Pricing in Transportation Management Estimating Demand (U.S Department of
Transportation) chpt 4
Many economic statistics including logistics costs are often cited in relation to Estimating Transportation
Demand. Implying an underlying relationship between the two. Though a relationship does indeed exist,
the relationship is a multi-faceted one prone to misinterpretation.
GDP is the total value of all goods and services produced during a certain period of time, such as a year,
that has not been consumed by the production itself. In physical terms, GDP is a huge basket of goods and
services that is available for final uses including consumer use, government use, investment use, and
foreign use (export). Therefore, the total value of GDP is equal to the total value of final use or final
demand. When the popular press states that two thirds of the US GDP is accounted for by consumer
purchase, it means that consumers purchase two thirds of the goods and services in the GDP basket. In
other words, consumers consume two thirds of the GDP.
Final use or final demand can be classified into different categories according to their general purposes.
For example, consumers purchase cars, tires, gasoline, auto insurance, etc. to serve their transportation
needs. Governments purchase steel, concrete, asphalt, etc. to build highways for transportation needs.
Therefore, consumer expenditures on cars, tires, gasoline, and auto insurance and government
expenditures on highway construction have one thing in common: they are all for the purpose of
transportation. All purchases for transportation purposes by consumers, governments, and businesses
(investment), and foreign users (export) can be put together and be called total transportation final
demand. When the transportation literature states that transportation accounts for 11% of the US GDP, it
means that all the final users purchase or consume 11% of the goods and services in the GDP basket to
serve their transportation needs. Similar final demand measures can be developed for other broad social
functions such as education, health, housing, and so on. One may treat logistics as a broad social function
that includes transportation. In that case, total logistics final demand as a percentage of GDP means that
logistics consumes that percentage of goods and services in the GDP basket. When a particular sector or
activity is related to GDP as a basket of goods and services for final uses, the resulting comparison is a
measure of how much of the GDP that sector or activity consumes. It is not a measure of how much the
sector in question produces or contributes to GDP.
Value-Added
Each industry purchases all different kinds of goods and services to run its operations. Through different
operational procedures equipped with capital and staffed with labor, each industry consumes what it
purchased and produces products and services to sell to its customers. The industry's purchase of goods
and services for its internal operations constitutes its intermediate purchase. The total value of the
industry's products and services constitutes its gross output. The gross output minus the intermediate
purchase is the industry's total value-added. All industries' combined value-added constitutes GDP.
Therefore, GDP as total industry value-added can be divided into different parts according to its origin.
Unlike GDP as a basket of goods and services for final use to which some industries may have very low
contributions (e.g., iron ores and pig iron,) GDP expressed as the total industry value-added is produced
by each and every industry in an economy.
An industry's contribution to GDP is normally measured by that industry's total value-added. It is indeed
in that sense that Triplett and Bosworth state that the transportation sector represented 3.3% of GDP in
2001. It is also in this sense that one can talk about logistics' contribution to GDP. The difficulty is that all
logistics activities are not neatly classified into a unique industry. To gauge the true contribution of
logistics to GDP, one must make extensive reclassifications, which greatly complicate measurement
effort.
As discussed above, GDP has different economic meanings. However, GDP is also a well-known
economic variable, the level of which can be used without any of its underlying meanings attached. For
example, often people may find it convenient to compare some economic measures with GDP, simply
because GDP is a good yardstick. In those cases, relating a particular economic measure to GDP conveys
no more intrinsic meaning than relating the size of the moon to the size of the earth. Anything that is not
comparable to GDP but is so compared should be interpreted this way. The level of logistics costs is such
a measure because it includes intermediate expenses by businesses and is therefore non-comparable with
GDP. Eno Transportation Foundation's transportation bill, including the passenger bill and the freight bill,
is another such measure. The result of comparing such measures to GDP only indicates the relative sizes
of the objects measured. It reveals nothing about the role of the entities' contribution to or consumption of
GDP. Therefore, phrases such as "contribute to" and "account for" should be avoided in these
comparisons. Instead, "GDP equivalent" may be used.
Methodology for Calculating Logistics Costs
The CASS measure of logistics costs includes three broad cost components comprising the business
logistics system. They are inventory-carrying costs, transportation costs, and logistics administration
costs. The inventory-carrying costs and transportation costs both contain subcomponents. Below each of
these cost categories is described in accordance with a publication by the United Nations.
