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This study was motivated by the French train company dedicated to freight (Fret SNCF) in their need to explore commercial oppor tunities through the tunnel. The tunnel linking England and France is remarkable in its im pact.
This study was motivated by the French train company dedicated to freight (Fret SNCF) in their need to explore commercial oppor tunities through the tunnel. The tunnel linking England and France is remarkable in its im pact.
This study was motivated by the French train company dedicated to freight (Fret SNCF) in their need to explore commercial oppor tunities through the tunnel. The tunnel linking England and France is remarkable in its im pact.
Author(s): Philippe-Pierre Dornier and Ricardo Ernst
Source: Interfaces, Vol. 27, No. 3 (May - Jun., 1997), pp. 39-59 Published by: INFORMS Stable URL: http://www.jstor.org/stable/25062249 . Accessed: 09/10/2013 07:06 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. . INFORMS is collaborating with JSTOR to digitize, preserve and extend access to Interfaces. http://www.jstor.org This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions The Logistics Impact of the Channel Tunnel Philippe-Pierre Dornier Ricardo Ernst Department of Logistics and Production ESSEC Cergy Pontoise France School of Business Georgetown University Washington, DC 20057 The tunnel linking England and France is remarkable in its im pact. As the global logistics network grows, the tunnel improves travel for people and goods moving between the UK and the continent. Although many speculated about the financial impli cations of the tunnel, no one had done a serious study regarding the logistics implications of this new rail infrastructure. This study was motivated by the French train company dedicated to freight (Fret SNCF) in their need to explore commercial oppor tunities through the tunnel. We started by performing a survey (in cooperation with Coopers & Lybrand) with European ex porting and transportation companies of expectations and stra tegic evaluation for the channel tunnel as a logistics alternative. We then develop some analytical models to offer guidelines for defining the range of values that would make one transporta tion alternative superior. In the study we worked with data pro vided by Fret SNCF as well as with consultation with many Eu ropean companies to validate the models and present specific solutions from different areas in the continent to the UK. In par ticular, we examined nine feasible scenarios for going to London from seven different areas in the European continent. Copyright ? 1997, Institute for Operations Research and the Management Sciences 0092-2102/97/2703/0039$05.00 This paper was refereed. DECISION ANALYSIS?APPLICATIONS TRANSPORTATION?ROUTE SELECTION INTERFACES 27: 3 May-June 1997 (pp. 39-59) This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions DORMER, ERNST The channel tunnel (Chunnel) linking England and France, which opened in 1994, greatly improves travel for both peo ple and goods moving between the UK and the continent. The tunnel connects the rail systems of the UK and France and indi rectly their road systems. It adds an impor tant component to the economic integration of Europe which (unlike the US, which has not built a railroad in decades) is building a network of tunnels, bridges, and high speed railroads [Sloan 1991]. The Chunnel is important for linking the European conti nent, not just France and England. It con sists of two rail-only tunnels and one ser vice tunnel running the 50 km between the terminals located at Folkestone in the United Kingdom and Sangatte in northern France. The respective ports of entry are Dover and Calais. Each of the twin rail tun nels is used exclusively for trains (capable of moving cars and their passengers, trucks, freight, and just passengers) which operate in one direction only. There are some cross-over sections between the main tunnels to allow for repair of the rail lines. The smaller service tunnel lies between the two rail tunnels and provides access for routine maintenance, ventilation, and safe refuge in the event of an emergency [Merchant, Knowles, and Acheson 1991]. The Chunnel will affect European busi nesses in three major areas. First, it will change travel patterns for business and lei sure purposes, particularly between the South of England, and the North of France and Belgium, since the travel time between London and Paris is no more than three hours. Second, it will affect the location of new business and commercial centers as traffic increases. Third, it will alter the or ganization, management, and control of lo gistics in companies that move goods, since the Chunnel offers shuttle services for freight trains and trucks. The Chunnel offers an interesting new option to be considered in evaluating logis tics alternatives in Europe. It has advan tages that go beyond any advantage in cost. It offers continuity in service, that is trans port service will not be affected by stormy weather or ship timetables. The Chunnel will always be open (365 days a year), with three trains departing per hour in each di rection during heavy activity and at least one departure per hour otherwise. The quality of transport has also improved with the reduction in transfers among modes of transport, since it is now possible to load freight on a train in a location at the south of France and unload it in the northern UK without the exchange from train to ferry and back at the channel (Figure 1). These conveniences have to be considered in com paring the Chunnel to other alternatives, instead of using only simple transportation cost calculations based on distance. From a financial point of view, the Chun nel has not been a successful project. Euro tunnel (the publicly traded British-French company that manages the tunnel) has spent more than double its $7.5 billion pro jection to build the tunnel, and only in the summer of 1995 was it able to cover its op erating costs and capital expenditures out of its cash flow for the first time. It is still far from able to meet interest charges on its $12 billion debt, which are accumulating at a rate of $90 million a month. The company expects to have sufficient revenues in six to 10 years to pay its interest bill. By the end of 1995, it had captured 41 percent of the INTERFACES 27:3 40 This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions CHANNEL TUNNEL Figure 1: The Chunnel offers a new alternative for linking the continent and the UK. Should a Spanish company shipping goods to the UK use its current existing Route 3, or