Methodologies to Estimate the Economic Impacts of Disruptions to the Goods Movement System (2012)

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61.1 Background The relationship between a healthy economy and transportation system performance is one of the most important relationships in transportation policy (see, for example, Washington State DOT, 2011). As long as commodities and goods need to move as part of the supply chain, providing reliable and cost-effective transportation capability is embedded in the supportive nature of transportation to economic productivity. When such capability is disrupted, either by man-made or natural means, economic losses—to the companies and individuals dependent on the supply chain as well to the broader society—could be significant. Examples of such disruptions have occurred in the United States over the past several decades, including numerous hurricanes, major labor strikes such as the one affecting the West Coast ports in 2002, the closure of northern rail lines during the winter of 2006 for almost 2 weeks due to snow, the 2008 fuel price spike, freezing temperatures and flooding, the shutdown of the national aviation system during 9/11, and stoppages on critical transportation links such as the Baltimore rail tunnel fire. Internationally, disruptions in supply chains have also been caused by health concerns, such as the avian flu. Disruptions such as these not only affect society at large in terms of economic losses and possible environmental impacts from the diverted movements, but so too they can affect the carriers and shippers that provide the services. For example, severe flooding in Arizona and Southern California in 2006 caused an international container carrier to divert two of its mega vessels from the ports of Los Angeles/Long Beach to the Port of Tacoma. Approximately 15,000 containers now had to be unloaded at Tacoma. Two major issues, however, caused this seemingly rational business decision to become very complex very quickly. Customs and Border Protection (CPB) in Los Angeles refused to release the cargo to the CPB office in Seattle and a major railroad serving the Port of Tacoma was informed late in the process of the arrival of the containers, resulting in inadequate rail assets being available to move the containers. As a result, the carrier had to take 7,000 containers back to Los Angeles, causing significant delay and disruption to the supply chain for the cargo carried on the ship and additional costs to the carrier. This report presents the findings of research completed for NCHRP Project 20-59(34), “Methodologies to Estimate the Economic Impacts of Disruptions to the Goods Movement System.” The research examined many different dimensions of disruptions. For example, one of the key issues relating to transportation system disruptions is the magnitude and reach of economic impact(s) that will be associated with such events. Although knowing what these impacts might be is a critical consideration in determining appropriate mitigation and response strategies, many uncertainties hinder a full understanding of the scope and nature of such economic consequences. Understanding the relationships among goods movement/supply chain participants, governmental policies, regulations, and economic activity, especially in the context of disruptions, is complex. C h a p t e r 1 Introduction and Background

Introduction and Background 7 And yet much of public policy oriented to responding to (or anticipating) such disruptions in a way that minimizes economic costs requires a basic familiarity with these integrated relationships. Analyzing the economic effects of such situations can help inform institutional and policy decisions and lead to better responses, thus enhancing the resiliency and efficiency of the overall system. 1.2 Research Objectives The goal of this research was to develop and apply one or more conceptual methodologies for identifying and estimating the short- and long-term impacts of disruptions to the goods movement system. In order to accomplish this goal, the research had the following three objectives: 1. Synthesize the current state of knowledge of the economic impact of transportation disruptions on goods movement and relate this to a conceptual framework that describes key relationships, 2. Develop conceptual methodologies for estimating such economic impacts for different geo- graphic and temporal scales, and 3. Illustrate the use of these methodologies at different scales and in different contexts. 1.3 Research Approach Figure 1-1 shows, as a high-level concept, how to conduct an analysis of the impacts of trans- portation system disruptions. This structure has been used as a successful foundation in other projects that have examined such impacts. The focus of this research project is in Step 2, the development of both a high-level (i.e., use of rules of thumb for estimating economic impacts) and a more in-depth analysis methodology (i.e., more detailed analysis) for estimating the economic impacts of system disruptions. One of the important concepts in developing such methodologies is to construct a tool kit of approaches that can be used for different types of disruptions and impacts. The research approach consisted of the following six tasks. Task 1: Develop a conceptual framework that illustrates the relationship between the supply chain, network performance (and disruptions), governmental policies, and economic impacts. This research began by developing a conceptual framework for understanding the relation- ships among network performance, supply chain practices, and government policies, and how Figure 1-1. Conceptual foundation for conducting disruption-related impact analyses.