Inventory-Carrying Costs
Inventory carrying costs include the cost of money (opportunity or interest), ad valorem taxes, insurance
and shrinkage. Inventory carrying costs vary with the level of inventory stored. They can be categorized
into the following four groups: (1) capital costs, (2) inventory service costs, (3) storage space costs, and
(4) inventory risk costs.
Capital Costs for Inventory Investment: Holding inventory ties up money that could be used for other
types of investments. Consequently, a company's opportunity cost of capital should be used to reflect
accurately the true cost involved. All inventory carrying cost components must be stated in before-tax
numbers, since all the other costs in the trade-off analysis, such as transportation and warehousing, are
reported in before-tax dollars.
Inventory Service Costs: Inventory service costs consist of taxes and insurance paid as a result of holding
inventory. In general, taxes vary directly with inventory levels. Insurance rates are not strictly
proportional to inventory levels, but are related to the value of inventory over a specified time period.
Storage Space Costs: Storage Space Costs can be incurred at four types of facilities:




plant warehouses;
public warehouses;
rented (leased) warehouses;
company-owned (private) warehouses.
Inventory Risk Costs: Although inventory risk costs vary depending on the company, in general, they
include charges for: (1) obsolescence, (2) damages, (3) pilferage, and (4) relocation.
Inventory carrying costs, the cost of taxes, and obsolescence, depreciation and insurance are estimated
according to the Alford-Bangs Production Handbook formula. In this formula, obsolescence accounts for
nearly 40 per cent of total inventory carrying costs, thus demonstrating the challenges facing inventory
managers in the world of fast cycles and just-in-time procurement. Total warehousing cost estimates
encompass both public warehouses and private warehouses operated by manufacturing and distribution
companies. Public warehousing costs are obtained from the public warehousing services data reported by
the Commerce Department's Census Bureau. Private warehousing costs are independently obtained by
CASS. Relocation costs are incurred at the transshipment of inventory from one warehouse location to
another to avoid obsolescence.
Transportation Costs
Total transportation costs include costs for both primary and secondary transportation. Primary
transportation is the movement of finished goods from plants and vendors to warehouses. Primary
transportation costs include costs for replenishment movement from plants or distribution centers to other
plants or distribution centers, and inbound freight on purchased finished goods movement to plants or
distribution centers for resale. Secondary transportation is the delivery of finished goods to customers.
Secondary transportation costs include payments to carriers, pickup allowances, truck or rail equipment
and operations costs, and freight allowed. Freight may originate in plants, distribution centers or
terminals.
Transportation costs include carriers' charges for all modes, including trucking, rail transport, water and
oil pipeline, and both international and domestic airfreight transport, as well as freight forwarding and
shipper-related costs. The freight transportation costs in the CASS report account for the largest portion of
logistics costs. These estimates are based on the annual Transportation in America report published by
the Eno Transportation Foundation. Of total transportation costs, trucking costs dominate the United
States business logistics system, accounting for more than 80 percent of the nation's freight bill. Shipperrelated costs include the loading and unloading of transportation equipment, as well as traffic department
operations.
Logistics Administration Costs
Logistics administration costs include indirect management and support staff, which includes central
distribution staff, planning and analysis staff, and the traffic department. Computer software and hardware
cost allocations are another important distribution expense. Such costs are included in the appropriate cost
categories, with any remainder considered part of administration costs.
Logistics administration costs are set at four per cent of the sum of the inventory-carrying costs and
transportation costs, in line with the methodology that has been consistently employed since the data
series was first published in 1973.
The details of these cost components and the CASS methods of measuring them are included in Table 1,
below.
Cost Components and Methods of Measurement
ENO Methodology for Calculating Transportation Costs
The Eno Transportation Foundation estimates the total cost of freight transportation in the United States
and publishes this estimate with modal details as nation's freight bill in its annual series Transportation in
America. As stated above, CASS relies on the Eno freight transportation cost estimate (freight bill,) which
is the largest component of the CASS estimate of logistics costs. Therefore, the Eno methodology for
calculating the freight bill should be considered part of the overall CASS methodology. The following
description of the freight bill estimate is based on Transportation in America, 19th Edition.
Intercity Truck
Intercity truck includes trucking operations for freight, mail, and express services. Recent year estimates
for ICC-authorized trucks are based on Census For-Hire Truck Revenue surveys. Estimates for non-ICCauthorized trucks are derived as follows. First, the ICC-authorized truck vehicle-miles are subtracted from
total freight-carrying truck vehicle-miles, using large truck vehicle-mile data for non-urban highways
from the Federal Highway Administration's Highway Statistics. Second, the resulting truck-vehicle miles
are multiplied by average revenue per vehicle-mile estimated using data for Class I and Class II ICCregulated carriers.