the Chunnel with the combination Route 1 and Route 2? The same question applies to a German company going to the North of the UK. Should it use its current Route 3' or the Chunnel with the combination Route V + Route 27 cross-channel market for cars, 45 percent of the coach market, and 47 percent of the freight market. The Channel Tunnel as a Logistics Alternative The tunnel links Calais in France to Folk stone in the United Kingdom, joining the European railway of 240,000 km to the Brit ish railway network of 15,000 km. The tun nel is 50 km long: 38 km are under the sea, three km are in France, and nine km are in the UK. The freight traffic crossing the channel at the beginning of the 21st century is expected to be 122.6 million tons each year, of which, 21.1 will be through the Chunnel (Table 1). The tunnel system is designed to accom modate shuttles that can transport 180 cars every 15 minutes during peak periods, giv ing it the capacity to transport 10,080 car passengers in each direction per day. There are also 40 high-speed passenger trains (no cars) per day in each direction. It is also ex pected to transport up to 28 trucks travel ing each way daily. In addition, trains car rying freight accommodate 35 shuttles that May-June 1997 41 This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions DORMER, ERNST Opening Channel Traffic 94/95 2003 2013 Passenger cars: Million cars/year 67.1 93.6 118.7 Chunnel share 29.7 39.5 46.6 Freight: Million tons/ year 84.4 122.6 170.4 Chunnel share 14.8 21.1 27.8 Table 1: The 1993 Eurotunnel forecast for channel traffic predicts an increase for passengers and freight between 1994 and 2013. are allocated as follows: 22 for combined transportation, that is, carrying containers of merchandise that are transferred from trucks to the train and at the other end of the Chunnel transferred back to trucks (about 4 million tons during the first year); five for conventional freight (about 2 mil lion tons during the first year); and eight for new cars, that is, trains moving new cars, such as Renaults (about 0.5 million tons during the first year). There are sepa rate loading platforms for freight and pas senger traffic, and separate custom facilities to expedite the processes. Since Britain joined the common market in 1973, its exports to the continent have grown from $6 billion in 1973 to $42 billion in 1986 [Project Cost-CEE 1993]. Currently exports to the continent account for ap proximately 65 percent of Britain's foreign trade in services and goods, excluding pe troleum products [Merchant, Knowles, and Acheson 1991]. According to customs data for 1992, the total flow of merchandise, in cluding petroleum products, is 56,363,000 tons from the continent to the UK and of 79,962,400 tons from the UK to the conti nent. Excluding petroleum products (which are generally moved by pipe), the numbers change to 47,016,200 and 35,671,800 respec tively (Figure 2). For almost all the exchanges between the largest continental countries and the UK, the balance favors the continent. This bal ance depends on several factors: ?It depends on the nature of the product. For example, the flow of agriculture and food products from the continent is twice that from the UK. For cars, chemicals, and health care products, the ratio goes down to 1.5. ?It depends on the country, with France exporting 40 percent more than it imports from the UK, the Netherlands 80 percent, Germany 30 percent, and Spain 20 percent. ?It depends on the country and the prod uct. The ratio between exports from and imports to for France in agricultural and food products is 4.6, while for Germany it is only 2.2. ?It also depends on the mode of transpor tation. Forty-six percent of the products coming into the UK are in containers, while 38 percent of those leaving the UK going to the continent are in containers. These figures explain why transportation prices and commercial conditions differ be tween the UK and each country in the con tinent. Today for example, the prices are 40 percent higher from France to the UK than from the UK to France. This study was mo tivated by the French train company dedi cated to freight (Fret SNCF) in their need to explore commercial opportunities through the channel tunnel. We worked with data provided by Fret SNCF and in consultation with many of the logistic providers in Eu rope to validate our ideas. We started the INTERFACES 27:3 42 This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions CHANNEL TUNNEL Figure 2: The figures at the head of the arrows show the merchandise that flows between the continent and the UK in millions of tons (excluding petroleum products). The percentages refer to types of products: A indicates agriculture and food, B indicates intermediate goods, and C indicates chemicals (Customs data from 1992). study with a survey of expectations for the Chunnel with exporting and transportation companies. The survey was performed in cooperation with Coopers and Lybrand Eu rope during the period July 1993 to March 1994. Logistics Opportunities of the Chunnel Using the tunnel has advantages and dis advantages: In terms of service, measured as the time it takes to go from the continent to the UK or vice versa, the tunnel crossing is fast and reliable (London to Paris in three hours), 35 minutes from Calais to Folkstone (versus two hours by ferry), and 80 minutes from the French highways to the British highways. For passenger traffic (those traveling by train through the Chun nel without cars), the time advantage is even greater since the train goes to train stations situated inside the cities (the train station in France is in Paris). For freight, a difference of less than 1.5 hours makes little difference except in special cases. The dis advantages are mainly the problems of mo nopoly in case of a strike (highly unlikely) and that the transit time does not allow May-June 1997 43 This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions DORMER, ERNST truck drivers much rest time so trucks might need a second driver. For truck drivers, the Chunnel's quicker transit gives no significant advantage over Moving containers required five handling steps on average. the ferry. Ferry companies offer services on board, such as restaurants and private cab ins. Therefore, price is the factor available to obtain the truck drivers' business. In terms of quality, the Chunnel requires fewer changes of modes of transportation (relative to the ferry) for merchandise trav eling directly by train from factories on the continent to final clients in the UK. That is, with the ferry the merchandise might need to be transferred from