also consolidate shipments;
their terminal network is thus in some ways very similar to an LTL
carrier's one. Note however that the sortation process is much more
complex than in the LTL case.

2.2. Levels of Planning

Motor-carrier's operations management problems can generally be

classified according to the following three levels of planning:
strategic, tactical and operational.
Decisions taken at the strategic planning level usually concern a
large part of the organization, have major financial impacts and may
have long term effects. In the motor-carrier industry, these decisions
are typically related to the design of a transportation system (Roy and
Picard, 1984), that is to:
1) the type and mix of transportation services offered (parcels, TL
or LTL services);
2) the territory coverage and network configuration such as
terminal location;
3) the service policy definition, i.e. the service levels offered to
customers in terms of both speed and reliability.
At any point in time, these decisions will help determine the
motor-carrier's strategic position on the market. These strategic
choices should therefore be revised periodically following changes
that are continually taking place in the motor-carrier's particular
environment. However, it would seem that motor-carriers have not
been very much concerned with strategic planning until recently.
Indeed, a study conducted by Kallman and Gupta (1979), before the
 515

Motor-Carrier Act of 1980, reveals that relatively few carriers plan

for more than one year ahead and that strategic planning is then
performed mostly informally. According to the authors, these results
could be explained as follows:
1) At the time the study was conducted, government regulation was
still very much in effect, thereby limiting the control
motor-carriers had over their major strategic options;
2) Long-range planning is also restrained by the labor intensity of
the industry, the powerful Teamster's Union largely controlling
the labor wages and fringes in the long run;
3) Strategic planning models are mostly used by the larger
companies those with annual revenues above 500 million
dollars. Hence, one cannot logically expect to find many
long-range planners in the motor-carrier industry which is
mostly composed of small and medium businesses.
Needless to say that the trucking industry's deregulation movement
initiated in the United States with the Motor-Carrier Act of 1980
should enhance carrier's interest for strategic planning models that
can be used as decision aids in a more competitive and uncertain
environment. In any case, choice made at the strategic level will
constrain the decision variables at the tactical and operational levels.
The tac ti cal planning level is located somewhere between
long-range strategic planning and day-to-day operations planning. It
is thus related to short or medium range activities such as:
1) equipment acquisition or replacement;
2) capacity adjustments according to demand forecasts and the
financial situation of the firm.
In the motor-carrier industry, tactical planning may be performed
over a time horizon of a few years, such as in the case of vehicle
replacement or freight handling equipment purchases, or yet over a
period of a few months when, for example, adjusting the
transportation plan - i.e. the number of trailer departures per period
 516

and the routing of freight 1 - according to seasonal variations in the

forecasted demand.
However, tactical planning can take slightly different meanings
according to various authors. for example, Bowersox (1978) considers
it as a procedure for developing contingency plans that describe
adjustments to be made with respect to events that were possible but
not probable at the time the initial operational plan was designed.
Nevertheless, tactical planning will generally influence decisions
made at the operational level, that is decisions concerning very short
term day-to-day operations or even real time management. At the
operational level, carriers are mostly concerned with detailed
planning of current activities, and decisions are often made at the
first line supervisory levels. Starting with transportation plans
formulated at the tactical level, motor-carriers have to decide for
example on driver and equipment assignments and transportation
schedules that have to be updated according to daily variations in
demand as well as equipment and labor availability. Finally, in real
time management, operational planning and control are performed
together in order to maintain the transportation system under
equilibrium.
The hierarchical, or vertical, relation amongst the three planning
levels greatly contributes to the impractibility of formulating a
unique model; it generates the need for different formulations
addressing specific planning levels or problems (Crainic and Roy,
1987).
At each planning level, and more particularly at the tactical level, a
second type of relation, called horizontal, can be observed amongst
the various decisions. For example, if demand for LTL transportation
for a given origin-destination pair is expected to increase in the
coming months, one could increase the number of trailer departures

1 This plan is also called the load plan in the LTL carrier industry (Powell
and Sheffi, 1983).
 517

at the origin terminal, and possibly at the intermediate terminals, in

order to satisfy this additional demand; such a policy would increase
transportation costs while maintaining present service speed and
reliability levels. One could also decide to maintain the existing
number of movements, and forward the additional freight through
other intermediate terminals in order to maximize the utilization of
trailer equipment. However, this second policy would increase freight
handling costs, total transit time and terminal congestion which, in
turn, could affect service reliability. Thus, the strategies developed
for one problem interact with those established for other problems.
Therefore, decisions should be made globally, network-wide, in an
integrated manner (Crainic and Roy, 1987).

3. A REVIEW OF EXISTING PLANNING MODELS

In spite of the importance of operations planning to motor-carriers,

planning models were not developed until recently. This can be
explained by the almost total absence of information systems for
motor-carriers' operations planning before the early 1970's.
Consequently, it was not possible at that time for both managers and
researchers to have access to the adequate data necessary for
planning large scale networks. Bur recent advances in computer
technology (e.g. microcomputers) and the development of software
especially designed for the trucking industry have made it possible
for an number of carriers to perform computer-assisted
in~reasing

analyses of their performance l . Indeed, a quick review of some of the

surveys on the use of quantitative methods by motor-carriers
reported in the literature during the past five years indicates that:

1 Extensive lists of computer software applied to the trucking industry are

produced and updated regularly by the Management Systems Committee of
the American Trucking Associations Inc. and by International Computer
Programs Inc. (1985).
 518

1) the percentage of motor-carriers who own or lease at least one

mainframe or microcomputer has increased from 52% in 1980
(Ferguson, 1982) to approximately 73% in 1984 (Anderson, 1984)
with larger carriers being more likely to use computer
applications, as could be expected;
2) computer technology is generally first applied to accounting
functions, then to various data analyses such as revenue, traffic,
productivity and profitability analyses 1;
3) only a minority of carriers are using computer software for
operations planning and monitoring functions such as routing
and dispatching, with vehicle maintenance management being
the most popular application in this categoryl.
One of the few softwares dedicated to most of the planning problems
mentioned earlier in this paper is the decision support system (DSS)
of Leaseway Transportation company (Javad, Hsu and Waldman, 1985).
This system includes:
1) a large-scale computer model called DISPLAN used to assist in the
location of facilities, such as distribution centers and terminals,
and in the determination of territory coverage;
2) an evaluation model, TNET, designed for the analysis of TL
transportation network. It determines the routing of freight so
that empty miles are minimized within the network;
3) CNET, a model that helps evaluate the near optimum assignment
of LTL shipments to consolidated legs. Decisions are based on both
the cost and service criteria;
4) ROUTEASSIST, a model designed for routing and scheduling
(day-to-day operations).
However, the authors did not describe the methodology they have
adopted to develop these models, nor the impact their DSS had on the
performance of Leaseway's operations planning. In fact, except for

1 See the surveys of Shrock and Astrom (1981), Sugrue, Ledford and
Glaskowsky (1982), and Anderson (1984).
 519

very few exceptions as we will see later in this paper, there is

practically no detailed information on computer softwares for
operations planning in the literature - one has to buy a software to
know partially what lies behind it.
Nevertheless, there exists some well documented papers on the
modelization of motor carriers' planning problems at the three
decision levels. In this paper, we focus on models for the tactical level
issues and only mention briefly some of the important work related to
problems at the strategic and operational levels.

3.1 Strategic Planning

According to Daskin (1985), facility location is one of the most

important logistical decisions faced in the long term. It is thus not
surprising that a vast amount of literature has been devoted to that
problem - see for example the reviews by Krarup and Pruzan (1983)
and by Daskin (1985). This problem is generally defined as follows: a
certain number of facilities must be placed among "m" possible sites
with the objective of minimizing the total cost for satisfying fixed
demands for a product, specified at "n" locations. Costs include a fixed
charge for opening each facility as well as transportation costs which
are function of the quantity shipped from a facility to a demand point.
There exists many variations to this problem such as to allow
fractional (or require integer) assignments of demands to facilities,
or to consider the distribution of several products. Many applications
may be found in the literature, such as the multicommodity
location/allocation model of Geoffrion and Graves (1974) which
considers the distribution of some products from plants through
warehouses to customers, warehouses being the facilities to locate.
Another example is the multiproduct, multimode warehouse location
model with balancing requirements for empty containers distribution
of Crainic, Dejax and Delorme (1986), which, according to its authors,
 520

should be applicable to the planning of loaded as well as empty

vehicle warehouse location and distribution systems (Dejax and
Crainic, 1987). It seems however that there is no reported case on the
use of this type of modeling approach - or of any other type in fact -
for terminal location in the motor-carrier industry, except for the
decision support system APOLLOl (Powell and Sheffi, 1986b) with
which a breakbulk location study has been carried out for Ryder/PIE
Nationwide, a large American LTL firm: this system was used to
analyze eight different locations. It required one week of continuous
work and produced savings of about 2 million dollars US annually. A
similar study was conducted manually before the implementation of
APOLLO; it focused on only one location, requiring one man-month of
work for estimated savings of 0,5 million dollars US. This last location
was not recommended by APOLLO, as in fact it generated losses of 1
million dollars US. This example shows the importance of good
analytical tools, based on operational research techniques, for the
analysis of terminal location in the trucking industry.
Other pertinent types of models that should be applicable to strategic
planning problems in the motor-carrier industry may be found in
papers on network configuration models - see for example Magnanti
and Wong (1984) - and on freight demand estimation methods - see the
review by Winston (1983). Finally, note that there are numerous
models from the fields of economics and management which may be
used, but they are truly beyond the scope of this paper.