Local Truck
Costs for local trucking are estimated as follows: The total truck vehicle-miles for urban travel (other than
interstate urban travel) are taken from FHWA's Highway Statistics Table VM-1. An estimated percentage
representing use of small urban trucks (pickups, vans, etc.) for passenger travel is subtracted from the
FHWA total. Vehicle miles for trucks carrying tools-of-the-trade (plumbers, repairmen, etc.), obtained
from U.S. Census data, are added to the remaining truck vehicle miles. The estimated per-mile costs were
determined using data showing the cost of different classes of single-unit trucks (truck driver costs added)
from the Federal Motor Vehicle Fleet Report, as published by the General Services Administration.
Railroads
Figures for 1980 to present are computed by using Class I rail freight revenues shown in Railroad Facts,
published by the Association of American Railroads (AAR), and adding revenues from non-Class I
railroads, plus outlays for rail freight service assistance and for rail employee pension benefits under the
Railroad Retirement Act paid by the U.S. Government. Data for earlier years includes freight, express,
baggage, mail, switching and demurrage, and is taken from the Transport Statistics in the U.S., Part I,
published by the ICC.
Water
International: Figures for 1980 to present represent outlays for ocean transportation for U.S. imports
(paid by shippers), including shipping, port expenditures and charter, but not military freight, taken from
Department of Commerce (DOC) analysis entitled "International Transportation Transactions." U.S.
export figures are from footnote 'c' of the same source. Earlier figures were taken from special reports in
the DOC's Survey of Current Business.
Coastal/intercoastal: Figures are estimated by multiplying ton-miles from "Waterborne Commerce of the
U.S., Part 5, National Summaries," as published by the U.S. Corps of Engineers (Corps), by estimated
revenue per ton-mile.
Inland waterways: Figures are calculated using the same methodology used to calculate
coastal/intercoastal costs. Figures include both domestic and foreign traffic moving in U.S. inland
waterways.
Great Lakes: Figures are calculated using the same methodology used to calculate coastal/intercoastal and
inland waterways costs.
Locks and channels: Figures include actual outlays made by the Corps for construction, operation and
maintenance of channels and harbors, locks and dams, and navigation, but exclude multi-purpose
projects. Figures are taken from the Budget of the United States.
Oil Pipeline
Regulated and Non-regulated: Current figures are based on Federal Energy Regulatory Commission data
as reported by the Oil Pipeline Research Institute. Earlier figures were from ICC data for regulated
pipelines, and estimated to be 16% of total for non-regulated pipelines (estimates provided by the ICC
and the Association of Oil Pipelines.)
Air
Domestic and international: All scheduled and non-scheduled carrier figures are from the Department of
Transportation's Air Carrier Financial Statistics. Section 418 All-Cargo carrier figures are from separate
DOT reports, plus air-freight waybill taxes.
Freight Forwarders
Figures through 1975 are from ICC annual reports, and include only remaining operating revenues after
deducting transportation purchased from rail, truck, and water carriers to avoid duplication of revenues
from forwarders paid to carriers. The figures from 1980 to present are estimates based on annual changes
in freight forwarder employment (Department of Labor data) and total average compensation (DOC data.)
Shipper Related Costs
Loading and unloading freight cars: Figures are derived by multiplying the sum of total rail freight
carloads by estimated cost per car from Railroad Facts, published by AAR. Yearly average cost is
adjusted to reflect changes in average weekly earnings in manufacturing industries shown in "Economic
Indicators," published by the President’s Council of Economic Advisors (CEA.)
Operation of traffic departments: Estimates are based on published surveys of total costs of salaries of
industrial traffic executives, administrators, supervisors and traffic clerks, handlers, and secretaries.
Average salary levels are adjusted annually based on average weekly earnings of manufacturing workers,
from "Economic Indicators," published monthly by the CEA.
Estimates for Recent Years
The latest available estimates of logistics costs from CASS are those for the year 2002. Table 2, based on
data from the 14th edition of the CASS Annual State of Logistic Reports, shows that the total logistics
costs were $910 billion in 2002, equivalent to 8.7% of the U.S. gross domestic product in the same year.