the train or truck to the ferry and then, at the other end, to the train or the truck (each mode of transporta tion is called a platform). With the Chunnel the intermediate exchange of platforms for crossing the channel is avoided, and there fore there is less manipulation of the mer chandise, which reduces the opportunities for accidents. In addition, orders could be consolidated at different points on the train network. In fact, the Transport Develop ment Group (TDG) has invested over $10 million in the construction of the UK's first distribution center (250,000 square feet) dedicated to rail and road transport and lo cated next to the Chunnel rail terminal to offer customers direct access throughout the UK and Europe. In terms of cost, experts foresee a price war between the tunnel and the ferry. The cost of ferries from the north of Europe to the south of the UK has decreased by 20 percent between January 1994 and July 1996. The Chunnel competes with the ferry, especially in the Calais-Folkstone area [Journal de la Marine Marchande 1994]. Even if enough market exists to support the two modes, a price war for market share is ex pected. In fact, the current figures on mar ket share for the Chunnel are below expec tations because of delays in the delivery of trains, railway strikes in France and Bel gium in December of 1995, and aggressive fare cutting by ferry companies. The tunnel can serve the following po tential markets [Coton 1994]: Companies that currently ship by train will find it attractive to continue into the UK without having to break their trains down to get them into the ferry. This is particularly important for companies that ship bulk products in big volumes (for ex ample, sand, cement, steel, and paper). The Chunnel permits complete trains to pass at specified times (mid-day or nights). Companies that currently ship full con tainers to the harbor by train, transfer them to ships to cross the channel, and then transfer them again to train or truck to get them to their final destinations (such prod ucts as whiskey and beer from north En gland, Scotland, and Ireland, or wine from France). Companies, such as Bell Lines, cur rently run freight ferries twice a day. Trains running from source to final destination may provide advantages of time, quality, and service. The Chunnel train can also serve compa nies that move small volumes in trailers (containers with wheels that can be con nected to trucks), carrying just the trailer across the channel. Other markets for the Chunnel are companies that use isolated INTERFACES 27:3 44 This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions CHANNEL TUNNEL freight cars for long distances (for example, from Italy to England), those who ship small and high-value parcels to be deliv ered quickly or automobiles or fresh prod ucts in refrigerated wagons. For example, the rail service operator European Passen ger Services (EPS) introduced four-hour parcel delivery services from London to Paris and Brussels using the Chunnel trains. Container Movement: Now an Improved Alternative The Chunnel makes the container move ment with a combination of modes of transport an improved alternative. That is one of its most important contributions. Trucks (or trains) can load containers on any location linked to the train system in the continent (not necessarily at the channel crossing point), and cross (through the tun nel) to the UK where the container can be delivered closer to a final destination and picked up by another truck (or linked to another train system). The UK train system has invested in underslung coaches, that is, flat cars that carry containers and are low enough to pass through the existing tun nels in the UK, to increase the scope of ac cessible cities. Before the Chunnel opened, moving con tainers was not very efficient: it required five handling steps on average and three modes of transport (truck, train, and boat or ferry). For instance, a container traveling from the south of France by a combination of modes (truck and/or train) might be transferred in Ostende or Zeebrugge from a train (or truck) to a boat and then reloaded on a truck (or train) for the final destina tion. In our study we found that combining modes of transport is a competitive alterna tive (relative to the other options to be dis cussed later) for freight coming from Italy, eastern and central Spain, the majority of France, and eastern Germany and Austria. Reduction in Exchange of Platforms A boat or a ferry used to be necessary for all but air transport between the continent and the UK. Transferring freight from train or truck to ship adds cost and affects qual ity without any value added. Direct linkage by train or combination of modes may change the logistics network for many com panies. Renault, for example, sells between 80,000 and 120,000 automobiles per year in the UK. Their distribution is affected by such issues as seasonality (25 percent of sales take place during June and July), the high value of the product, and the high risk of damage during transportation. Renault transports the cars in several steps. First they ship the cars by boat or train to the port of Le Havre in France. Then, "jockeys" drive the cars onto roll-on, roll-off ferries, which carry them to Southampton for de livery in the south of the UK or to Goole for delivery in the north. In each of those ports, Renault maintains a distribution cen ter that handles deliveries to dealers. The trip from the plant in France to the UK distribution centers takes 10 days and involves a high risk of damage and other problems associated with changing modes of transport. With the Chunnel, Renault could ship directly to its distribution cen ters, which it could relocate closer to its customers. The Chunnel would reduce the transportation time to two days requiring less inventory in the pipeline. Electrolux/Distrilux in Italy exports ap May-June 1997 45 This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions DORMER, ERNST proximately 850,000 appliances per year from five plants in Italy to five distribution centers in the UK. This represents about 10 freight cars a day. Currently, 90 percent of the freight goes to Le Havre by train where it is off-loaded into a company warehouse, from which it is shipped by ferry or boat to the different distribution centers in the UK. The company is considering shipping di rectly to its customer markets in the UK via the Chunnel, which will mean changes in costs, quality, and speed of delivery. This is the type of analysis that Fret SNCF was interested in quantifying in their need to offer logistics solutions to