3.2 Operational Planning

The routing and scheduling of vehicles is probably one of the most

studied short-term planning problems in freight transportation
systems: as a matter of fact, the comprehensive overview of Bodin et
al. (1983) covers more than 500 papers on vehicle routing and

1 This system is described in the section on tactical planning.

 521

scheduling. While most of routing models have been designed for

delivery and pickup activities, some of them concern more
specifically intercity transportation operations of motor-carriers.
One of these models, proposed by Powell, Sheffi and Thiriez (1984), is
designed to route trucks of a TL carrier by maximizing its net expected
revenue. Demand forecasts for TL services are treated as random
variables with known means and variances from Erlang distributions.
The basic structure of the model is represented by a space-time
network where nodes correspond to customer regions at specific
points in time. The decision variables are then the (random) flows of
vehicles moving between each pair of regions over time. A solution
method based on the Frank-Wolfe approach was derived by the
authors; they have tested it using a network of a medium size trucking
company (40 regions, 295 nodes and 4840 links). Powell (1986a) has
improved the model by assuming random supplies of vehicles at each
node of the network; the parameters of the supplies distribution are
determined endogenously by the model. In addition, when demand is
not sufficient, vehicles allocated to move loaded are held over in the
same region until the next period (typically one day). Given initial
supplies of empty vehicles for each region, the model is used to
determine the number of vehicles that must be:
i) sent empty from region i to a different region j in a future point
in time;
ii) held at region i another day;
iii) allowed to handle demands from to j.
Although the model's formulation gives rise to a nonlinear,
nonseparable maximization problem for which concavity is not yet
established, Powell (1986a) has developed a solution algorithm adapted
from the Frank-Wolfe method which seems very efficient. However,
the model presents two serious limitations: first, a vehicle which
cannot be moved full to a particular region is not allowed to move to
another region, which is in fact very restrictive. Moreover, the
 522

solution method may produce non-integer routing flows, a rather

undesirable propriety for a real time planning tool (Powell, 1987).
An alternative model was then proposed by Powell (1987): it is
designed for the management of a fleet of vehicles in a real time
environment. This network optimization model called LOAD MAP
(Powell, Sheffi et aI., 1987) uses historical data on revenues, transit
times and demands to estimate the future consequences of present
dispatching decisions; data is updated with actual information on loads
and movements using time series techniques. The innovative aspect
of this model is that deterministic as well as stochastic arcs are used to
track down on a dynamic network the future trajectory of trucks. The
deterministic part of the network depicts the known movements of
trucks at the time of their first dispatch. On the other hand, stochastic
links represent uncertain information about the second dispatch of a
truck to some unknown load as well as all further uncertain
movements until the end of the planning horizon (typically from 10
to 20 days ahead of present time). The cost for such an arc is the
marginal value of an additional vehicle sent to a region at some point
in the future; it is computed by a "regional impact model" based on
probability distribution convolution methods and Markovian
techniques. The overall network is efficiently optimized using an
adaptation of a network simplex code. LOAD MAP has been
implemented at the Commercial Transport Division of North American
Van Lines (NACT) - see Powell, Sheffi et al. (1987). It has considerably
reduced the work of the dispatchers who were faced with high
uncertainty in shipper demands from day-to-day - indeed, on any
given morning they used to know only 30 to 40% of daily loads to
carry and as little as 10% for the next day. According to some
experiments reported by Powell, Sheffi et al. (1987), it seems that
LOADMAP allows NACT to provide a higher level of service while
maximizing its profits.
To our knowledge, the above mentioned operational models are the
 523

only ones which consider explicitly stochasticity in demand for

intercity freight transportation, which is an important propriety for
a real time planning tool. The network flow model by Brown and
Graves (1981), designed for the real time dispatch of petroleum tank
trucks but which in our view may be adapted for TL shipments, does
not have such a propriety. Their model optimizes the routing of
trucks from bulk terminals to customers where each route contains a
single drop point. It is formulated as an integer linear program,
where transportation costs are minimized while honoring vehicle
and driver shift length restrictions. The model seems to improve the
operating efficiency of dispatchers while diminishing transportation
costs by about 3% as reported by the authors.
Routing models for LTL carriers - in the context of day-to-day
planning - are more complex to design: as we have mentioned earlier
in this paper, the routing of LTL shipments involves a lot more
operations - such as consolidation - than TL shipments. As a result,
very few mathematical models tackling this problem have been
developed and are currently used by LTL carriers. One of them is the
evaluation model of Barker, Sharon and Sen (1981). It was first
intended for tactical purposes but is now being used at the operational
level of planning by ANR Freight Systems Inc.; this model is described
in the next section.
Breakbulk operations management has been the subject of a
research report by Daily, Dare and Omurtag (1985), who have
developed a decision support system aimed at the allocation of men
and equipment on a daily basis for various costs and service
situations. In particular, this system is used to help breakbulk
managers in:
1) forecasting their workload for the coming week in order to make
an accurate weekly manpower bid (Le. schedule) - this is done by
exponential smoothing using past data on labor and productivity;
2) determining the number and type of trailers required for the
 524

loading doors;
3) minizing the weight-distance of freight across the dock from
unloading to loading doors - a heuristic approach (which is not
described in the paper) is used to solve the problem.
At the time of the report's publication, the system was about to be
installed at all breakbulk facilities of Yellow Freight System Inc., a
large US motor-carrier. Although this company has recognized the
potential benefits of such a system, we cannot comment objectively
on its value since no results on its performance seem to have been
reported thus far. Peck ( 1983) has used a quite different approach to
analyze freight breakbulk operations. He has conceived a complex
simulator which processes LTL shipments inside a terminal. This
simulator includes a heuristic which assigns trailers to loading and
unloading doors in such a way as to minimize the total transfer time
of freight from one trailer to another. To our knowledge, Peck's
highly theoretical system has never been validated in a real world
situation - as a matter of fact, a procedure was developed to generate a
shipment data base in order to test the simulator.
Powell (1985, 1986b, c) and Powell and Simiio (1986) have worked on
a very specific problem occurring at breakbulk terminals: the
waiting of freight, at loading docks, before departure on the next
outbound vehicle. Powell (1985) has first studied several vehicle
dispatching strategies in the context of bulk arrival, bulk service
queues. These strategies are based on the following rules:
1) a vehicle may be held until the queue (Le. the amount of freight
at loading docks) reaches a specified minimum - this policy is
known as "the general bulk service rule";
2) a vehicle departure may be cancelled if the queue length is below
the minimum required.
Many variants of these policies were considered by Powell. Using
transform methods, the author has developed the first two moments of
the queue length distribution. An exact expression for the mean
 525

waiting time of freight on docks and an approximation of the

variance were then derived from these moments. The results obtained
were used to investigate the relative performance of the dispatching
strategies considered, both in terms of costs and levels of service.
Powell (1986b) has later proposed approximate expressions for the
above queuing parameters, which are easier to evaluate than the
previous ones; they are estimated by regression techniques. As Powell
pointed out, these expressions may be implemented in large scale
network design models - such as Roy's tactical model (see next
section) for which the need to quickly estimate delays is
particularly important. Let us mention finally the iterative
procedures of Powell (1986c) and of Powell and Simlio (1986) which
describe queue length distributions respectively for stationnary
(with Poisson and non-Poisson arrivals) and transient (such as
time-dependent arrival rates) bulk arrival, bulk service queues. The
procedures are based either on numerical convolution algorithms for
stationary processes, or on discrete time recursion techniques for the
transient ones. They allow the computation of several performance
measures not generally obtainable from transform methods (Powell,
1986c), such as the probability that a shipment will leave on the nth
vehicle. All this work on queuing problems is still at the stage of
research: many questions relating to numerical implementation and
performance are actually under study (Powell, 1986c).
A last problem encountered at the operational planning level is the
scheduling of in-vehicle crew, which is highly related to the routing
and scheduling of trucks. Rousseau (1984) has recently published a
review and state of the art on such problems. However, we have found
nowhere reported applications of existing models for intercity
freight carriers.
 526

3.3 Tactical Planning

One of the main mid term problems facing LTL carriers is without
any doubt the determination of the transportation - or load - plan for
the next coming months. Powell (1986d) defines this problem as the
specification of how freight should be routed (and consolidated) over
the network, given a set of direct services between terminals. This
routing is done by minimizing transportation and handling costs
while improving - or at least maintaining - preset levels of service.
The working out of a good load plan must consider the three following
interrelated subproblems:
1) the service network design, i.e. the selection of routes on which
carrier services will be offered and the determination of the
characteristics of each service such as its mode, speed and
frequency (number of vehicle departures on a given route per
planning period);
2) the traffic distribution, i.e. for each origin-destination pair (or
traffic class) with a positive traffic demand, which sequence of
services will be used to move freight and which terminals it will
pass through;
3) the empty vehicle movements, i.e. the determination of empty
movements required to establish the balance between the
number of vehicles departing and those arriving at each
originating terminal in the network.
One of the first attempts to model the load planning problem is the
development of a "network operations evaluator" by Terziev,
Richardson and Roberts (1978). This evaluator is a supply model
which takes into account all the activities of a carrier, from pickup of
shipments to their delivery, including freight handling at breakbulk
facilities and intercity movements. It was designed to help planners
with the evaluation of global operating strategies by estimating their
impact on operation costs and level of service (i.e. service rapidity
 527

and reliability). The basic inputs needed to run the evaluator are the
following:
1) the network configuration, i.e. the characteristics of each
terminal and the distance between all terminals;
2) an operating strategy, consisting of:
i) the routing of freight through the network from its origin
to its destination;
ii) service frequencies along with the conditions under which
they can be modified;
iii) the number of men and vehicles available to handle peak
periods;
iv) and finally, the assignment of linehaul responsibilities to
terminals;
3) for each traffic class, the demand probability distribution (which
gives the probability that a certain volume of freight might be
shipped on any given day of the week).
All these data allow the model to evaluate:
1) the distribution of transit times for each terminal;
2) the number of linehaul vehicles required at each terminal;
3) all the costs related to intercity freight transportation, freight
handling at each terminal as well as pickup and delivery
activities.
Unfortunately, it appears that this evaluator has never been used
nor even tested with actual data.
The same type of modeling approach has been adopted by Barker,
Sharon and Sen (1981) for a large American motor-carrier, ANR
Freight Systems Inc. Their model can be used in interactive mode and,
as the previous one, measures the outcome of alternative operating
plans in terms of costs and level of service. The following data are
required to run the model:
1) the LTL volume to be hauled on average day for each traffic class;
2) the intercity transportation costs for each traffic leg (i.e.
 528

service) as well as freight handling costs for each breakbulk

terminal;
3) truck capacities for each traffic leg;
4) the levels of service required for each traffic class.
Given this set of data, the authors have first looked at the possibility
of creating an optimization model in order to produce the load plan
which would convey shipments at least cost while maximizing service
quality. They have soon given up this idea when considering the
complex task of solving a large nonlinear optimization model at
reasonable cost within the time frame set by the carrier. The authors
have therefore developed an evaluation model which can assist the
dispatchers in the mid-term (and even short-term) planning of
i.ntercity freight transportation, given the load plan currently in use.
The model works in the following way:
1) using the load plan, the model consolidates all shipments passing
through breakbulk terminals in order to determine the
frequency of each service. This number is computed by
considering the maximum frequency required
i) to physically move the freight,
or ii) to meet service requirements.
2) having moved the freight, the model determines for each
terminal the number of trucks required to balance the network.
This balancing procedure is done with linear programming.
3) the last step is an analysis of each itinerary used to move freight
from its origin to its destination; it is carried out in the following
manner:
i) for each traffic class characterized by a direct itinerary
(i.e. without intermediate stops at terminals), the model
tries to find a better itinerary (less costly or with higher
service standards) via breakbulk terminals;
ii) for all other traffic classes (Le. those using an indirect
route), the model indicates whether it is better to route
 529

freight through a direct itinerary.