Table 2 - U.S. Business Logistics Costs, 2002
Carrying Costs - $1.444 Trillion all business inventory Billions of Dollars
Interest
Taxes, Obsolescence, Depreciation, Insurance
Warehousing
23
197
78
Transportation Costs
Motor Carriers:
Truck - Intercity
300
Truck - Local
162
Other Carriers:
Railroads
37
Water
27
Oil Pipelines
Air
Forwarders
Shipper Related Costs
Logistics Administration
Total Logistics Cost
9
27
9
6
35
910
The following two charts present graphically the information contained in table 2 above. Transportation
accounted for 63% of the total logistics costs, while inventory-carrying costs accounted for 33%, of which
interest costs account for 8%.
Chart 1 description: Chart 1 presents the shares of the three main components of the logistics costs such
as inventory-carrying costs (33%), transportation costs (63%), and logistics administration costs (4%).
Chart 2 description: Chart 2 shows the subcomponent shares of the inventory-carrying costs such as
interest (8%), warehousing (26%), and taxes, obsolescence, depreciation and insurance (66%).
Transportation costs, the largest component of logistics costs, are largely composed of trucking costs.
Intercity and local trucking make up a combined total of nearly 80%, which is more than 10 times as large
as the second largest mode, railroads.
Chart 3 description: Chart 3 shows the subcomponent shares of the transportation costs such as intercity
truck (50%), local truck (27%), railroad (6%), logistics administration (6%), water (4%), air (4%), oil
pipelines (1%), forwarders (1%), and shipper-related costs (1%).
Table 3, based on data from the same CASS publication, provides time-series data. Both logistics costs
and its largest component, transportation cost, have experienced a steady decline as compared to GDP,
while the inventory cost shows some cyclical fluctuations over time. Along its decline compared to GDP,
transportation as a share of the total logistics costs has trended upward, ending more than 18 percentage
points higher in 2002 than in 1981.
Table 3 - The Cost of the Business Logistics System in Relation to Gross Domestic Product ($ in Billions
Except GDP)
Ye
ar
Nomin
al
Values
of All
Invent
ory
Invent
ory
Transp
or-
Admi
ni-
Total
U.S.
Transpo
r-
Logisti
cs
Invent
ory
Transp
or-
GDP
Business
Carryin Carryin
g
g
tation
strati
ve
Logisti
cs
tation
as %
% of
GDP
as a %
tation
as
$
Trillio
n
Inventor
y
Rate
(%)
Costs
Costs
Costs
Costs
of
Logistic
s
of GDP
% of
GDP
198
1
3.13
747
34.7
259
228
19
506
45.1
16.2
8.3
7.3
198
2
3.26
760
30.8
234
222
18
474
46.8
14.5
7.2
6.8
198
3
3.54
758
27.9
211
243
18
472
51.5
13.3
6.0
6.9
198
4
3.93
826
29.1
240
268
20
528
50.8
13.4
6.1
6.8
198
5
4.21
847
26.8
227
274
20
521
52.6
12.4
5.4
6.5
198
6
4.45
843
25.7
217
281
20
518
54.2
11.6
4.9
6.3
198
7
4.74
875
25.7
225
294
21
540
54.4
11.4
4.7
6.2
198
8
5.11
944
26.6
251
313
23
587
53.3
11.5
4.9
6.1
198
9
5.44
1005
28.1
282
329
24
635
51.8
11.7
5.2
6.0
199
0
5.8
1041
27.2
283
351
25
659
53.3
11.4
4.9
6.1
199
1
5.99
1030
24.9
256
355
24
635
55.9
10.6
4.3
5.9
199
2
6.32
1043
22.7
237
375
24
636
59.0
10.1
3.8
5.9
199
3
6.64
1076
22.2
239
396
25
660
60.0
9.9
3.6
6.0
199
4
7.05
1127
23.5
265
420
27
712
59.0
10.1
3.8
6.0
199
5
7.4
1211
24.9
302
441
30
773
57.1
10.4
4.1
6.0
199
6
7.81
1240
24.4
303
467
31
801
58.3
10.3
3.9
6.0
199
7
8.32
1280
24.5
314
503
33
850
59.2
10.2
3.8
6.0
199
8
8.78
1317
24.4
321
529
34
884
59.8
10.1
3.7
6.0
199
9
9.27
1381
24.1
333
554
35
922
60.1
9.9
3.6
6.0
200
0
9.87
1478
25.3
374
590
39
1003
58.8
10.2
3.8
6.0
200
1
10.08
1486
22.8
339
581
37
957
60.7
9.5
3.4
5.8
200
2
10.47
1444
20.6
298
577
35
910
63.4
8.7
2.8
5.5
Chart based on data in table 3, more clearly shows the different growth patterns of the three major
components of the logistics costs.