different companies. Working in collaboration with a team from the French company, we devel oped the models presented in this paper as a tool for evaluating alternatives. Before we did this study, many ideas existed about the financial implications of the tunnel. However, no one had made a serious at tempt to study the logistics implications of this new rail infrastructure. European Companies' Perceptions of the Chunnel As part of our research project, we col laborated with Coopers and Lybrand Con sultants to survey companies in France, En gland, and the Netherlands. The objective was to gather information about how these companies perceived the Chunnel and what they expected from it. For each coun try, Coopers & Lybrand divided the sample into exporting companies and transporta tion companies to discover any differences between companies that sell products and the companies that deliver them. They ob tained 83 responses from transporters (17 French and 66 English, 39 percent of the sample) and 136 responses from exporters (59 French, 56 English, and 21 Netherlands, 18 percent of the sample). The results of the survey revealed that the transportation companies or carriers are more directly involved with the Chunnel than the exporters. The majority of those sending goods from the continent to the UK subcontract their shipping and have no interest in its route. The exporters then, have no realistic view of the current prob lems or future opportunities. Even more, transportation companies are usually free to select routes (66 percent), and those an swering the survey questions recognized twice as many ports in Europe as those representing the exporters. With respect to informants' awareness about the Chunnel, we found that 88 percent of the French ex porters and 63 percent of the French trans porters were not aware of the services of fered by Eurotunnel, as opposed to 27 percent of British exporters and nine per cent for the British transporters. As a consequence, exporters do not con sider the opportunities available with the Chunnel in evaluating their logistics alter natives. As might be expected, the trans porters better understand the current prob lems with the ferry than do exporters. When asked how satisfied they are with current transportation methods (excluding the Chunnel), 63 percent of the French ex porters answer they are satisfied versus only 53 percent of the transporters. The fig ure for British exporters is 69 percent ver sus 58 percent for the transporters, and for Dutch exporters, it is 95 percent versus 81 percent for the transporters. We considered the most important fac tors related to the use of the Chunnel to be cost, delivery time, weather dependence, INTERFACES 27:3 46 This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions CHANNEL TUNNEL A TRANSPORTER High Medium Weak Cbst Weak Medium High EXPORTER 4 French ^- English Figure 3: French and English exporters and transporters differ in their perceptions of the Chunnel concerning cost, delivery time, weather dependence, labor conflicts, fixed schedules, frequency of service, speed of service, and exchange of platforms. On the horizontal axis we present the per ceptions of the exporters and on the vertical axis the perceptions of the transporters. When both observations are on the diagonal, the perceptions of exporters and transporters coincide. labor conflicts, fixed schedules, frequency of service, speed of service, and exchange of platforms. We charted the results for ex porters and transporters in France and the UK (Figure 3). Based on the figure we ob tain the following general results: ?Cost is an important factor for both transporters and exporters. Because the ferry has had a monopoly crossing the channel, people believe its prices are high. May-June 1997 47 This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions DORMER, ERNST ?The issue of frequency of service and de livery time was classified as intermediate in importance. ?Weather is more important to transport ers than to exporters. ?Labor conflicts are important to French companies in particular. This might be be cause the French ports have had labor problems over the last four years in re sponse to government attempts to imple ment new laws and regulations. ?Changing modes of transport is not con sidered a problem by the British since they do it for all their exports. The French are used to shipping directly to other markets on the continent. The opportunity to ship direct thanks to the Chunnel seems to be extremely important to the French, British, and Dutch transporters but not to export ers. Sixty-one percent of the British exporters and 41 percent of the French exporters think that the tunnel gives them an oppor tunity to modify their logistics networks. For French transporters, the response is 88 percent versus 40 percent for the British. Here are some of the reasons that might ex plain this: ?The tunnel alters the competitive situa tion and will attract new transporters and third-party companies [Vicherman and Craven 1986]. Seventeen percent of the French exporters, 28 percent of the British, and 14 percent of the Dutch believe that they will use new transportation companies or third-party logistics companies by the time the Chunnel is fully operational. They expect to reallocate freight to different modes, particularly the British (22 percent of the exporters and 32 percent of the trans porters). This change should benefit train companies. ?Suppliers will increasingly send goods just in time. Exporters (77 percent of the French, 87 percent of the British, and 48 percent of the Dutch) expect to increase the frequency of their deliveries. Transporters expect this increase in demand and there fore are planning to increase the number of trips they make (74 percent of the French, 90 percent of the British, and 71 percent of the Dutch). Finally the most interesting contrast in responses between British and French par ticipants was to the question: Do you think about the logistics impact of the Chunnel in your organization? Seventy-seven percent of the French exporters and 63 percent of the French transporters answered "no" while 88 percent of the British exporters and 80 percent of the British transporters answered "yes." Given the current flows of freight between the continent and the UK, and among the countries on the continent, the British have a more urgent need to in clude the Chunnel in evaluating their logis tics since the continent is their main market. Optimal Selection of Transportation Alternatives We constructed a model to permit com panies to determine the optimal transporta tion alternative