At the end of a session, various reports may be produced on the
performance of the system, such as statistics on vehicle utilization or
on terminal activity, transportation and freight handling costs as
well as levels of service provided to customers. In the same paper,
Barker, Sharon and Sen (1981) propose a procedure aimed at the
management of TL services, based on the vehicle imbalance
generated by LTL shipments transportation (evaluated by the above
model), as well as on TL demand estimated from historical data. The
overall system has proved to be highly profitable to ANR Freight
Systems Inc., as indicated by some figures on its utilization reported
by the authors. In particular, savings of about 8.7 million US dollars
have been achieved in 1980 by this carrier, as a result of management
decisions evaluated by the model. No other results seem to have been
published since that time.
The main characteristic of the two above-mentioned models is their
descriptive nature. Although they allow planners to evaluate their
transportation strategies in measuring the trade-offs between
operating costs and service quality, these models offer poor assistance
in the determination of an optimal transportation plan. In addition,
they do not take advantage of "the computer's ability to identify and
compare thousands of possible alternative plans" (Powell and Sheffi,
1983).
A global optimization modeling approach is, in our opinion, more
appropriate for the load planning problem. Powell and Sheffi (1983)
agree with our view, as they have proposed a network optimization
model to solve the problem. Their model was later extended and the
solution method improved (Powell, 1986d) in order to be installed as a
computer interactive package at a large L TL firm, Ryder/PIE
Nationwide (Powell and Sheffi, 1986a). The formulation yields a large
mixed integer programming problem which takes into account the
design of the service network as well as the traffic routing and the
 530

empty balancing process. The optimal load plan is obtained by

minimizing the total linehaul and handling cost while ensuring that
satisfactory levels of service are provided.
The main assumption underlying the model concerns the way
service frequencies are expressed as a function of the volume carried
on each link of the network:
i) trucks are dispatched on a go-when-filled basis provided that
the volume of freight they must convey per week is
sufficiently important;
ii) whenever the number of trailerloads of freight to move is
below a given minimum, the number of trucks dispatched is
equal to that minimum.
This function is written as follows:
F ij (x) = number of trucks moving from terminals i to j, per week

X .•
')
if x··
')
> M··I)
{

M ij otherwise.

where Xij is the total flow (in trailerloads of freight per week)
moving from terminals i to j - (i,j) defines a transportation
service of the network, and M ij is the minimum frequency for
service (i,j).
Note that Xij is a decision variable of the model. A direct implication
of this approach is that service frequency (which is not constrained
to be integer) is not an explicit variable in the model. In addition, and
more importantly, the use of minimum frequencies is the way the
authors have chosen to handle service requirements, as it guarantees
that freight will never wait too long for the next trailer departure at a
terminal. Note that this approach does not take into account transit
 531

time 1 of freight as well as service reliability. However, the authors

seem to be contended with it as it is "in fact very realistic in terms of
how many carriers actually operate" (Powell and Sheffi, 1986b).
This assumption on levels of service greatly simplifies the
formulation of the problem and has allowed the authors to develop an
efficient solution algorithm. It is based on a local improvement
heuristic which drops and adds links (i.e. services) to a given initial
network (usually the current service network of the carrier) using a
specific sequencing logic. This logic depends:
1) on the type of link considered (i.e. breakbulk to breakbulk,
breakbulk to end-of-line and vice versa) and on the modification
rule (addition or deletion of a link), which implies six possible
sets of changes;
2) on the order with which the search is conducted for a given set
of links; for the dropping procedure, links are sorted in
increasing order of the flow they are carrying, while for the
addition procedure, they are ordered beginning with the link
showing the largest estimated savings (in terms of operating
costs) when included in the service network.
A change is carried out if it decreases the overall system cost.
After each modification in the service network, flow is rerouted
using a decomposition method and an adaptation of a shortest path
algorithm. The decomposition is based on the assumption that the
routing of freight from all points in the network into a destination
must form a tree. Such an assumption implies that freight at
breakbulk 1 which has the same final destination (say terminal k)
will follow the same route through the network from terminals i to k,
regardless of the point of origin of freight. While this method clearly
reduces the size of the model, it also takes away flexibility with regard

1 Constraints related to transit times were part of the first version of the
model (Powell and Sheffi, 1983); for unknown reasons, they are no longer
present in the current version (Powell, 1986d).
 532

to the choice of routes that may be used by freight. To determine the

routing of freight, it is assumed that shipments follow the least unit
cost path subject to routing overrides which are defined as follows:

1 if freight at i destined for s must move next over

the link to j,
o·~
lJ
=
o if it should follow the least cost path to s.

These variables must be introduced to take into account the fixed

cost associated with each service, as standard shortest path algorithms
are not designed to handle this particular type of cost. Note that the
fixed costs are induced by the minimum service frequency
requirements. A family of labeling procedures were developed to
handle overrides; they are all based on the following approach: for
each link where the current flow is below the minimum, the
overrides are modified in order to increase the flow on the link while
decreasing the total system cost. All procedures start with the link for
which the minimum frequency is the most violated.
After the rerouting has been performed, the empty balancing
problem is solved using a primal network simplex code (its
formulation turns out to be a simple linear minimum cost network
flow problem). The balancing takes into account TL movements which
are determined by a shortest path algorithm (Powell and Sheffi,
1986b).
Numerical experiments carried out by Powell (1986d) on a network
composed of 12 breakbulk and 128 end-of-line terminals suggest that
the solution method works efficiently. In the same paper, the author
concludes by mentioning some important issues that remain to be
explored, such as the inclusion of constraints that deal explicity with
levels of service requirements.
The model is now part of a decision support system named APOLLO
which has been installed at Ryder/PIE Nationwide (Powell and Sheffi,
1986a); substantial savings have followed from its utilization. Some
 533

important issues related to its implementation are discussed in depth

in a paper by Powell and Sheffi (1986b). One of the main features of
APOLLO is its capability to deal with unprogrammable decision rules
regarding the service network design: the planner may decide in an
interactive manner where direct services should be offered, given
suggestions provided by the model.
Despite the apparent success of APOLLO for solving the load
planning problem, several aspects of intercity freight transportation
systems were not considered by Powell and Sheffi. Note first that
service frequencies are not explicit decision variables in the model;
they are more an output of it as they are estimated from the total flow
(in trailerloads) carried on each link of the service network (see the
relation shown above). Moreover, because the variable flows are not
restricted to take on integer values only, the model may provide the
planner with the following rule which is rather difficult to apply:
"send 7 .21 trucks per week from terminals i to j" . In addition, the
model ignores congestion phenomena which happen at breakbulk
terminals when for instance the volume to classify or the number of
trucks to unload increase. Finally, as mentioned earlier, service
characteristics such as transit time of freight and its variability are
not considered in the model.
Recently, Crainic and Rousseau (1985) have proposed a general
modeling framework for the medium-term planning problem of
multicommodity freight transportation systems which takes into
account the above-mentioned elements missing from Powell and
Sheffi's model. It was first used to solve a complex rail application
(Crainic, Ferland and Rousseau, 1984) and later adapted by Roy (1984)
for LTL problems. An overview of the methodology as well as the
general design of the planning tool currently under development are
presented in a paper by Crainic and Roy (1987).
The model of Roy, named NETPLAN, is intended to assist
motor-carriers in their decision-making process concerning the
 534

design of the service network, the routing of freight and the empty
vehicles balancing problem. It is formulated as a non-linear mixed
integer programming problem, where service frequencies as well as
the volume of freight moving on each route (or itinerary) through
the network are the main decision variables. Their values are
determined by minimizing a total system cost (defined below) while
satisfying the demand for transportation, specified for each
origin-destination pair (or traffic class), and integrality constraints
on frequencies; note also that the decision variables are required to
be nonnegative. The trade-offs to be made between operating costs
and both speed and reliability of service are explicitly considered by
NETPLAN at the objective function level. Thus, the main function of
NETPLAN is to try to give the best service at minimum cost.
The total system cost is the sum of:
1) the intercity transportation costs, which may vary according to
the type of services used and their frequencies;
2) the freight consolidation costs, which depend on the amount of
freight handled at breakbulk terminals;
3) the capacity penalty costs, which penalize the over-utilization of
trailer capacity for each transportation service;
4) the service penalty costs, which are incurred when service
performance standards are not met, considering both the mean
and variance of planned transit times for each traffic class.
Service penalty costs are modeled by paying attention to the
estimation of delays occuring at terminals and over the road. These
delays fall into one of the following four categories:
1) the intercity transportation time for each service. It is usually
estimated from historical data;
2) the waiting time of vehicles at each terminal before their
unloading. This delay depends on the size and configuration of
the terminal as well as on the productivity of the employees
assigned to handling operations. Its estimation is based on
 535

queuing theory;
3) the time incurred to unload and classify freight at each terminal.
It is expressed as a function of the average volume of freight
carried by a vehicle (determined by NETPLAN) and of the
unloading rate at the terminal in volume units per hour;
4) the frequency delay for each service, i.e. the time spent by
freight at loading docks waiting for the next vehicle departure.
This delay, which is obtained from queuing analysis methods,
depends on the service capacity as well as on its utilization rate.
The transit time for a given itinerary is computed by summing
frequency delays and transportation times related to each service
used, as well as all delays incurred at each terminal encountered. For
a more detailed description of all these terms, see the work by Roy
(1984).
The modeling structure of NETPLAN is as follows:

Minimize { 2. C! FI (transportation costs)

(F,X) 7

+ ~ Cf ~ (freight consolidation
J J', costs)