8 Methodologies to estimate the economic Impacts of Disruptions to the Goods Movement System these affect economic impacts when disruptions in the transportation system occur. A major goal of this research was to develop interest among transportation officials in using the methodologies developed as part of this project. Such a goal, in turn, required a well thought out description of the relationships among the different variables that could influence economic impacts resulting from a disruption. As noted earlier, many different aspects of these relationships add to the complexity of such an understanding. The purpose of a conceptual framework is to identify the key variables that will influence the magnitude and direction of a particular outcome. For example, a study by North Carolina State University’s Supply Chain Resource Cooperative identified a long list of variables that would increase the impact of disruptions in the supply chain, including such items as customs regulations, storage requirements, security requirements, and legislative actions related to importing or global sourcing. The study identified the following variables as particularly influential in determining the impacts of unexpected and abrupt disruptions: number of transfer points (for diverted traffic), vessel capacity and channel overload, port issues and infrastructure, land transportation network capacities, potential for terrorism, and natural disasters. The conceptual framework needs to include different elements of a typical supply chain and the dependence of economic productivity on a functioning transportation system (and of the different components of this system, such as ports, intermodal terminals, roads, etc.). Several researchers have examined the impact on the supply chain and the different ways of conceptualizing the eco- nomic consequences of disruptions. Kleindorfer and Saad (2005), for example, identified differ- ent types of risks involved with supply chain disruptions and strategies that could be adopted to “manage” such risks. Similarly, Tomlin (2006) looked at the economic value of mitigation and contingency strategies for different types of risks along the supply chain. Wilson (2007) looked specifically at the impact of transportation disruptions on supply chain performance and, in the process, identified the “transportation sensitive” components of the supply chain and the consequences of disruptions. This supply chain perspective is a critical component of an overall conceptual framework that examines the economic consequences of transportation system disruptions. However, the economic consequences of such disruptions will go beyond just the supply chain and potentially will include national, regional, state, and local economic impacts. Many of these impacts will be caused by supply chain disruptions (e.g., reduction in local labor income because of goods temporarily not moving through a bottleneck point). Task 2: Review and evaluate methodologies to measure direct and indirect economic impacts of disruptions to the goods movement system. A literature review was conducted to identify different methodologies that have been used in practice and that could serve as a base from which to choose the methodologies described in Task 3. The results of this literature review were combined with the research team’s own experience and expertise in economic modeling to identify different types of methodologies that could be used to measure direct and indirect economic impacts. Once a comprehensive list of economic impact methodologies had been identified, the methodologies were evaluated based on a set of criteria that directly related to the formulation and use of the methodologies being examined as part of this research project. Evaluation criteria were used that reflected the different characteristics that make a particular methodology appropri- ate for the assessment of particular disruption situations. The results of this literature review were combined with the research team’s own experience and expertise in economic modeling to identify different approaches that could be used to measure direct and indirect economic impacts associated with disruptions. Each approach was then evaluated against a set of criteria deemed

Introduction and Background 9 appropriate for the assessment of particular disruption situations. Here, the results of Task 1 fed into the understanding of the key relationships and the types of approaches one can use to analyze them. A detailed set of evaluation criteria related to such things as data requirements, model specification, timeframe for impact assessment, direct and indirect impact definitions, typical outputs, etc., was developed for this purpose. The methodologies that best reflected the requirements of both the high-level and more in-depth economic impact analyses, along with their ability to characterize a disruption, were identified and their characteristics and model forms used in Task 3. Task 3: Develop both a high-level and an in-depth methodology for estimating the direct and indirect impacts of network disruptions. Based on the results of Tasks 1 and 3, this task developed approaches for a high-level economic impact analysis methodology and one focusing at a much higher level of detail, referred to as an in-depth economic impact analysis methodology. In the initial stages of the research, the intent was to develop the high-level methodology, show its potential application, and then discuss how a more in-depth methodology could result. During the course of the research, however, it was found that identifying all of the possible components of a supply chain and how they could be modeled or analyzed in the context of a transportation system disruption was a more appropriate beginning for the research. By doing so, the research team was able to lay the foundation for both the in-depth methodology as well as the high-level approach. Thus, in this report, the more detailed analysis approach is presented first, followed by the high-level methodology. It was important to note early on that the economic impacts of system disruptions will vary across several key attributes. Figure 1-2 illustrates the concept of how economic impacts could Figure 1-2. Variability of economic impacts over time.