for moving a defined quan tity of products between the continent and the UK. We assume that the company ships its products by either train or truck and therefore must choose between a ferry or the tunnel. To capture the different possi bilities available, the model allows for changing modes of transportation (from train to truck or vice versa) before and after crossing the channel. This generates four INTERFACES 27:3 48 This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions CHANNEL TUNNEL possible intervals (two for each side) plus the one crossing the sea, resulting in 32 combinations or alternatives. Some of these alternatives are very inefficient a priori. We compare, in particular, the option of using a short route that includes a ship or ferry (the current alternative) with a longer route that includes the tunnel. Then, for ex ample, a company in Spain that currently loads its freight on a ship in a nearby har bor might benefit from a longer route that includes the tunnel. The main trade-offs for that company would be greater expendi ture for land transportation (possibly in cluding the cost of extra drivers) versus the savings from avoiding changes in logistics platforms (to use the ferry, shippers must transfer their goods from either truck or train to the ferry, and back to truck or train on shore). When the ferry used is close to the Chunnel the distance over land may be the same. The model quantifies the differ ent options available and selects the option that minimizes total transportation cost while satisfying a predetermined level of service measured as the required time to deliver the predefined freight quantity. We made the following general assumptions: (1) The shipper can move the predefined freight quantity by either train or truck, that is, in each interval, it will use only one mode of transportation. (2) Every time the shipment changes mode of transport (from truck to train or vice versa), the company pays a fixed cost and a variable cost for changing platforms. (3) If the company uses a ship or ferry, it will always pay a fixed cost for changing from either the train or truck to the ferry and then back. If it uses the tunnel without changing mode of transport, it pays no such cost. We formulated the problem as a mixed integer problem that minimizes total trans portation cost. The model incorporates no charge for transit time. In theory, the time in transit is inventory being kept in the lo gistics pipeline and therefore should be part of the decision process. However, we assumed that the difference in time among the transportation alternatives (for the type of products to be moved) would not result in significant inventory costs. Companies can use the model to discover which way is the cheapest, using a ferry or the Chunnel, train or truck, and to examine sensitivity on price increases. The results can be used as a benchmark for comparison purposes. The model's application is lim ited, given its specific assumptions. For ex ample, in addition to the two alternatives, train or truck, a company could use the combined mode. Modeling this alternative Transportation companies are more directly involved with the Chunnel than exporters. is complicated because the stations that ac commodate change of platforms for com bined mode may not necessarily be those at which changes of regular transport mode are made. Also, in the model we assume that the routes by train and truck are of the same length, which might not be the case. To study the hypothetical implications of the different alternatives, we performed a sensitivity analysis on two different scenar ios (Figures 4 and 5). One scenario is for a company in Spain moving products to the UK with two possible routes, a short one May-June 1997 49 This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions DORMER, ERNST using the boat and a long one using the Chunnel. The other scenario is for a com pany in Germany moving products to the UK with the same two possible routes. We started the analysis with a base case for each scenario (Tables 2 and 3). Our objec tive was to find out how changes in the dif ferent parameters would change the solu tion. In particular, we wanted to know what increase or decrease in the fixed and variable costs for the Chunnel versus the ferry would make it optimal for shippers to switch between alternatives. We performed the same kind of analysis for train and truck options. We didn't include a sensitiv ity analysis for the service level constraint. Coming from the South For the first scenario, we obtained the following results (Table 2). The company currently ships goods from Spain to the UK by train on the continent, boat across the channel, and truck in the UK. Train service in the UK is not as good as that in France. For the company to switch to using trucks ^ Figure 4: We used the analytical model to perform a sensitivity analysis and compare two trans portation alternatives for a company in Spain moving products to the UK. One alternative is us ing a short route combined with the boat and the other is to use a long route crossing the chan nel. Lll and L12 are the two segments of the long route on the continent, and L21 and L22 are the two segments in the UK. The intersection point in each case allows (if necessary) a change in mode of transport. The same applies to the short route (Sll, S12, S21, S22). INTERFACES 27:3 50 This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions CHANNEL TUNNEL Figure 5: For goods coming from the north, we use the analytical model to perform a sensitivity analysis and compare two transportation alternatives for a company in Germany moving products to the UK. One alternative is using a short route combined with the ferry and the other is to use a long route crossing the channel. Lll and L12 are the two segments of the long route in the conti nent, and L21 and L22 are the two segments in the UK. The intersection point in each case allows (if necessary) a change in mode of transport. The same applies to the short route (SU, S12, S21, S22). for the entire route, the truck company in Spain must reduce its variable cost to just four percent over the variable cost of the train. To obtain the business of this company, the UK train company must reduce its vari able cost to just two percent over the truck cost in the UK. The company could then use train transport for the entire route. These results are based on the assumption that the variable cost for the boat is 25 per cent higher than the variable cost of the Chunnel. We next explored what happens when the variable cost of the boat increases. It has to be 50 