+ 1 cr {min [0, 0.9-Xz / a, If ]}2 (capacity penalty

costs)

+ L ~ C/n
m
xr {min[O, S m- E (T,/: ) -n (J(T'f )])2} (service
penalty
costs
subject to

t X'f = d"' for all m (demand constraints)

~m ~ 0 for all m and k

O~ F/~ E Z and F Z integer for all I
where decision variables are:
Fz , the frequency of service I,
and Xi ' XI ' and Xr
, the volumes of freight handled at
 536

terminal j, moved by service l, and route

through the k t h itinerary for traffic
class m respectively,
and where:
C1t is the transportation unit cost for service 1,

C9 the consolidation unit cost at terminal j,

]

cq the capacity penalty unit cost for service 1 (usually set

to C{),
(J.l the average capacity of vehicles assigned to service l,
CmS the service penalty unit cost for traffic class m,
Sm the required service standard time for traffic class m,
r,m the transit time of freight moving on the kth itinerary
k
of traffic class m (it depends both on the X and the F
variables),
E(Tk') the average transit time and (J (Tk') its standard
deviation,
n a positive number which depends on the required
service reliability,
the demand for traffic class m,
and El an upper bound on the frequency of service l.
Other types of constraints may be easily added to the model through
the use of penalty costs at the objective function level, such as
restrictions on the utilization of given types of vehicles. NETPLAN can
also take into account other specific operations of LTL carriers, as for
instance the transportation of baseloads 1 when the LTL volume on a
given link of the service network is insufficient to justify the regular
use of vehicles in order to maintain high service standards. Note
finally that the model may be extended to handle several types of
products for the planning of the activities of carriers specialized in

1 A baseload is a shipment which takes up about half a trailer capacity. It

remains always in the "nose" of the trailer (the unused space may be filled
up with LTL shipments) and it is considered as a TL shipment; it is
therefore never handled at terminals.
 537

the transportation of parcels. All these modeling issues are treated in

a paper by Delorme and Roy (1988).
One of the main characteristics of NETPLAN's formulation is its large
size. To solve such a problem, Crainic (1982) has developed an
algorithm based on a decomposition scheme, which makes use of its
particular structure. The solution method works alternatively on the
following two subproblems:
1) Service network design: given a fixed traffic distribution,
frequencies are modified, one at a time, to improve the objective.
If this is not possible, the algorithm stops. Finite differences are
used to determine which frequencies have to be changed.
2) Traffic routing and distribution: given service frequencies, the
optimal traffic distribution is determined by a decomposition
procedure which considers cyclically each traffic class, while all
others are kept fixed. For each subproblem, a new itinerary is
first generated by a shortest path algorithm; marginal costs are
used to measure the "lenght" of an itinerary. Then, the traffic
distribution is reoptimized using a modified steepest descent
technique.
The algorithm is described in more details and its performance
analyzed in a paper by Crainic and Rousseau (1985).
After the above problem has been solved, the balance between the
number of trucks leaving and those arriving at each terminal in the
network must be re-established. This is done by a procedure developed
by Roy (1984) which calls for the addition or the elimination of
frequencies required to solve the imbalance while minimizing total
costs. The procedure is based on a modified version of the
transportation simplex method. It is flexible enough to take into
account the possibility of soliciting return loads (Le. TL shipments)
and adjust the imbalance forecast accordingly.
NETPLAN was first tested by Roy (1984) on actual data for October
1982 from CN Express, the LTL transportation division of Canadian
 538

National. CN Express was then operating a network of 34 terminals,

serving a total of 959 origin-destination pairs (traffic classes) all
across Canada with some 289 different services. These services are
determined by their O-D pair and vary according to equipment
ownership and capacity, transportation mode (truck, piggyback,
container or boxcar) and responsibility for returning the equipment
to its origin. When comparing the model's results in terms of both
operating costs and service with the company's actual performance
for October 1982, Roy has found that the percentage of traffic classes
provided with a reliable service could be increased significantly
while slightly reducing total operating costs. It is fair to say that CN
Express was desperately trying to reduce its operating costs during
that period and its rather poor service performance was due to a lack
of sufficient transportation capacity which resulted in freight being
left behind on the terminal floor. Nevertheless, through better
routing, NETPLAN proposed a far better operating plan by providing
sufficient capacity to move the freight while maintaining costs at a
minimum. Several sensitivity analyses were also performed by Roy on
this set of data, such as variations in the demand for given traffic
classes or in the service penalty costs. All these analyses confirmed
the good behaviour of NETPLAN and the quality of its solutions.
More recently, the model has tested on a different network with
actual data provided by Transport Brazeau Inc., a large Canadian
motor-carrier. The results, reported by Tassoni (1987) in her master's
thesis under the supervision of Delorme and Roy, show that
significant improvements may be achieved in both operating costs
and service standards (Le. speed and reliability) when comparing the
model's solution to the actual company performance for March 1985
and April 1986. A second experimental study is presently under way
in order to test a new version of NETPLAN which considers the
possibility to move baseloads, a widespread activity at Transport
Brazeau Inc. The results of this study will be published in the ~ear
 539

future by Roy and Delorme. Note finally that NETPLAN should be

installed at this motor-carrier in the coming year.
NETPLAN can also be used to assist motor-carriers in their strategic
decision-making process by evaluating the consequences of various
scenarios involving the terminal network. One such application is the
Canada Post Corporation's network reconfiguration study which is
presently under way. The model has been adapted to deal with the
transportation of several types of products (first class mail, parcels,
etc.) in a service network composed of 49 terminals (processing
plants) and 8 transportation modes (from planes to trucks) all across
Canada. Preliminary results suggest that NETPLAN works quite well.
To be really effective in a working environment, NETPLAN should
be part of a comprehensive planning tool combining a data bank
together with procedures to access and analyze it, procedures for
post-optimal analysis and an interactive-graphics capability to
display and help study data and results. A research group at the
Centre de recherche sur les transports (Universite de Montreal) is
currently developing and experimenting these types of procedures -
see, for instance, the work of Crainic and Mondou (1986) on the
graphic representation of data.
Other valuable studies have been conducted on service network
design and freight routing problems, such as the work of
Balakrishnan and Graves (1985) who have modeled economies of scale
in transportation, resulting from the consolidation of LTL shipments.
This was done using a piecewise-linear concave cost function for
each link of the service network. This function is embedded in a
multicommodity network flow model, which optimizes the routing of
freight in the network. The solution method is based on a Lagrangean
relaxation technique. To our knowledge, the model was never applied
to real situations in the trucking industry. Let's note also the
bounding procedures of Lamar, Sheffi and Powell (1984) for fixed
charge, multicommodity network design problems. These procedures
 540

are incorporated in an implicit enumeration algorithm which solve

the load planning problem of LTL carriers. The modeling approach
was later extended by Lamar and Sheffi (1985) to take into account
link cost functions that are piecewise convex (in addition to the fixed
charge). Their solution method can however handle only very small
problems, as Powell and Sheffi (1986a) have pointed out. Another
study which is closely related to LTL planning problems is the work of
Blumenfeld, Burns et al. (1985) which consists of an analysis of the
trade-offs to be made between transportation, inventory and
production costs on freight networks, in order to determine optimal
routes and shipment sizes. The networks considered involve direct
shipping, or shipping through a breakbulk terminal. Simple
formulas were developed which take into account concave cost
functions. This study opens up interesting perspectives for the design
of a tactical planning tool for firms who control both the production
and the transportation of some goods.
Let us finish this chapter by mentioning the important contribution
of Turnquist and Jordan (1986) to the solving of another medium-term
planning problem in the trucking industry, the fleet sizing problem.
They have developed a stochastic model which minimizes the number
of containers used to ship parts from a manufacturing plant to
several assembly plants. The production cycle is assumed
deterministic while travel times are not known with certainty. The
model helps in analyzing the trade-offs between the probability of
running short of containers and the containers fleet size. The authors
believe that their methodology could be adapted to situations occuring
in the TL carrier industry. As for LTL carriers, it seems that there is
no specific models on fleet sizing in the literature; but as Turnquist
and Jordan (1986) have pointed out (see also Turnquist, 1985), there
exist many deterministic models for airlines and mass transit systems
that could be applied to the above-mentioned problem - see, for
example, the work of Ceder and Stern (1981) on a bus fleet planning
 541

problem.

4. CONCLUDING REMARKS

A review of existing planning models for motor-carriers operations

reveals that most research efforts and applications have really begun
in the late 1970's under the strong influence of the deregulation
movement in the United States. This is particularly evident in the case
of strategic and tactical planning models which were not really
needed until recently when motor-carriers perceived the importance
of careful operations planning in order to successfully manage
cost/service trade-offs in a competitive industry.
This paper shows that in spite of the relatively recent interest of
operational researchers for the motor-carrier industry, major
accomplishments in the development and application of planning
models have been reported in the literature. However, there are still
important areas of research opportunities for the future. At the
strategic level, for example, more efforts are required to provide
motor-carriers with models and decision support systems that will
assist them with facility location, network configuration and service
policy decisions. At the tactical level, fleet sizing under stochastic
conditions offers another promising research opportunity. As a
matter of fact, Couillard (1987) has just recently completed a Ph.D.
thesis proposing a Decision Support System for the fleet planning
problem in the motor-carrier industry.
Further research is also needed at the tactical level in order to
properly adjust existing planning models to actual motor-carriers
operations such as the use of a single tractor to pull two or even three
trailers on some highways, the use of baseloads and other loading
practices that increase equipment utilization, etc.
Finally, research is currently underway at the "Centre de recherche
 542

sur les transports" (Universite de Montreal) in order to 1) develop a

better (graphic) interface between planning models and their users,
2) propose solutions to problems closely related to the tactical
planning level, such as the crew scheduling (planning of bids) and
empty vehicle returns problems and 3) develop a real-time
dispatching tool for LTL carriers.

