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

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89 6.1 Conclusions This project has examined the characteristics of disruptions to freight networks and devel- oped two approaches to analyzing the associated economic impacts. The conclusions from this research relate to three important areas—characteristics of the disruptions and network responses themselves, modeling and analysis approaches, and the proposed methodologies for analyzing the economic impacts of disruptions. 6.1.1 Disruptions and Network Responses In many of the cases studied for this project, the freight system responded quickly to the disruptions by either rerouting or using other means of delivering cargo. In such cases, the economic impacts to the carriers and customers were limited and regional. In a few rare cases, such as the port shutdown in Los Angeles/Long Beach, the economic losses were much greater. Several characteristics of the disruption and network response are important to consider. • The spatial or geographic scale of disruption will likely have a direct bearing on the magnitude of the economic impact. For example, the closing of a major port or key links in a land trans- portation network could have negative impacts throughout the supply chain, assuming little redundancy in moving goods on alternate paths. • Different types of disruption could have a range of direct and indirect economic impacts. For example, the removal of one critical link or mode in a network could create a bottleneck that might or might not have important consequences to goods flow. In the situation where a single mode is disrupted, shipments are likely to transfer to alternative modes. On the other hand, widespread network disruption (for example, due to floods and hurricanes) could have a multitude of overlapping and connected economic impacts. • The characteristics of the freight being disrupted will also affect economic outcomes; disruptions of high-value, time-sensitive freight within a low-inventory, just-in-time supply chain will create larger economic impacts. • The temporal nature of disruption will also have potentially important economic consequences. A short disruption, that is, one lasting a day or up to a week, might cause some temporary or short-term economic loss, but overall would have minimal economic impacts. However, one lasting a much longer time could have severe consequences depending on how industries and supply chains adjust. • The economic impact of severe bottlenecks and disruptions could affect a wide range of supply chain participants, not just the ocean carriers, truckers, railroads, and shippers that are using the network to transport the goods. These participants include public agencies, local labor unions, local retailers, warehousing and distribution providers, and potentially a significant C h a p t e r 6 Conclusions and Future Research

90 Methodologies to estimate the economic Impacts of Disruptions to the Goods Movement System number of consumers and economic organizations throughout the nation. The geographic incidence of impacts can shift over time as well. • Network redundancy is a very important characteristic of economic impact. If, for example, goods flowing through a particular bottleneck can be rerouted without significant economic costs, the overall economic impact of a bottleneck could be minimal, ignoring for a moment the economic consequences to the local economy. • The global goods movement supply chain is a multi-tiered system with various entities, stake- holders, networks, and modes involved that span a huge physical space and by their very nature are susceptible to natural and human-caused disruptions. International supply chains are also intricately interconnected. • In case of a major event, such as a terrorist attack or an earthquake, standard risk mitigation measures, such as increasing safety stock, diversifying supply base, and building redundancy into logistical systems, may or may not afford much protection from damage. • Disruption resistance (security) and tolerance (resilience or recovery) are both important measures in disruption management. These measures have to be balanced with concerns regarding productivity, while promising to provide sufficient benefits to justify costs. 6.1.2 Modeling and Analysis Approaches A number of important issues for economic impact modeling were identified from this research, as follows: • Various types of economic models can help estimate the potential for losses due to a disruption in the supply chain. These range from simple logical frameworks to complicated dynamic economic simulations. However, it is important to understand the underlying assumptions of these models, particularly with regard to resiliency of, and interdependencies among, businesses and infrastructures. The order of magnitude of loss estimation can be greatly affected by these assumptions. • Cargo can shift to alternative modes when disruptions occur. The extent and nature of this shift will depend on many factors, such as whether the alternative mode serves the same geographic markets, the degree of redundancy and flexibility in the system, the economics of goods movement for different modes (e.g., low-value-added bulk goods moving by barge will not likely shift to truck, but rather to rail as the next best alternative), and the available capacity on alternative modes. Analysis methods must have the capability of estimating the level to which mode shift will occur. • Whether goods can be shipped economically via other modes depends, in addition to the availability of service, on the value and nature of the cargo itself. High-value commodities or commodities that are otherwise time-sensitive, such as air cargo, may not economically be shifted to slower modes. This could have major negative effects on some parts of the country. • The spatial level of the disruption can affect the degree of impact, as well as the types of models used in the assessment. The time dimension is especially important and merits some extra discussion. In the short run, impacts may be smaller under “normal” supply chain conditions, because there will be inventory to fall back upon. In the long run (i.e., for very long-term disruptions), the impacts may also be relatively small in an absolute sense, because both supply chains and industries may adjust. However, the spatial and distributional impacts may be significant to the extent that adjustments become permanent. Assessing economic effects has to take into account the nature of the methodologies being used. For example, a disruption that shifts shipments from rail to truck may require that far more truck drivers be used. Some economic models would see this as a positive impact—more workers are being employed. However, from a user perspective, the system has become potentially less efficient and not enough drivers and/or highway capacity may exist to handle the increased shipments.

