Economic and Environmental Implications of Online Retailing

and Centralized Stock Keeping in the United States

H. Scott Matthews and Chris Hendrickson

Green Design

Carnegie Mellon University

Growth of Retail E-commerce ($)Growth of Retail E-commerce ($)

• US DOC began measuring and reporting retail e-commerce in March 2000– 4Q 02 = $14.3 Billion– 1.6% of all retail purchases [$46B for 2002]– Uses same sampling as traditional surveys

• 12,000 out of 2 million firms (dangerous now?)

– Note the following are not considered retail (and thus also not counted in e-commerce $)

• Travel, financial, ticket brokering

E-Commerce Retail Quarterly E-Commerce Retail Quarterly Volume ($B)Volume ($B)

Traditional Retail Logistics Traditional Retail Logistics SystemSystem

• Factory to warehouse to warehouse to retailer.

• Last leg of trip by private vehicle

Single Facility SalesSingle Facility Sales

• LL Bean, Lands End - catalogue sales

• Amazon (original), MusicOutpost - web based sales from a single facility

www.eiolca.netwww.eiolca.net• Free life cycle assessment software on the web

from Carnegie Mellon - public data• >20,000 uses this year• economic, environment and resource

requirements for purchases from any sector– just added injury and fatality data

• based on linear model of economy and 500 sectors!

EIO-LCA ImplementationEIO-LCA Implementation

• Use the 480*480 commodity input-output matrix of the U.S. economy (1997)

• Augment with sector-level environmental impact coefficient matrices (R) (average impact per dollar of output)

• Linear environmental impact calculation:

E = R[I - D]-1F

Comparison of Freight Modes

0

10

20

Total Energy (TJ/$1M) Direct Energy(TJ/$1M)

Total Energy (MJ/ton-mile)

Direct Energy (MJ/ton-mile)

Air

Truck

Rail

Book Publishing Case StudyBook Publishing Case Study

• Traditional System:– logistics: printer > warehouse > warehouse >

retailer > home, all by truck/car– unsold returns - roughly 35% for bestsellers

• E-commerce System:– logistics: printer > warehouse > distribution

center >home, by air and truck.– No unsold returns

Comparative AnalysisComparative Analysis

• Traditional:– truck transport (1000 mi)

– warehousing

– production of returns

– reverse travel of returns

– private automobile transport

• E-Commerce– air transport (500 mi)

– truck transport (500 mi)

– warehousing

Comparative Costs ($ 1000s for Comparative Costs ($ 1000s for $ 1 M or 290,000 books)$ 1 M or 290,000 books)

Traditional E-Commerce

W/o Returns or Auto

700 992

W Returns but w/o Auto

1,300 992

W/o Returns but w/ Auto

1,170 992

W returns and auto

1,780 992

Why are E-Commerce Costs Why are E-Commerce Costs Lower?Lower?

• Higher transportation costs for e-commerce, but:– Returns of unsold copies – Lower retail transactions costs– Lower (private) automobile cost

• Result is cost advantage for e-Commerce

Energy(TJ)

*ConventionalAir Pollutants

(mT)

RCRAHazardousWaste (mT)

GreenhouseGas Emissions(CO2 Equiv.,

mT)

Trucking (with returns) 5.3 8.9 9.1 354

Production 9.45 8.1 23 612Packaging 1.2 1.1 3.5 84Passenger Trips 9.7 42 0 611Pass. Fuel Prod. 7 1.7 30 337Total 33 62 66 2000

Trucking 1.2 2 2 80Air 7 3 9 440Production 7 6 17 453Packaging 4 3 11 254Delivery Trips 11 18.5 19 736Pass. Fuel Prod. 0 0 0 0Total 30 33 58 1963% Difference 9 47 12 2

Summary Environmental ImpactsSummary Environmental Impacts(per-book basis)(per-book basis)

Trad. E-Com.