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 SEAPORT SYSTEMS STRATEGIC PLANNING

Giuseppe Vito

Istituto di Ricerche sulle Attivita Terziarie - Consiglio Nazionale delle

Ricerche - Viale Gramsci, 5 - 80122 Napoli - Italia

The principal objective of this paper is to underline the effectiveness of

the application of quantitative methods to seaport systems planning.
After recalling the main features of port co-operation and reviewing
significative examples of the administrative conditions under which port
co-operation must take place in practice, lack of utilization of strategic
planning tools and lack of co-ordination among boards deputed to
investment decisions are identified as the major obstacles to the effective
development of seaport systems in countries where the public authority
involvement in port administration is great.
In this connection, the general features of a mathematical model based on
linear programming and finalized to assign priorities to a set of
investment projects in seaport facilities or, in turn, to evaluate the ratio
supply/demand of port services of a Country are described.
Then, the Italian case is briefly examined and the principal results of the
application of the model in such a way to obtain the ratio supply/demand
of services furnished by Italian seaport systems as identified in the
official programmatic plan of Italian transport system are presented.

1. INTRODUCTION

The concept of seaport system has been subjected to various

interpretations and to remarkable evolution during the time.
From a regional science point of view, seaport system is essentially
regarded at as a set of ports located in a certain coastal zone and
co-operating in some way and to some extent.
From another point of view, the seaport system is identified with the
port as a system, characterized by several sub-systems including, for
example, navigation aid system, quay handling and transfer system,
co-ordination with inland transport, etc.
This paper does not attempt to deal with the problem of a single port
planning, but rather it is intended to give a contribution to the
 547

problem of national seaport systems planning, regarding at the

seaport system as a set of ports which face the problems of co-
ordination and co-operation in order to optimize their own
performances.
As regards the functionalistic approach established in the regional
sciences in the mid-Fifties, Vallega (1985) underlines that the concept
of port system has been evolving as a functionalistic one, in which
the relevant aspect is the co-ordination of functions and structures of
ports however connected by political-istitutional or physical factors.
The exigence showed by the maritime sector in the early Seventies
was just the functional co-ordination among ports belonging to a
Country and/or located in a certain port range. This exigence was
induced by the considerable transformations that had taken place in
maritime transport since after the second world war.
In this connection, three periods can be identified as far as the
technological innovation process which involves maritime transport
sector is concerned.
During the first decade following the second world war, the
international connections among Countries were re-established and,
as pointed out by Suykens (1983), maritime traffic rapidly increased
without any significant technological innovation in port sector.
In the second period, extended up to the late Sixties, the quick
economic development induced a real explosion of maritime transport
giving rise to port congestion. In that time, transportation cost
weighed heavily on total cost of commodities for the low cost of raw
materials. This started significative efforts of technological
innovation both as regards the ships (dimensional growth of tankers,
realization of containers and ro/ro ships) and port terminals, which
were automatized to a large extent with the main objective to reduce
unit transport cost.
Since the early Seventies, the exigence to reduce additional costs
deriving from port congestion speeded up the technological
 548

innovation process in maritime sector which manifested in port

operations automation and in affirmation of container ships and
ro/ro ships. However, the necessity to attain the best projection on
the maritime transport market in a situation of scarcity of resources
to allocate in new investments in port facilities, submitted the
problem of port co-operation and hence the problem of effective
national seaport systems rationalization as a suitable instrument to
contribute to the achievement of economic efficiency of the whole
maritime transport sector.

2. PORT CO-OPERATION

From a systemic point of view, the way ports located along a stretch
of coast develop in such a way as to become a seaport system in a
functionalistic meaning, is effectively explained by the Anyport
model, carried out in the Sixties in Great Britain by the National Port
Council.
The Anyport model as described by Bird (1971) points out 5
significant stages in the attainment of a systemic trim of a set of
ports; in the first one, ports located along a stretch of coast with their
own connections with the hinterland are considered; in the second
stage, both the level of traffic and connections with the hinterland of
some ports improve; in the third stage, some ports develop more
rapidly than other ports and in the fourth stage two ports, eventually
co-operating, affirm. In the last stage, one port assumes the
leadership from a functional point of view and eventually from a
managerial one.
In this way, ports located in a certain port range become a spatial
system (featured by his own inner sites originating traffic, his
transport routes and nodes, etc.) as well as a hierarchically ordered
system.
 549

As the consideration of the Anyport model suggests, co-operation

among ports in a certain port range can take place in the following
areas:
- the area of structures and functions;
- the area of management and organization.
The attainment of co-operation in the two considered areas depends
upon strategic initiatives undertaken by the boards which are
deputed competences in planning investments in new structures or
in reconverting the existing ones and in undertaking port pricing
policy.
Button (1979) underlines that suitable pricing and investment
policies represent topics attracting increasing interest from
economists. This paper does not attempt to describe the consequences
of the adoption of a definite port pricing policy on the distribution of
traffic among ports, but it deals with consequences of investment
decisions on such distribution.
The main features of co-operation among ports in the areas under
consideration are as follows.
In the functional-structural area, co-operation is made possible by
the optimal distribution of the structures among ports located in a
certain port range and/or belonging to a Country with regard to the
characteristics of traffic and the way of handling cargoes.
This viewpoint, strictly functionalistic in the sense described above,
meets a set of difficulties both on a theoretical basis or on a practical
one. In fact, the complexity of a theoretical approach to a model
pursuing the settlement of the problem to optimize the distribution of
port functions along a definite stretch of coast (or, in an even more
complex scenery, of a whole Country) appears evident considering
both the number of variables involved and the conceptual framework
of the model.
On a practical basis, the obstacles that interpose to the optimization
of the functions distribution among ports derive from many factors,
 550

mainly from the various development policies followed by port

administrators and the consequent distribution of the existing
facilities, the productive structure of hinterland, the peculiar
development path of the area in which ports are located and so on.
In the section 5 of this paper the general features of a mathematical
model based on linear programming and accomplished in order to
approach the problem of such an optimization are discussed.
In the area of management and organization the principal feature
of port co-operation is represented by functional co-ordination
between port owners (and/or managers) in order to reach the
objective of the optimal projection on maritime transport market.
Co-operation in this area can develop on many levels, not excluding
co-ordination on a local level in the examination of the development
plans of each port.
As already pointed out, the greater role in creating the basic
conditions for effective co-operation in the areas described above is
played by the boards which are deputed the investment decisions and
the port pricing policy.
In this connection, primary significance is assumed by the type of
administration of ports. In particular, great importance is assumed by
the subject on which financial load for structures and primary
infrastructures realization falls on; if such expenses are sub stained
by the Government or the public board managing the port (which
means, to some extent, that port operations are carryied out in order
to maximize the community benefits), investment decisions may take
place on a central level and they can concern the set of ports
belonging to a Country as well as to the same stretch of coast. In this
case, the relevant problem is the optimal allocation of resources in
new investments, solvable by means of appropriate centralized
planning processes.
If the expenses are substained by the private board managing the
port (which means that port operations are generally performed in
 551

such a way to be profitable) co-operation may take place on a local

level between boards managing the various ports; in this case, the
aim of co-operation is the optimal projection on maritime transport
market of ports located in a certain port range avoiding interport
competition; in this case, co-operation can take place on a local level
in the area of management and organization.

3. THE ADMINISTRATIVE FRAMEWORK

In order to point out the large variety of situations that can occur in
practice as far as the problem of port administration is concerned, it
is effective to refer to the subdivision of seaport functions as to those
performed by the infrastructures, by the sovrastructures, by the
additional equipments. In fact, in some Countries, the public authority
involvment in port administration is limited to the production of the
infrastructural services while in some other Countries such
involvment extends to the sovrastructural services and even to the
additional ones, as in Communist Countries and in some developing
Countries.
Port administration forms which occur in practice are effectively
identified by Karmon (1982) as follows:
- national or provincial government administration;
- autonomous public board administration (Port Authority);
- municipal administration;
- private administration;
- Maritime Development Area Administration (MIDA's).
Moreover the occurence of a combination of forms is not
infrequent.
However, there are very few seaports that are wholly in the private
sector, as underlined by Goss (1981).
Verhoeff (1981) points out that the main cause of the involvment of
 552

public authorities in seaport administration all over the world derives

from the great national or regional importance of a port area for
which public authorities cannot accept local monopolies. A second
reason is found in the characteristics of port infrastructures, whose
operating costs are small in comparison with the capital cost of the
infrastructures themselves.
For these reasons, even in Countries such as USA and UK, where
private firms play a major role in port terminals administration there
is a great involvment of public authorities in port administration.
Addressing attention to the Western European Countries, their
preliminary classification results effective with respect to the
intensity of such an involvement. As underlined by Bird (1982), it is
quite low in the United Kingdom and in Denmark, where ports
generally operate on a commercial basis, that is the production of
port services should be profitable. In the other EEC Countries, such an
intensity is generally higher, port administration generally
pursuing the objective to maximize the social benefit for the
communi ty. In such Countries port development is generally
financed by central Government subsidies.
In order to point out the variety of situations that occur in practice,
some examples of higher and lower involvment of public authority in
port administration, as deriving from some EEC countries, follow.
French ports of Dunkirk, Le Havre, Rouen, Nantes-St. Nazaire,
Bordeaux and Marseilles, although autonomous from a managerial
point of view depend to a large extent on the Department of Ci vii
Works. As far as primary infrastructures, such as docks, are
concerned, financial load of port investments falls on National
Government for an amount equivalent to 80%, the remaining share
falling on the Port Authority. For the other infrastructures, such as
quays, financial load reduces to 60%.
Sovrastructures are generally managed by private firms. The other
French ports are directly administrated by Central Government by
 553

means of a director.
Belgian Antwerp and Ostend ports are directly administrated by
Municipality, while Gand port is administrated by a municipal board.
In such ports financial load for primary infrastructures falls on the
state for an amount equivalent to 100%; subsidies for the other
infrastructures vary from 60% to 100%, the eventual remaining share
falling on Municipality. In the three considered ports,
infrastructures repairing and maintaining is completely devoted to
the Municipality. An analogous situation can be noticed in Zeebrugge,
where the administration is performed by an autonomus public board:
the expenses for the infrastructures are sustained by the National
Government and the expenses for their maintaining and repairing
are sustained by the Port Authority. In all Belgian ports,
sovrastructures management is performed by private firms.
The Dutch ports of Rotterdam and Amsterdam are administrated by
munipal boards and National Government subsidies are limited to 60%
of the total expenses concerning the primary infrastructures. The
remaining expenses and shares fall on Municipal Board;
administrating the ports; sovrastructure management is performed
by private firms, as handling operations too.
In Italy ports are generally owned and managed by public boards
and obtain up to 80% of financial resources to allocate in new
investments by the National Government.
To the italian situation is devoted the section 6 of the present paper.