Conclusions and Future research 91 In other cases, the methodologies might rely on tools such as scientific surveys. Accordingly, the analysis of disruptions may require more of a “tool kit,” rather than a “one-size-fits-all” model, organized within a consistent methodological framework. Certainly, data issues currently warrant such a tool kit approach. Obtaining data inputs for the high-level approach was not the easiest of tasks, given the wide range of responses and costs possible in any given situation. Local knowledge is invaluable here, although putting a specific numerical value on local insight remains a challenge that may require a search for local data in order to produce suitably accurate/acceptable input parameters. 6.1.3 Methodology for Assessing Economic Impacts of Freight Network Disruptions The high-level methodology, based on the concept that the economic impact of any par- ticular disruption would depend primarily on the commodity characteristics, the extent and nature of the disruption, and the costs associated with different elements of the cost structure (e.g., transport/logistics costs, inventory costs, productivity and output losses), is a useful sketch analysis tool. It can provide the user with an estimate of likely economic costs associated with any particular type of disruption. The more detailed methodology depends on a much higher level of detail and more sophisti- cated analysis of the supply chain dynamic (especially under stress). To fully implement the more detailed methodology, further research would have to be conducted on several elements of the analysis approach, especially the supply chain response to external forces. Both the high-level and more detailed level methodologies described in this report pose sig- nificant data acquisition issues. Some effort is required to provide a meaningful set of estimation parameters that best suit a particular type of network disruption. To the extent possible, local data should be used in developing estimates of disruption costs. The limited amount of extant data sources suggests that some effort also go into keeping track of such costs as an aid to future studies. 6.2 Future Research This project has explored the feasibility of developing a high-level and a more detailed level methodology for assessing the economic impacts of disruptions to freight networks. The high- level methodology is intended to provide decisionmakers with “rules of thumb” that can be used to provide an estimate, often in the short term, of what the economic impact of disruptions might be. The high-level methodology holds promise for indicating which types of economic impacts are likely to be most important for different types of disruptions. It would be very useful to further develop this approach in spreadsheet format for different types of disruptions that could provide more illustration of how the methodology could be employed. Clearly, the more detailed methodology would require a greater level of effort in developing at sufficient detail and at much higher levels of analysis to estimate adequately a finer level of detail in terms of economic impact. In addition to developing both the high-level and more detailed methodology, the following potential research topics result from this project: • Figures 3-2 to 3-6 describe the major components of the more detailed impact methodology. Of these different components, the supply chain response analysis effort (shown in Figure 3-4) is in most need of research. As was shown in earlier sections of this report, many models exist for estimating economic impacts, some of which are used regularly in economic studies. However, this research has shown that analysis and modeling efforts of the supply chain

92 Methodologies to estimate the economic Impacts of Disruptions to the Goods Movement System response phenomenon have not been well developed. Part of this research would be to gain a better understanding of market responses to supply chain disruption. This is an area of research that deserves significant attention. • Transportation network resiliency is one of the most important aspects of determining the ultimate economic impact of a disruption. The degree to which a network can bounce back from a disruption is directly related to the level of short-term economic impact. If a rail line that is disrupted can be restored or traffic diverted in a short period of time, the economic impact is likely to be not as great as a disrupted line that causes weeks of delay. The concept of resiliency, and how it relates to economic impact and the strategies for incorporating resiliency in networks, is an important topic in the broader investigation of economic impacts of network disruptions. • Related to the previous topic, research would be useful in identifying the costs and benefits of different public policies to enhance security and resiliency of freight networks. What policies make the most sense given the different magnitudes of economic costs to likely disruptions? What are the benefits of implementing such policies? What are the costs associated with this implementation? • It was difficult to identify the longer term changes that disruptions cause in production and location decisions. For example, the 2011 tsunami in Japan and the 2011 floods in Thailand have resulted in manufacturers of both automobiles and computers re-thinking the location of some of their production facilities. Very little research has been conducted on such cause-effect relationships between disruptions and location of economic activity. This could be coupled with an analysis of the longer term impact of such changes on U.S. gateways. • The 3PLs are important actors in the supply chain, controlling much of the freight supply chain activity. The bigger 3PLs must deal with large numbers of carriers, shippers, and brokers. Very little information was found relating to the role of 3PLs in large-scale disruptions. How do they cope with cargo reassignments on a potentially vast scale?