Energy (MJ) 115 105

Conventional Air (kg) 0.2 0.1

Hazardous Waste (kg) 0.2 0.2

Greenhouse Gas (kg) 7 7

Sensitivity AnalysisSensitivity Analysis

• ‘Traditional’ becomes better if:– Local distance to bookstore < 3 miles– Air transport of books > 700 miles– Orders not shipped together

Harry Potter CaseHarry Potter Case

• 250,000 books shipped on release date by Amazon.com– 9,000 trucks and 100 airplanes

• 2.5 lb. book, 0.7 lb. packaging (3.2 lbs.)– Bookstores got 10 per box

• Shopping trips for books avg. 11 miles– Marginal effects

Example 2: Centralized or Virtual Example 2: Centralized or Virtual WarehouseWarehouse

• Traditional: Stock at Local Warehouse with Rapid Delivery but High Stock Costs

• Centralized or Virtual: Stock at Remote Warehouse with Rapid Delivery by Higher Cost Mode. (Note E-commerce Model: Delivery Mode Choices).

Warehousing vs. Trucking ($ 100M)Warehousing vs. Trucking ($ 100M)

Effects Warehouse Truck Difference

Transactions ($ M) 180 200 -20

Elec. (M kw-hr) 44 20 23

Energy (TJ) 770 2,500 -1,700

Air Emissions (mt) 830 5,700 -4,900

Haz Waste (mt) 4,200 2,800 1,400

Fatalities 0.2 0.3 -0.1

Example: Defense Logistics AgencyExample: Defense Logistics Agency

• Military spare parts management: 632,000 part types, inventory of 108 million parts, value of $ 83 B, 286 storage locations.

• GAO – Consolidate spare parts inventory in major sites.

• GAO – also, reduce excess inventory (not analyzed here)

Category Cost (Saving)

EIO-LCA sector used

Non-major location Inventory Reductions

($693 million)

Warehousing and Storage

Shipping Back to Major Warehouses

$40 million Trucking and courier services, non-air

Major Locations Increased Inventory

$78 million Warehousing and Storage

Centralized WarehousingCentralized Warehousing

Local to Central WarehousesLocal to Central Warehouses

Effects Local Whs Truck Central Whs.

∆

Elec. (M kw-hr) -300 10 30 -260

Energy (TJ) -5,400 1,000 600 -3,800

Air Emissions (mt) -5,700 2,300 640 -2,800

GGR (mt CO2) -440,000 74,000 49,000 -317,000

Haz. Waste (mt) -29,000 1,100 3,200 -25,000

Some Analysis IssuesSome Analysis Issues

• What are E-commerce future scenarios?

• What will happen with local manufacturing technology?

• What will be impact of new business models for controlling inventory (warehousing), manufacturing and shipping.

• What is appropriate time scale of analysis?

Analysis Boundary Issues (cont.)Analysis Boundary Issues (cont.)

• Buildings - decrease in retail or warehouse space?

• Shopping - will individuals substitute other travel for reduced shopping travel?

• Computers - what fraction of personal computer burdens should be allocated to E-commerce?

Will E-commerce Improve or Will E-commerce Improve or Degrade the Environment?Degrade the Environment?

• Net Effect - hypothesis: depends upon product and processes and upon the analysis boundary.

• Appropriate Public Policy - – Don’t ignore service industries in environmental

policy.– Consider life cycle costs including social costs.– Take advantage of cost savings to create

environmental benefits

AcknowledgmentsAcknowledgments

• AT&T Foundation’s Industrial Ecology Faculty Fellowship Program

• Organization of Economic Cooperation and Development (OECD)

• Japan Foundation Center for Global Partnership

ReferencesReferences

• "Environmental and Economic Effects of E-Commerce: A Case Study of Book  Publishing and Retail Logistics," Hendrickson, Chris T., H. Scott Matthews, and Denise L. Soh,  Transportation Research Record 1763, pp. 6-12, 2001.

• "Harry Potter and the Health of the Environment," Matthews, H. Scott, Chris Hendrickson and Lester Lave, Spectrum, 20-22, November 2000.

• The Economic and Environmental Implications of Warehousing Strategies in the New Economy, Matthews, H. Scott and Chris Hendrickson,  J. of Industrial Ecology, 2002.