4. SEAPORT SYSTEM STRATEGIC PLANNING

As already pointed out, there are only a few examples of seaports

that are wholly in the private sector. Hence, for the importance of
Public Authorities involvment in port administration throughout the
World, programming efficient seaport systems results an essentially
 554

political activity, as raised again by Starkie (1976) as regards the

whole transport system of a country.
However, the political area of programming results generally far
from the area of managing resources and from that of carrying out
the main lines of the policy. In the political area only basic criteria of
development policy which the Government means to undertake and
general objectives pursued in the sector are fixed. Such criteria and
objectives must be taken into account and effective tools for their
accomplishment in terms of priorities and scheduling must be found.
Strategic planning, regarded in its moment of determining the
optimal resources allocation in new investments, represents a basic
presupposition of such an activity.
However, as underlined by Bianco (1987) the necessity of feedback
between strategic planning and political programming in such a way
to adjournate the planning process on the basis of changes or
adjoustments of the initial objectives is evident.
An effective centralized long term planning seems to have become
very important in Countries where the financial load for new port
investments falls on the National Government in a preponderant
share for the possibility, also recalled by Goodman (1984) of
centralized planning to internalize some external economies and so
remedy some inefficiencies. In the case of private port
administration, the effectiveness of strategic planning in
determining the optimal allocation of resources depends upon the
degree of co-ordination among private boards on which the expenses
for port development fall.
In the view of this paper the main objective of. long term planning
is the optimal distribution of structures and functions among ports
belonging to a Country with regard to the foreseeable level of
transport demand with the purpose to maximize the performances of
the whole system.
According to Goss (1967) investment decisions in port planning are
 555

concerned with the whether, how, when and where any given
proposal shall be carried out and, as underlined by the same Goss
(1970), "there is no commonly accepted method of appraising
proposals for investments in port facilities ... in some instances this
lack of systematic appraisal techniques appears to have led to under
investment, over-investment or misplaced and mistimed
investments" .
The lack of quantitative techniques utilization in tactical and
strategical planning in maritime transport sector has been also
pointed out by Ferrara (1979), who performed an effective model for
the financial evaluation of alternative investment projects in ships.
Imakita (1978) performs a careful review of quantitative methods
applied to the seaport sector with the aim to obtain the operational
consequences of port investments and to evaluate, as accurately as
possible, their systemic implications.
The application of quantitative methods to the problem of multi-port
planning has been extensively studied by Eidem (1974), who carried
out models developed to allow simulations of several ports
simultaneously.
In order to approach the general problem of national seaport
systems planning, the Italian National Research Council (C.N.R.)
accomplished a mathematical model based on linear programming
finalized to the optimization of public resources allocation in port
investments in such a way to determine the optimal distribution of
port terminals among ports belonging to a Country (or, in a
sub-systemic view, among ports located in a certain port range).

5. A STRATEGIC PLANNING MODEL

The specific aim of the proposed model is to assign priorities to a set

of investment projects in new port facilities or in technological
adjournment of the existing ones and hence to maximize the economic
 556

efficiency of public investments under the hypotesis that the main

purpose of the economic policy in the sector is to maximize the
benefits for the community. The consideration of the section 3
exposition indicates that this condition seems to be met in countries
where public authority involvment in port administration is great, as
in many EEC countries.
An alternative performance of the model consists in verifying the
relation between supply and demand of seaport services; in this case,
the primary aim of the model is the identification of foreseeable lack
of balance between demand and supply of seaport services to utilize as
the basis of the programming policy in the sector. In this way, the
problem to give rise to feedback between political programming and
strategic planning should be approached.
As already pointed out, the implicit assumption of the model is
represented by the presupposition of a sector policy finalized to the
maximization of the benefits for the community. This implies that the
model can ignore the consequences on the local economic
environments of port investments. The level of detail of the system
representation performed by the model is coherent with such
assumption, therefore the model utilization does not permit the
identification of significative differences among alternative locations
of port facilities in a restricted area, namely the stretch of coast on
which a particular hinterland gravitates.
In this way, the general principle not to simulate by means of a too
detailed model systems characterized by a complex hierarchy of
decisional centers operating on different levels is observed. However,
it is always possible to apply the model to sufficiently complex sub-
systems.
The proposed model utilizes the IBM "MPSX" standard code and it
consists in a single-period linear programming model with
continuous variables. The utilization of such a model implies the
following further simplifications in the representation of the system:
 557

the economies of scale deriving from the increased capacity of

port facilities produced by new investments are not taken into
account;
the choice among alternative investments is performed in a static
manner, that is the model does not consider the possibility to
grade the interventions.
The optimization problem consists in minimizing the cost function
containing all cost variables by determining the optimal distribution
of traffic among ports (or the aggregations of ports considered).
The cost parameters the model takes into account are
port handling costs;
bunker cost;
diesel oil for board services cost;
charter cost;
land transport cost;
investment costs.
The investment to perform in order to increase tha capacity of each
port are determined according to the different alternative ways
traffic can distribute among ports having sufficient capacity.
Inhibiting the activation of such variables makes the model run in
order to furnish the shares of traffic pertinent to each port in the
present situation; this kind of analysis allows the calculation of the
ratio supply/demand of seaport services with reference to the
considered ports.
Flow variables considered by the model are sub-divided with respect
to their national or international (import/export) characteristic. In
this ambit, flows are identified by the kind of commodity, the type of
ship associated to each commodity, the origin and destination sites,
the seaports involved in the transportation process.
As regards the origin and destination sites and the seaports involved
in the transportation process, the levels of disaggregation to adopt
depend on the territorial scale of the model application. This means
 558

that the application of the model with reference to a whole country

allows the consideration of wide territorial aggregates as regards both
the origin/destination areas and the port aggregations; at a sub-
systemic level a more detailed aggregation results effective.
The adoption of a corrispondence between the kind of commodity
and the type of ship implicitly means the utilization of a constraint
expressing the condition that fixed shares of a certain kind of traffic
must be performed by means of a certain type of ship. In the absence
of such a constraint, model should assign all traffic to the cheaper
type of ship, which does not obviously represent the real situation.
The other constraints of the model are represented by the capacity
of each port, by the total volume of traffic between a certain couple
origin/destination, by the share of such a traffic volume pertinent to
the maritime transport.
Port capacity results as a function of the kind of traffic, different
types of traffic differently taking up port resources.
A very simplified version of the model is schematically represented
in figure 1, for the elementary case of two ports, P i and P j' one
commodity k, one kind of ship, a single couple of % areas (each one
exclusively dominated by a single port).
With reference to the simbology adopted in fig. 1, the input data of
the problem are:
B k,h = capacity of port h as regards the commodity k (h = i ,j);
Ik = flow of commodity k between the origin 0 and the
destination 0;
Mk maritime flow of commodity k between the origin 0 and
the destination D.
The upper bounds D 1,h restrict the increase of port capacity Ph
(h= iJ) deriving from new investments to fixed shares of the existing
capacity, as it generally results in practice.
The lower bound D 2 concerns the type of ship and its utilization in
the model imposes that the distribution of traffic among the various
 559

kinds of ships comply with a fixed mix.

The meanings of the coefficients presented in fig. 1 are:
Ak ,h = port operation costs per ton pertinent to the commodity k;
A2 bunker unit cost;
A3 diesel oil unit cost;
A4 charter unit cost;
A5 unit cost of land transport between port Ph and area h;
C·lJ. unit cost of land transport cost between areas i and j;
Co ,h unit investment costs to increase capacity of Ph;
The meaning of the explicative variables are:
C 1,h handling costs;
C2 bunker cost;
C3 diesel oil cost;
C4 charter cost;
CS,h cost of land transport from ports to OlD areas.
The main variables to be determined are:
q iJ maritime flow between ports Pi and P j;
qh traffic volume of port Ph;
zh increase of capacity necessary for port Ph;
liJ inland transport flows between areas i and j, area h beeing
dominated by port Ph'
Of course, q iJ = q i = q j in this case.
Less trivial seaport systems can be traduced in the model simply by
repeating or enlarging the matrix in figure 1 for each couple of ports
and OlD terminals and by using linking equations of flow balance.
Because of its semplicity, the model can be handled quite easily to
simulate the effects of political decisions on the structure of a
complex seaport system both in terms of capacities and operative
costs. Furthermore, it can be managed to attain the optimal allocation
of financial resources for investments in port capacity, i.e. in order to
solve the most important problem in the co-ordinate co-operative
approach to the seaport planning.
 560

.. e0 ..
VARIABLES
10<
0
rIl

.. .. .. .. t:
.. .... ....
Q. ~ >.010<= 0

..
.. rIl .... 0 rIl
e
rIl Q.

- .
rIl
=
~
0 ~ rIl rIl
10< ~
10<
~OOl)e C) rIl
0
C) 0 = ~

. ....
0 0 Q.1o<=~ C) C) ~
10< rIl
Eo<

-.... - ..
~ C) .... 0

..
~ Q. 01) ~
0 Eo< 0 '0
>. U.:.~ > = 10< 10<
G)
C)
'0 10< = 0
....
-
~ '0 .14 0 '0
=
~ ....Q. = =
rIl
....0 ~ =
::s
.£: ~ ::s .£: ~
Q.

EQUATIONS =
1-1
Vl
Port Port :t: III 0 U "J =
1-1

i j i j
Varia· q. q. I.. q .. z . z .
bles I } I, } I" I } C1,h C2 C3 C4 Cs MIN
Economic
function Coeffi· C..
cients IJ Co',I COJ 1 I 1 1 1
Port handling
Ak,I· Ak',} -1 ~ 0
costs

Bunker cost A2 A2 -1 ~ 0

Diesel oil cost A3 A3 -1 ~ 0

Charter cost A4 A4 -1 ~ 0

Land Transport -1 0
AS',I A SJ ~
cost
Po,rt
i +1 -1 ~ B 1';
Capacity
Port +1 -1
j ~ B k,h

Total flow 010 +1 +1 ~ Ik

Total maritime +1 ~ Mk
flow 010
Ship type +1 +1 -2 0
constraint
LOWER BOUND D2
UPPER BOUND C1,1
.. Dl ,I. DIJ

Figure 1. Matrix simplified framework

 561

For this aim, the "static" or "stationary" single period formulation

adopted for the model can be reviewed as related to the long term
optimal design of the system. Time scheduling can be achieved by
using different time horizons and introducing the related scenario
values in the parameters of the model: then, solving the model for
such different periods can give sub-optimal expansion hypothesis of
the system, i.e. investment programmes and capacity evaluations that
are internally coherent.