10 Methodologies to estimate the economic Impacts of Disruptions to the Goods Movement System vary over time. In this illustrative example, the disruption has a staged effect on regional economic costs. • Stage 1—In the immediate aftermath of the disruption there would be a diversion of freight to other modes and routes, or in some cases, cargo would stop flowing. This would be a temporary diversion that would result in economic costs stabilizing after the initial shock (flat line). • Stage 2—As disruption effects linger, production may fall and inventories are depleted, but freight-related businesses and other service industries will begin to adjust staff and inventories according to newly established demand levels. This second round of effects may also stabilize (flat line). • Stage 3—Transportation/supply chain adjustments are fully implemented where possible (but at higher cost than before the disruption); some industries further adjust by shifting production to other locations where possible. Firms that cannot adjust supply chains or adjust their production locations may go out of business. After this permanent adjustment, the regional economy equilibrates at a different point. Although the figure does indicate a range of time (e.g., <2 months, 6–12 months, >1 year), in reality, the amount of time that it will take for each market impact to occur will likely vary by the type and scale of disruption, the specific industry or groups of industries and types of commodities and the modes involved. Although the figure is consistent with many studies that indicate increasing costs over time, it is not necessarily the only pattern. For example, economic costs may actually be greatest on a national basis in the medium term, if long-run adjustments are not yet established, but inventories are drawn down and significant supply chain disruptions begin to occur. Over time, long-run logistics adjustments may actually mitigate the effects (e.g., by shifting production to other locations or by major supply chain adjustments), so that costs plateau or even decline some. An analytic progression in problem solving should be followed for conducting economic analysis of system disruptions. This includes the following basic steps: 1. Compile as much freight flow data as possible across the affected network, within the time and resources available for study. Freight should be disaggregated by mode and by industry and commodity as much as possible. 2. Compute short-term direct effects based on an analysis of route and mode diversions. Direct effects are transportation and inventory costs from longer and slower routes and differences in modal costs (e.g., shifts from rail to truck, which are more costly on a per ton basis). 3. Other direct effects are added if a major transportation facility that employs numerous people shuts down or dramatically reduces activity, for example when vessels are not calling or containers cannot be moved. 4. Indirect economic effects for the short run can be estimated from the direct effects, using input-output (I-O) or other economic impact models. 5. For an in-depth methodology, that is, one that includes more variables and can be applied at a greater level of detail, more “behavioral” responses over the longer term (for disruptions that last a long time) may be added. These could include additional problems along the supply chain not reflected in the diversion analysis, or supply chain adjustments over time. Industry responses too can be added, mainly for long-term and very extensive disruptions, where industrial production goes to an off-shore plant or to a plant in another region and alterna- tive supply chain practices are implemented. Behavior responses could be incorporated based on econometric models, dynamic simulation models, or by judgment-based adjustments to the results, each based on detailed industry supply chain data. Different methodologies might be appropriate for different types of issues that are being examined, the level of detail being pursued (high level vs. in-depth methods), the types of available data, and the geographic scope of the impacts.

Introduction and Background 11 Task 4: Prepare an interim report and propose case studies for evaluation in Task 5. An interim report was produced that summarized the results of Tasks 1, 2, and 3. In addition, potential case studies of transportation system disruptions were recommended for project panel consideration. These case studies included historical cases and reflected different modes, geographies, time periods, and ranges of impacts. Task 5: Apply the high-level methodology and identify the additional data and steps needed to implement the in-depth economic impact methodology. The high-level methodology was developed with actual application in mind. In other words, the types of data required, the complexity of the analysis, and the metrics that are reported were defined in a way that will be relevant to transportation officials. The high-level methodology was applied to a case study to show how it can be used to estimate, in general terms, the economic impacts of system disruptions. The application of the methodology focused on national, regional, and local economic impacts (to the extent that data were available) to examine impacts at each level. The application was validated against economic studies that had been conducted on the disruption itself to see how close the high-level methodology came to study results. Task 6: Prepare a final report. The final task was the preparation of this report. 1.4 Intended Audience This research is aimed at providing information to four primary audiences. The first is the public official who is often involved in developing or making the decisions regarding trans- portation systems and networks that will be effective in a wide range of operational scenarios. Understanding the economic implications of system disruptions will be an important point of departure for establishing resilient networks and response strategies that could minimize economic consequences. This audience needs to know the importance of the tradeoffs among the many dif- ferent objectives that can be considered with respect to network resiliency and system structure. The second audience is the general public that needs to gain a better perspective on the relation- ship between economic productivity and transportation system performance. Economic impact assessments can translate transportation disruptions into terms more readily understandable by the general public, including the numbers of jobs affected. The third audience for this research is the educational community. To some extent, the first two audiences above represent the current professional and decision-making community, with all of the challenges of dealing with the transportation system operations that they represent. The research team thought that an important audience for this research must be the universities and colleges that will be producing tomorrow’s transportation professionals, and thus the materials developed by this project should be viewed as potential inputs into course curricula and as background for further research. This project will also help to define where more research and new/improved models are needed, which is work often undertaken by universities. The fourth, and in some minds, the most important audience is the “end-user” community of shippers, transportation carriers, terminal operators and logistics providers. This community is the most impacted by the decisions, policies, and plans made by those entities that do not have a commercial stake, but are relied upon to provide the necessary services and infrastructure during disruptions. Thus, this community must not only understand the current and proposed implications identified in this study, but also be allowed to provide meaningful comment on how these implications and findings will impact the reality of goods movement within their purview.

12 Methodologies to estimate the economic Impacts of Disruptions to the Goods Movement System 1.5 Report Organization The remainder of this report is organized in the following manner: • Chapter 2 presents a literature review of economic impact analysis models that have been used in disruption studies. • Chapter 3 presents a detailed analysis framework that can be used to do an in-depth economic analysis of transportation system disruption. Note that the more in-depth analysis framework is presented first simply because it was more logical to understand fully the different variables and relationships that constitute a valid analysis framework before thinking about a more general, high-level method. • Chapter 4 presents case studies of transportation system disruptions that have occurred over the past 15 years in the United States. These case studies were an important foundation for identifying the rules of thumb for economic impact analysis that constituted the high-level methodology. • Chapter 5 describes the high-level methodology and the rules of thumb that can be used for estimating economic impacts. The methodology is applied against a real disruption case study and the results compared. • Chapter 6 presents conclusions and identifies future areas of research.