Chart shows the different growth patterns of the three major components of the logistics costs such as
inventory-carrying costs, transportation costs, and logistics administration costs. While administrative
cost component is the lowest in level and almost flat over time, transportation component is the highest in
level and fastest in growth. Inventory-carrying cost is in the middle and fluctuates over time.
Assessment and Recommendations
The CASS methodology was designed and implemented to measure U.S. business logistics costs. What
are actually measured are U.S. business freight logistics costs. Business logistics encompasses not only
freight logistics, as businesses must get the right people to the right place in right time no less so than they
must ensure the delivery of their supplies or outputs. A full measure of business logistics costs should
thus include both freight and passenger logistics costs. The CASS measure of business logistics costs is
incomplete because it excludes business passenger logistics costs.
For measuring business freight logistics costs, the CASS approach is generally valid. The CASS measure
captures key components of the freight logistics without including unrelated internal business functions.
In fact, among many of the business operations outside transportation and warehousing that are often
incorrectly classified as logistics functions, the CASS approach only includes logistics administration. As
was discussed in section II, a more inclusive measure can be useful for some purposes but the narrower
measure based on the CASS approach is more useful for public policy analyses and public decisionmaking.
The measurement of logistics administration costs under the CASS approach is undoubtedly very rough.
However, this element of the overall logistics costs is very small in comparison to transportation costs and
inventory-carrying costs, which together account for over 90% of the total.
The CASS methodology relies on Eno estimates of transportation costs. Section IV details the data
sources and methods used to calculate the costs. Because input data come from so many different sources,
and because the data were originally collected or compiled for different purposes, whether they are
internally consistent is not clear. The Eno approach is generally defensible under the very real condition
that not many alternative source data exist.
Eno estimates of trucking costs do include the extensive in-house trucking operations since they are
derived on the basis of truck vehicle miles, and vehicle mile data cover private trucks. There are also inhouse operations for other modes such as railroads that are not counted in Eno estimates because the
estimates are revenue-based and in-house operations usually do not have identifiable revenue records. The
U.S. Transportation Satellite Account (TSA) was designed to produce estimates of all transportation
operations for all modes. The Bureau of Transportation Statistics of the U.S. Department of
Transportation is currently exploring ways to capture in-house railroad operations, corporate jets, and
private barges and ferries as well as in-house trucking. Future TSA estimates of transportation output may
provide a better choice for transportation costs. Before then, Eno provides more readily usable data than
the national accounts because the national accounts data are often industry-based without detailed enough
distinction between passenger and freight transportation. Also the national accounts do not cover any inhouse operations.
The third component of the CASS logistics costs is inventory-carrying costs. The CASS estimates of
these costs are well based, using inventory data from the national accounts and warehousing data from the
Census. The annualized commercial paper rate is a good approximation of the rate of interest cost for
capital tied-up in the form of inventory. The parameters from the Alford-Bangs Handbook that the CASS
Information System uses are well within the range of the industry standards.
Improved Measure of Logistics Costs
While the CASS methodology is generally sound, it may be improved. Several changes, if implemented,
would allow the CASS estimates to better reflect real changes in the logistics system.
First, the prices of the goods in inventory should be held constant to allow inventory levels to be
estimated in constant dollars. This is a standard practice applicable to all other logistics cost items.
Without controlling price effects, inventory level fluctuates even if the real inventory level does not
change.
Second, the level of inventory can be smoothed over time to lessen the effect of cyclical changes. As
discussed in section II, an unexpected economic slowdown usually pushes up business inventory causing
an increase in inventory carrying cost, other things being equal. Likewise, an unexpected economic
upturn causes inventory to go down. While the resulting level of inventory-carrying costs can still be
usefully measured, its changes are not good indicators of whether the underlying logistics system is
working better or worse. A moving-average or some other time-series processes may be applied to the
inventory data so that a more persistent trend can be identified.
Third, the interest rate used to estimate the inventory capital costs should be held constant. While the tax
rates and the insurance premiums can both change, the CASS estimation does not individually utilize tax
rate and insurance premium data. Interest rates are also relatively more volatile. Fluctuations in interest
rates directly result in changes in the inventory-carrying cost even if the underlying logistics system stays
unchanged. For a trend analysis, interest rates should be held constant.
With these adjustments for price effects, a constant-dollar time series or a quantity index could be
developed to complement the available current-dollar cost estimates.