6. THE IT ALlAN CASE

In Italy there are over 140 seaports of which 94 perform commercial

functions. From an istitutional point of view ports are generally
owned and managed by public boards and obtain Government
contributions up to 80% in order to perform their own development
plans.
As the result of the lack of co-ordination among the Italian boards
deputed to investment decisions, the Italian ports, long to form a
seaport system in a functionalistic meaning, show a heavy desordered
situation. In fact, the distribution of seaport terminals along the
Italian coasts seems to be incoherent with respect both to the present
and the future in the short term demand and to the type of traffic;
moreover, from a normative point of view, the situation feels
consequences of outdated laws that are inadequate to regulate today's
situation.
In order to point out the lack of co-ordination in investment
decisions that may be found in Italy, table 1 illustrates the public
expenditures in the maritime transport sector performed in the years
1977, 1980, 1983. The table shows that there are 8 boards deputed to
investment decisions in maritime transport sector; moreover, such
activity is often developed with different goals and in accordance
 562

Table 1

Public expeditures for maritime transport in 1977, 1980, 1983 years

(Million lire x 1000)

------------------------------------------------------
1977 1980 1983

Department of Merchant Marine 45.6 176.2 471.9

Department of Civil Works 64.7 140.9 210.1
CASMEl 32.2 64.8 150.8
RINA 8.3 12.2 25.8
Regional Government 5.4 52.1
Financial Trust 951.1 1442.4 1673.0
Port Authorities 176.0 273.9 478.0
FlO 114.2

Total 1277.9 2115.8 3175.9

Source: Piano Generale dei Trasporti, Roma 1986.

with different basic criteria. For example, ex CASMEZ (Cassa per it

Mezzogiorno) pursued the definite objective to induce economic
development in depressed areas, Port Authorities (Enti Porto) follow
their own development plans, FlO (Fondo Investimenti e Occupazione)
has its own goal in financing projects of relevant public interest in
terms of employment and revenue.
The result of such lack of co-ordination is that 5 or 6 ports located in
a certain port range asked and obtained funds for analogous
structures from different boards, each port aiming to increase its own
role in the maritime transport market. In this way, in the period
1982-1986, the Italian supply of seaport functions has generally
 563

overcome the present and, in some specialistic sectors, the

foreseeable in the medium-short term demand.
The application of the model presented in the section 5 to the
present transport demand and supply of italian ports has led to the
results exposed in Table 2, pointing out a general over-capacity of
Italian seaport terminals. The results have been obtained with
reference to the Italian port systems as identified in the Italian
official programmatic plan (Piano Generale dei Trasporti) and to
three main aggregatoes of cargo (general cargo, ro/ro and
containers, bulk cargo).
Successively, the model has been applied under three different
hypothesis of transport demand evolution up to 2000.
The first hypothesis considers that the present distribution of
traffic among port systems will not be affected by the foreseen
development of maritime transport and that the share of traffic
pertinent to each one will increase in proportion to the general
increase.
The second hypothesis derives from the application of the model in
such a way to obtain the optimal distribution of traffic among the port
systems; hence, in this second scenario, the model is free to assign the
shares of traffic to each port system.
The third hypothesis, which seems the more reliable one, considers
the optimal distribution among the port systems of the additional
share of traffic in such a way to add this share to that pertinent to
each port system in 1983.
Tables 3 show the results obtained under the three considered
hypothesis.
With reference to the third considered scenario and as far as
general cargo is concerned, the appropriate level of port facilities
supply of Ligurian, High and Medium Tyrrhenian, Ionian and Low
Adriatic, High Adriatic seaport systems must be outlined but a general
inadequacy of the other ones.
 564

Table 2 - Relation between present demand and supply

General Cargo

Seaport System Supply (t x 1000) Demand (tSupplylDemand)

Ligurian Sea 6395 4894 1,31

High and Medium Tyrrhenian 4326 2961 1,46
Low Tyrrhenian 3377 2743 1,23
Ionian and Low Adriatic 2850 2751 1,04
Medium Adriatic 4042 4013 1,01
High Adriatic 8439 5386 1,57
Sicily 1632 1522 1,07
Sardinia 3180 3106 1,02
Total 34241 27376 1,25

Containers and ro/ro

Ligurian Sea 5926 5026 1,18

High and Medium Tyrrhenian 5397 4975 1,08
Low Tyrrhenian 2352 1719 1,37
Ionian and Low Adriatic 261 161 1,62
Medium Adriatic 2859 2043 1,40
High Adriatic 3410 1859 1,83
Sicily 1716 255 6,73
Sardinia 1389 481 2,89
Total 23310 16519 1,41

Bulk cargo

Ligurian Sea 14414 11623 1,24

High and Medium Tyrrhenian 1995 1973 1,01
Low Tyrrhenian 1659 590 2,87
Ionian and Low Adriatic 2026 926 2,19
Medium Adriatic 7175 4714 1,52
High Adriatic 10283 9263 1,11
Sicily 2072 1413 1,47
Sardinia 4649 3254 1,43
Total 44309 33756 1,31

Source: CNR, Studies and researches carried out in PFT.

 565

Table 3 - Relation between foreseen demand and supply

General Cargo

1st scenery 2nd scenery 3rd scenery

Supply supply! supply! supply!
Seaport System (txl000) demand demand demand demand demand demand
Ligurian Sea 6395 6756 0,95 8090 0,79 6080 1,05
High and Medium
Tyrrhenian 4326 3433 1,26 3068 1,41 2961 1,46
Low Tyrrhenian 3377 1749 1,93 1317 2,56 2743 1,23
Ionian and Low
Adriatic 2850 2357 1,21 2814 1,01 2751 1,04
Medium Adriatic 4042 5336 0,76 3082 1,31 4328 0,93
High Adriatic 8439 5680 1,49 5983 1,41 6201 1,36
Sicily 2332 2909 0,08 3866 0,60 3156 0,74
Sardinia 3180 3760 0,85 3760 0,85 3760 0,85
Total 34941 31980 1,09 31980 1,09 31980 1,09
Containers and ro/ro
Ligurian Sea 16426 9066 1,81 10377 1,58 10127 1,62
High and Medium
Tyrrhenian 7397 8062 0,92 6578 1,12 7076 1,05
Low Tyrrhenian 2352 2658 0,88 2918 0,81 2694 0,87
Ionian and Low
Adriatic 261 141 1,85 368 0,71 368 0,71
Medium Adriatic 7459 5607 1,33 3501 2,13 3351 2,23
High Adriatic 5110 2256 2,27 3985 1,28 4111 1,24
Sicily 1716 605 2,84 668 2,57 668 2,57
Sardinia 1389 875 1,59 875 1,59 875 1,59
Total 42110 29270 1,44 29270 1,44 29270 1,44
Bulk cargo
Ligurian Sea 14414 15477 0,93 13698 1,05 13291 1,08
High and Medium
Tyrrhenian 1995 2784 0,72 3383 0,59 3384 0,59
Low Tyrrhenian 1695 881 1,92 1100 1,54 1110 1,53
Ionian and Low
Adriatic 2026 1376 1,47 1513 1,34 1495 1,36
Medium Adriatic 7175 6984 1,03 7189 1,00 7787 0,92
High Adriatic 12783 13564 0,94 13959 0,92 13782 0,93
Sicily 2072 1976 1,05 2200 0,94 2193 0,94
Sardinia 4649 4623 1,01 4623 1,01 4623 1,01
Total 46809 47665 0,98 47665 0,98 47665 0,98

Source: CNR, Studies and researches carried out in PFT.

 566

As regards bulk cargo, in front of a sufficient ratio supply/ demand

of Ligurian, Low Tyrrhenian, Ionia and Low Adriatic seaport systems,
the other ones show a substantial inability to meet the foreseen level
of demand.
At last, as far as containers and ro/ro are concerned, port systems
which show inability to match the demand are Low Tyrrhenian and
Ionian and Low Adriatic.

7. CONCLUSIONS

Co-ordination in investment decisions in seaport facilities

represents an effective tool for the attainment of a systemic trim of
ports belonging to a Country in such a way to avoid interport
competition and strategic planning, regarded in its moment of
determining the optimal allocation of resources in port investments,
represents a basic presupposition for the attainment of such co-
ordination.
This is valid, in particular, for Countries where public interference
in port administration is great, as in the EEC Countries. In fact, where
investment decisions can be taken at a central level complying with
objectives of sectoral policy, the effectiveness of such a co-ordination
is wide for the univocal programmatic horizon which planning must
account for.
The lack of co-ordination in port investment decisions throughout
the world and, as pointed out by Thorburn (1960), the intuitive basis
on which investment decisions have been taken to a large extent
have led to a distribution of seaport functions generally incoherent
with the demand forecasts.
Such a situation appears particularly evident in Italy, where the
lack of co-ordination among the boards deputed to the investment
decisions has led to an over-dimensioning of port functions on some
 567

stretches of coast and for some specialistic functions and to an under

dimensioning in some other cases.
Recognizing the general lack of co-ordination in investment
decisions in maritime sector, the Italian Governement points out, in
the transport official programmatic plan (Piano Generale dei
Trasporti) some instruments which seem comply with the
interpretative framework of this paper in order to rationalize the
sector.
The first proposal is represented by the establishment of "Port-
System" defined as "an economic-territorial complex (and not,
therefore, a mere administrative aggregate) that, in view of the port
as the main terminal, performs an organic model of transport supply
integrating sea-road-railroad in view of a global productive strategy"
operating at a local level as promoter, collector and co-ordinator of
local instances.
The set of proposal indicated in P.G.T. for the rationalization of the
Italian transport system in general and, consequently, of maritime
transport, involves two other boards, namely CIPET and Secretariat,
operating on a central level the first one in the area of programming,
the second one in the planning area.
The CIPET (Comitato Interministeriale per la Programmazione
Economica nei Trasporti) main function should consist in pointing
out basic criteria and long term objectives of the Italian transport
policy; Secretariat should perform the function to accomplish
co-ordinated development plans to submit to CIPET.
The role of quantitative methods in strategic planning assumes, in
the present situation, a particular importance firstly for identifying
the lack of balance in the system, secondly to determine priorities to
assign investment projects in order to attain the optimal distribution
of seaport functions along the coasts of a Country with respect to the
demand long term forecasts.
 568