percent higher than that of the Chunnel for the company to switch from the boat to the Chunnel for the channel crossing. If the variable cost of the boat is just 20 percent over that of the Chunnel, the company is better off using the boat. It will, however, use the train for the first three intervals (the first two in the conti nent and one in the UK) and change to the truck only for the last one; that saves the additional charge for changing modes of May-June 1997 51 This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions DORMER, ERNST Continent UK Interval 1 Interval 2 Crossing Interval 3 Interval 4 Truck Fxi = 10 VKQl = 1.0 VKDl = 1.1 Fpju = 10 S? = 250 Ln = 750 Train FTl = 6 VTQl = 1.0 VVdi = 1.0 FPT1 = 10 Truck FK2 = 10 Vkqi = 1.0 VxD2 = LI FPK2 = 10 S12 = 250 L12 = 900 Train Fn = 6 VTQ2 = 1.0 yTD2 = lo FPT2 = 10 Ferry Ff = 5 Vfq = 1.0 yfD = 1.25 FPf = 10 Df = 1,000 Chunnel Fc = 7 VCQ = 1.0 yDC = lo Fpc = 10 Dc = 50 Truck Fks = 10 VkQ3 = LO VKD3 = 1.0 Fpx3 = 10 S21 = 100 Ln = 150 Train fr3 = 6 VTQ3 = 1.0 yTD3 =. 1.05 Fpt3 = 10 Truck FK4 = 10 Wq4 = TO V*D4 = LO FPK4 = 10 S22 = 600 L22 = 800 Train FT4 = 6 WQ4 = 1.0 VTD4 = 1.05 FpT4 = 10 Table 2: In evaluating the analytical model, we used this base case of parameters for the scenario for freight coming from the south of Spain and going to the north of the UK. transport at the crossing point (there is an incremental cost for changing from train to truck before crossing). The company will use the Chunnel instead of the boat if the variable cost of the boat is maintained at 50 percent over that of the Chunnel, but the Continent UK Interval 1 Interval 2 Crossing Interval 3 Interval 4 Truck Fxi = 10 VKQ, = 1.0 VKDl = 1.1 FpKi = 10 Sn = 250 L? = 650 Train FT\ = 6 Vtqi = 1.0 V-rm = 1.0 FP71 = 10 Truck Fk2 = 10 Vkqi = 1.0 VkD2 = 1.1 Fpx2 = 10 S12 = 250 L12 = 500 Train Fn = 6 Vtqi = 1.0 Vtto = 1.0 FPr2 = 10 Ferry Ff = 5 Vfq = 1.0 yFD = 1.25 FPF = 10 Df = 900 Chunnel Fc = 7 Vcq = 1.0 yDC = l.o Fpc = 10 Dc = 50 Truck FK3 = 10 VkQ3 = 1.0 VKD3 = 1.0 Fpk3 = 10 S21 = 100 L21 = 150 Train Fi3 = 6 VYQ3 = 1.0 Vtd3 = 1.05 FPT3 = 10 Truck FK4 = 10 VKQ4 = 1.0 VKD4 = 1.0 Fpx4 = 10 S22 = 300 L22 = 800 Train FT4 = 6 Vtqa = 1.0 VTD4 = 1.05 FPT4 = 10 Table 3: In evaluating the analytical model, we used this base case of parameters for the scenario of freight coming from the north in Germany and going to the north in the UK. INTERFACES 27:3 52 This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions CHANNEL TUNNEL variable cost of the train is reduced to just two percent over the variable cost of the truck. If, on the contrary, the variable cost of the truck on the continent is reduced to just one percent over the variable cost of the train, the company will ship its goods by truck and Chunnel for the entire route. As expected, the cost of the train or truck affects the choice of train or boat since companies look at total transportation costs. Coming from the North Under this scenario, currently the com pany uses the train for the entire route with the ferry for the channel crossing (Table 3). If the truck reduces its variable cost to just four percent over that of the train on the continent, the company will switch to using the truck for the entire route. The UK train should then reduce its variable cost to three percent over that of the truck to make it at tractive for the company to switch again and use the train through the entire route. If we keep the costs of the base case (Ta ble 3) and change the variable cost of the ferry, the company will switch to the tun nel when the variable cost of using the ferry is 35 percent higher than the variable cost of the Chunnel. In this case the opti mal combination for the company is to use the train for three intervals and change in the last interval to the truck. If the variable cost of the ferry is 35 per cent greater than that of the tunnel and the variable cost of the truck on the continent is reduced to two percent above that of the train, the company will switch and use the ferry and the truck for the entire route. The variable cost of the ferry has to be 40 per cent over that of the Chunnel for the com pany to use the tunnel instead. If the train reduces its variable cost to four percent over the variable cost of the truck in the UK, the company will use the train over the entire route and the ferry. Again, the variable cost of the ferry has to be 40 percent over that of the Chunnel for the company to use the tunnel, but if the trucking company makes an additional re duction in its variable cost to just two per cent over that of the truck, the company will use the train over the entire route. As we can see, the options for freight coming from the north are highly sensitive to changes in the variable cost of the ferry relative to the Chunnel. For all the scenar ios examined, we changed the variable costs as a function of distance while keep ing other costs fixed. More than to obtain normative results, our objective in the sen sitivity analysis was to determine the po tential outcomes for different possibilities. We didn't explore a scenario for shipments coming from Italy, because in that case, the short and long routes coincide, and the comparison is simply between fixed and variable costs for the different transporta tion modes, that is, given the fixed costs for the ferry and the Chunnel, the variable cost for the ferry has to be at most four percent over the variable cost of the Chunnel for it to be attractive. The model was very useful in helping us to understand the trade-offs among the dif ferent transportation alternatives. We could analyze different scenarios with the model, but the base cases require detailed valida tion. Although it doesn't provide exact re sults, the analytical model offers guidelines for defining the range of values that would make one alternative superior. In making a decision, companies would consider addi May-June 1997 53 This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions DORMER, ERNST tional variables not included in the model formulation. Empirical Approach We could extend the analytical model to include many realistic restrictions. How ever, to obtain specific and precise results, we compiled a database of actual costs re lated to distance, exchange of transporta tion modes, and physical locations for dif ferent alternatives, including conventional train, truck, or combined transport (that is, when the container is transferred from one mode to another) and a ferry or boat, or the Chunnel. In each case, we obtained data for nine different scenarios (combinations of transportation modes). The database con sists of 