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Vol. 263: M. Schafer, Resource Extraction and Market Structure. XI,
154 pages. 1986.
Vol. 264: Models of Economic Dynamics. Proceedings, 1983. Edited Vol. 293: D. Batten, J. Casti, B. Johansson (Eds.), Economic Evolu-
by H.F. Sonnenschein. VII, 212 pages. 1986. tion and Structural Adjustment. Proceedings, 1985. VI, 382 pages.
1987.
Vol. 265: Dynamic Games and Applications in Economics. Edited by
T. 8a§ar. IX, 288 pages. 1986. Vol. 294: J. Jahn, W. Krabs (Eds.), Recent Advances and Historical
Development of Vector Optimization. VII, 405 pages. 1987.
Vol. 266: Multi-Stage Production Planning and Inventory Control.
Vol. 295: H. Meister, The Purification Problem for Constrained
Edited by S. Axsiiter, Ch. Schneeweiss and E. Silver. V, 264 pages.
Games with Incomplete Information. X, 127 pages. 1987.
1986.
Vol. 296: A. BOrsch-Supan, Econometric Analysis of Discrete
Vol. 267: R. Bemelmans, The Capacity Aspect of Inventories. IX, 165
Choice. VIII, 211 pages. 1987.
pages. 1986.
Vol. 297: V. Fedorov, H. Lauter (Eds.), Model-Oriented Data Analy-
Vol. 268: V. Firchau, Information Evaluation in Capital Markets. VII, 103 sis. Proceedings, 1987. VI, 239 pages. 1988.
pages. 1988.
Vol. 298: S. H. Chew, Q. Zheng, Integral Global Optimization. VII,
Vol. 269: A. Borglin, H. Keiding, Optimality in Infinite Horizon Econo- 179 pages. 1988.
mies. VI, 180 pages. 1986.
Vol. 299: K. Marti, Descent Directions and Efficient Solutions in
Vol. 270: Technological Change, Employment and Spatial Dynamics. Discretely Distributed Stochastic Programs. XIV, 178 pages. 1988.
Proceedings 1985. Edited by P. Nijkamp. VII, 466 pages. 1986.
Vol. 300: U. Derigs, Programming in Networks and Graphs. XI, 315
Vol. 271: C. Hildreth, The Cowles Commission in Chicago, 1939- pages. 1988.
1955. V, 176 pages. 1986.
Vol. 301: J. Kacprzyk, M. Roub'lns (Eds.), Non-Conventional Prefer-
Vol. 272: G. Clemenz, Credit Markets with Asymmetric Information. ence Relations in Decision Making. VII, 155 pages. 1988.
VIII, 212 pages. 1986.
Vol. 302: H. A. Eiselt, G. Pederzoli (Eds.), Advances in Optimization
Vol. 273: Large-Scale Modelling and Interactive Decision Analysis. and Control. Proceedings, 1986. VIII, 372 pages. 1988.
Proceedings, 1985. Edited by G. Fandel, M. Grauer, A. Kurzhanski
Vol. 303: F.X. Diebold, Empirical Modeling of Exchange Rate
and A. P. Wierzbicki. VII, 363 pages. 1986.
Dynamics. VII, 143 pages. 1988.
Vol. 274: W. K. Klein Haneveld, Duality in Stochastic Linear and
Dynamic Programming. VII, 295 pages. 1986. Vol. 304: A. Kurzhanski, K. Neumann, D. Pallaschke (Eds.), Optimiza-
tion, Parallel Processing and Applications. Proceedings, 1987. VI,
Vol. 275: Competition, Instability, and Nonlinear Cycles. Proceedings, 292 pages. 1988.
1985. Edited by W. Semmler. XII, 340 pages. 1986.
Vol. 305: G.-J. C. Th. van Schijndel, Dynamic Firm and Investor
Vol. 276: M. R. Baye, D.A. Black, Consumer Behavior, Cost of Living Behaviour under Progressive Personal Taxation. X, 215 pages.
Measures, and the Income Tax. VII, 119 pages. 1986. 1988.
Vol. 277: Studies in Austrian Capital Theory, Investment and Time. Vol. 306: Ch. Klein, A Static Microeconomic Model of Pure Compe-
Edited by M. Faber. VI, 317 pages. 1986. tition. VIII, 139 pages. 1988.
Vol. 278: W. E. Diewert, The Measurement of the Economic Benefits of
Vol. 307: T. K. Dijkstra (Ed.), On Model Uncertainty and its Statistical
Infrastructure Services. V, 202 pages. 1986.
Implications. VII, 138 pages. 1988.
Vol. 279: H.-J. Buttler, G. Frei and B. Schips, Estimation of Disequi-
Vol. 308: J. R. Daduna, A. Wren (Eds.), Computer-Aided Transit
librium Models. VI, 114 pages. 1986.
Scheduling. VIII, 339 pages. 1988.
Vol. 280: H. T. Lau, Combinatorial Heuristic Algorithms with
Vol. 309: G. Ricci. K. Velupillai (Eds.), Growth Cycles and Multisec-
FORTRAN. VII, 126 pages. 1986.
toral Economics: the Goodwin Tradition. 111,126 pages. 1988.
Vol. 281: Ch.-L. Hwang, M.-J. Lin, Group Decision Making under
Mu~iple Criteria. XI, 400 pages. 1987. Vol. 310: J. Kacprzyk, M. Fedrizzi (Eds.), Combining Fuzzy Impreci-
sion with Probabilistic Uncertainty in Decision Making. IX, 399
Vol. 282: K. Schittkowski, More Test Examples for Nonlinear Pro- pages. 1988.
gramming Codes. V, 261 pages. 1987.
Vol. 311: R. Fare, Fundamentals of Production Theory. IX, 163
Vol. 283: G. Gabisch, H.-W. torenz, Business Cycle Theory. VII, pages. 1988.
229 pages. 1987.
Vol. 312: J. Krishnakumar, Estimation of Simu~neous Equation
Vol. 284: H. Lutkepohl, Forecasting Aggregated Vector ARMA Models with Error Components Structure. X, 357 pages. 1988.
Processes. X, 323 pages. 1987.
Vol. 313: W. Jammernegg, Sequential Binary Investment Decisions.
Vol. 285: Toward Interactive and Intelligent Decision Support VI, 156 pages. 1988.
Systems. Volume 1. Proceedings, 1986. Edited by Y. Sawaragi,
K. Inoue and H. Nakayama. XII, 445 pages. 1987. Vol. 314: R. Tietz, W. Albers, R. Selten (Eds.), Bounded Rational
Behavior in Experimental Games and Markets. VI, 368 pages. 1988.
Vol. 286: Toward Interactive and Intelligent Decision Support
Systems. Volume 2. Proceedings, 1986. Edited by Y. Sawaragi, Vol. 315: I. Orishimo, G.J.D. Hewings, P. Nijkamp (Eds.), Informa-
K. Inoue and H. Nakayama. XII, 450 pages. 1987. tion Technology: Social and Spatial Perspectives. Proceedings,
1986. VI, 268 pages. 1988.
Vol. 287: Dynamical Systems. Proceedings, 1985. Edited by A. B.
Kurzhanski and K. Sigmund. VI, 215 pages. 1987. Vol. 317: L. Bianco, A. La Bella (Eds.), Freight Transport Planning
and Logistics. Proceedings, 1987. X, 568 pages. 1988.
Vol. 288: G. D. Rudebusch, The Estimation of Macroeconomic Dis-
equilibrium Models with Regime Classification Infomlation. VII, 128
pages. 1987.
Vol. 289: B. R. Meijboom, Planning in Decentralized Firms. X, 168
pages. 1987.
Vol. 290: D.A. Carlson, A. Haurie, Infinite Horizon Optimal Control.
XI, 254 pages. 1987.
Vol. 291: N. Takahashi, Design of Adaptive Organizations. VI, 140
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Vol. 292: I. Tchijov, L. Tomaszewicz (Eds.), Input-Output Modeling.
Proceedings, 1985. VI, 195 pages. 1987.
 T. Vasko (Ed.)
The Long-Wave Debate
Selected papers from an nASA (International Institute for Applied
Systems Analysis) International Meeting on Long-Term Fluctuations in
Economic Growth: Their Causes and Consequences, Held in Weimar,
German Democratic Republic, June 10-14, 1985
1987.128 figures. xvn, 431 pages. ISBN 3-540-18164-4
Contents: Concepts and Theories on the Interpretation of Long-Term
Fluctuations in Economic Growth. - Technical Revolutions and Long
Waves. - The Role of Financial and Monetary Variables in the Long-
Wave Context. - Modeling the Long-Wave Context. - Modeling the
Long-Wave Phenomenon. - List of Participants.

I.Boyd, J.M.BlaU
Investment Confidence and Business Cycles
1988. 160 pages. ISBN 3-540-18516-X
Contents: Introduction and brief summary. - A brief historical survey of
the trade cycle. - Literature on confidence. - The dominant theories. -
A first look at the new model. - Confidence. - Descripti()n of the model. -
The longer run. - Some general remarks. - Appendices. - References. -
Index.

M. Faber, H. Niemes, G. Stephan

Entropy, Environment and Resources
An Essay In Physico-Economics
With the cooperation ofL.Freytag
Translated from the German by I. Pellengahr
1987.33 figures. Approx. 210 pages. ISBN 3-540-18248-9
The special features of the book are that the authors utilize a natural
scientific variable, entrQPY, to relate the economic system and the envi-
ronment, that environmental protection and resource use are analyzed in
combination, and that a replacement of techniques over time is analyzed.
A novel aspect is that resource extraction is interpreted as a reversed
diffusion process. Thus a relationship between entropy, energy and re-
source concentration is established.

E.VUlDamme
Stability and Perfection of Nash Equilibria
1987.105 figures. Approx. 370 pages. ISBN 3-540-17101-0
Contents: Introduction. - Games in Normal Form. - Matrix and Bimatrix
Games. - Control Costs. - Incomplete Information. - Extensive Form
Springer-Verlag Games. - Bargaining and Fair Division. - Repeated Games. - Evolu-
Berlin Heidelberg NewYork tionary Game Theory. - Strategic Stability and Applications. - Refer-
London Paris Tokyo ences. - Survey Diagrams. - Index.