41 possible departure cities in the continent and three destinations in the UK (London, Manchester, and Glasgow). We chose the departure cities for their impor tance in Europe. The entire database is pre sented in the IHEL report [1994]. For each linkage (one continental city to one UK city), we examined nine scenarios: (1) Truck-Ferry 1 (departing from the most often used port)-Truck. (2) Truck-Ferry 2 (departing from the second most used port)-Truck. (3) Train-Ferry-Truck: The continental train transfers the goods to a truck at the ferry port; the truck crosses by ferry and makes the delivery in the UK. (4) Train-Shuttle-Truck: As in scenario 3, but the truck crosses the channel on the Chunnel shuttle. (5) Train-Boat-Truck: The continental train transfers the goods to a boat at the most popular port. A truck picks them up at the UK for final transport. (6) Truck-Boat-Truck. (7) Train-Chunnel-Train. (8) Combined: Containers travel from the departure city to the closest combined platform station by truck, travel by train through the Chunnel to the combined plat form nearest the final destination, and then by truck. (9) Truck-Shuttle-Truck: The truck trav els through the Chunnel on a special car. For two scenarios, from Milan, Italy to London, UK and from Porto, Portugal to London, UK, we calculated the transporta tion costs as the aggregation of all the lo gistics costs (transportation, handling costs when necessary, exchange of platforms, and so forth) (Tables 4 and 5). Then we cal culated a global cost by adding the inven tory pipeline costs. We adjusted the inven tory pipeline cost for the delay incurred in each case (the opportunity cost of the in ventory in the pipeline). We obtained data on costs from transpor tation companies (train, trucks, boat, ferry, combination), industrial companies with in ternational activities, and specialized con sulting companies. We hoped to obtain re alistic costs by taking into account the commercial conditions. For each of the nine scenarios, we used a combination of trans portation and handling costs. We obtained empirical results for the entire sample and can draw some general conclusions as to the best alternative: ?For western Spain and Portugal, trans porting freight to the UK by ship is the cheapest option. Truck or combined modes cost 40 to 50 percent more. For areas east of a North/South axis going through Madrid, the various options are in close competi tion; the worst solution is only 15 percent more expensive than the best. ?For the Atlantic and areas bordering the INTERFACES 27:3 54 This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions CHANNEL TUNNEL MODE Continent Channel Total Cost Total Cost - Transportation for20FF/Kg for 150FF/Kg UK Cost (in FF) Delay (in FF) (in FF) Truck Ferry 1 Truck 10,189 3 10,456 12,162 (Zeebrugge) Truck Ferry 2 Truck 10,189 3 10,456 12,162 (Calais) Train Ferry Truck 9,958 3.5 10,370 12,259 Train Shuttle Truck 11,416 3.5 11,728 13,717 Train Boat Truck 22,452 9 23,253 28,370 Truck Boat Truck 20,288 9 21,039 26,206 Train Chunnel Train 10,204 2 10,383 11,549 Combined (Milan) 9,776 2 9,954 11,091 Truck Shuttle Truck 11,700 3 11,962 13,673 Table 4: We compared different transportation modes for freight coming from Milan, Italy and going to London, England. channel between Nantes, France and the Netherlands, truck is the best option. The further north the final destination is in the UK, the more attractive the combined option becomes. ?For Italy, all modes are competitive, but shipping by train is usually cheapest. Com panies must weigh the cost advantage care fully, because the train offers poor service in the UK. ?For East Germany, Austria, and the rest of France, truck and the combined mode compete closely. ?For most of Germany, truck offers an ad vantage. However, for final destinations in the north of the UK, sending freight by MODE Continent Channel UK Transportation Cost (in FF) Delay Total Cost for 20FF/Kg (in FF) Total Cost for 150FF/Kg (in FF) Truck Ferry 1 Truck 13,424 4 13,780 16,054 (Cherbourg) Truck Ferry 2 Truck 14,202 4 14,558 16,832 (Calais) Train Ferry Truck 15,169 4.5 15,570 18,127 Train Shuttle Truck 15,367 4.5 15,767 18,326 Train Boat Truck 10,702 7 11,325 13,304 Truck Boat Truck 8,072 7 8,695 12,675 Train Chunnel Train 17,082 3 17,349 19,055 Combined (Bordeaux) 12,090 3 12,357 14,063 Truck Shuttle Truck 15,729 4 16,085 18,359 Table 5: We compared different transportation modes for freight coming from Porto, Portugal and going to London, England. May-June 1997 55 This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions DORMER, ERNST Figure 6: Transportation alternatives vary for goods going to London from different locations in the Continent. Each area indicates the transportation alternative that minimizes total cost. For Area 1, the boat and truck combination dominates. In Area 2, the best option is boat with either truck or train. In Area 3 all options are competitive. For Area 4, the ferry-truck combination domi nates. In Area 5, the combined (Chunnel) option is the best. In Area 6, the combinations truck/ ferry/truck, all train, or combined mode are competitive. Finally, in Area 7, the best option is truck/ferry/truck. INTERFACES 27:3 56 This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions CHANNEL TUNNEL ship is more attractive. The state-owned train company in Germany and the harbor in the north of Germany provide combined low-cost service. For shipments to London, we identified seven areas in the continent (Figure 6). For area 1, boat and truck (scenario 6) and less often boat and train (scenario 5) are the cheapest options. For area 2, boat with truck or train is usually most competitive. For area 3, all options are competitive. For area 4, the only competitive option is ferry-truck (sce narios 1 and 2). For area 5, the combined op tion dominates. For area 6, truck/ferry/truck, all train, and combined are all competitive. For area 7, the best solution is truck/ferry/ truck (scenarios 1 and 2), but the combined option (scenario 8) is also competitive. Conclusions There are no generic solutions to the lo gistic implications of the Chunnel. Each in dustry and each company within an indus try will have its own limitations and constraints. In some companies, distribu tion costs are high and significant (relative to sales) and in others, they are not. How ever, by developing general frameworks for the issues and analytical models for specific cases, we offer a tool that will allow com panies to evaluate and understand the ad vantages and disadvantages of the Chun nel. The analytical models supported with empirical data allow companies to quantify the impact. One company heavily affected by this study is the French train company in charge of freight (Fret SCNF). The head of its international department recognized that our results are very useful for its stra tegic thinking and permit it to refine some of its marketing and commercial decisions. The opening of the channel tunnel offers an alternative that can improve freight dis tribution in Europe. Transportation solu tions are not better or worse in isolation but in the context of the overall logistics function. Our research summarizes the issues that are relevant from a global logistics point of view. APPENDIX The general analytical model requires the following notation. Define: / = subscript that indicates the intervals, i = 1,2,3,4. ; = subscript to indicate the mode of trans portation where t is for train and k is for truck. / = subscript to indicate the linkage be tween the UK and the continent, that is, / for the ferry and c for the Chunnel. Q = predefined quantity to be shipped be tween the Continent and the UK. Qji = quantity of shipment with the mode ; for interval i. Qi = quantity of shipment through the linkage. Dji = distance on mode ; for interval i. Di = distance on the linkage, that is, ferry or Chunnel. Fji = fixed cost for using mode ; in interval i. Ff = fixed cost for using the linkage /. Vjqi = variable cost for using mode j as a function of the quantity Q in interval i. V?i = variable cost for using mode ; as a function of the distance d in interval i. Su, S12 = are the two short intervals in the Continent. S2i, S22 = are the two short intervals in the UK. Lu, L12 = are the two long intervals in the Continent. ?21/ ^22 = are the two long intervals in the UK. 6j = binary variable equal to 1 if the com pany uses mode / of transportation, 0 otherwise. May-June 1997 57 This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions DORMER, ERNST ?f = binary variable equal to 1 if the com pany uses the ferry, 0 otherwise. ytki = binary variable equal to 1 if there is a change of platform from train to truck at the end of interval i, 0 otherwise. y m = binary variable equal to 1 if there is a change of platform from truck to train at the end of interval i, 0 otherwise. Fpji = fixed cost for changing platforms us ing mode ; at the end of interval i. (??i = speed of mode / in interval i. Ti = time it takes to cross between the UK and the continent by linkage /. Minimize 3 4 FkiSk + X (hi + Fpk?jtki + X VkqtQki + I VMiDki + Fn6t + X (Fti + Fpti)ykti i=\ i=2 4 4 + 1 VtqiQti + I VtdiDti 1=1 1=1 + (Ff+VfdDf)?f+VfqQf + (Fc + VcdDc)(l - 6f) + VcqQc + Fpf?f + Fpcytk2 + Fpcjka. Subject to Qn s Q6t, Q*i s Q?k, Qf = Q6f Qn + Qh * Q, Qa + Qn = Q, Qf + Qc * Q, Qo + Q? ^ Q, On + Qh s Q Qn - Qt2 s QTfH, Qm - Qk ^ Qr?i, Qf2 - Qn ^ Qy?t2/ Qki - Qk3 =? Qym, (3) Qt3 - Qt4 ^ Qjtk3, Qks - Qk4 ^ Qjkt3 Dn + Dkl > SuSf, Dt2 + Djt2 ^ Su6f, Dn + Dtt ^ L?(l - 6f), Dt2 + Dk2 > L12(l - ?,), (4) Dt3 + Dt? > S2l?f/ D?4 -h Djt4 > S226f, D?3 + Df? ^ L2i(l - ?f), Dt4 + Dk4 > L22(l - ?,). (5) Q Lm Vi,/Am = 11,12,21,22 sm Q IZ^ + i/T/+(l- fi/)Tc i=l j=t,k ?fi (6) < Required Time. ?f A ?,- G {0,1} V; 7f;iG{0,l}Vf = l,2,3A V;. (7) The first part in the objective function cap tures the fixed and variable costs of using the truck in each of the intervals. Wlien the truck is used for any two consecutive intervals, no extra fixed costs are incurred (only the vari able costs). This condition is captured by the binary variable 6t and ytJd. The same is true for the train in the second part of the objec tive function. The third term in the objective function captures the cost of using either the ferry (6f = 1) or the tunnel (?f = 0). The re maining terms in the objective function cap ture the costs incurred for changing the logis tics platforms at the crossing. Constraints (1) and (2) make sure that the INTERFACES 27:3 58 This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions CHANNEL TUNNEL predetermined quantity Q will be delivered by any of the possible alternatives. Constraint (3) captures the changing of platforms and constraint (4) determines the distances by mode of transportation according to the pre defined short or long distances. It is assumed that S - - is smaller than L for any subinter val. Constraint (5) makes sure that if quantity Q is going to be delivered by train (or by truck) in interval i then the corresponding distance will be traveled by train (or truck). Constraint (6) is a service constraint for the rninimum lead time required. Finally, con straint (7) is the binary constraint. References Journal de la Marine Marchande 1994, "ADPF: Les liaisons transmanche/' No 393 (February). Bonnaud, L. 1994, Le Tunnel sous la Manche: Duex Si?cles de Passion, H?chete, Paris. Coton, M. 1994, "La manche," FRET Magazine, No. Special Tunnel, No. 60 (May), pp. 38-47. Institut des Hautes Etudes Logistiques 1994, "Logistics impact of the Chunnel," cahier de IHEL, No. 2 (November), ESSEC, Cergy Pontoise, France. Merchant, J. E.; Knowles, J. B.; and Acheson, J. M. 1991, 'The Chunnel and the changing face of a UXunified European market," Pro ceedings of the seventh International Logistics Congress, Society of Logistics Engineers, French Chapter, Paris, pp. 198-208. Project Cost-CEE 1993, "Rapport final d'action: Evaluation des effects du tunnel sous la man che sur le flux de trafic," Office of Official Publications, European Community, Luxem bourg. Sloan, A. K. 1991, "Eurotunnel vision: The new focus on site selection, shipping routes, and business travel," Journal of European Business, Vol. 2, No. 3 (January-February), pp. 8-12. Vicherman, R. W. and Graven, J. 1986, "The fixed channel link: Consequences for regional growth and development," Regional Studies Association Conference, London, March 21. Marie France Lagraulet, Chef du D?par tement International, Direction du Fret, SNCF, 44, Rue de Rome, 75008 Paris, France, writes, "Professors Dornier and Ernst developed a study for the Logistics Impact of the Chan nel Tunnel in Europe. Before this study was done, many ideas existed about the economics and financial aspects of the Channel Tunnel but no serious approach had been taken to the logistics implications of this new rail infrastructure. "The study allowed a close interaction between academics and logisticians in Eu ropean companies, and I would like to ac knowledge that the results presented are very useful for our strategic thinking and permit us to refine some of our marketing and commercial decisions." May-June 1997 59 This content downloaded from 86.55.176.96 on Wed, 9 Oct 2013 07:06:17 AM All use subject to JSTOR Terms and Conditions