Following up on my recent article on simulation of barge transports I summarize the financial impacts and benefits of a barge transport simulation study. I show that a reduction of required barge pool capacity by just one barge results in a long-term (10 year) annual 53% return on investment of simulation study expenses. This means that would the simulation study be a stock, trading on a stock market, it would have a 53% annual return, for 10 years straight. In other words: An abnormally attractive investment. A $10,000 initial investment for a simulations returns more than $700,000 profit over a 10 year time span.
I have already introduced barge transports systems in a previous article and you can read the article here: Simulation of barge transport systems. In this article I focus on cost reduction, and how simulation can be applied to achieve cost reductions in a barge transport system.
How simulation creates value for barge transport
In the end the real value of analytics and simulation roots in the promise that, using these methods, companies can increase their profits by a significantly larger amount compared to what these methods cost in deployment. This example demonstrates that simulation studies can deliver direct, positive impact on a companies net income.
In the specific case of barge transport systems a simulation study delivers positive impact on a companies present or future net income if it satisfies one or several of the following criteria:
- Enables the design and verification of systems that deliver value and that could not have been analyzed and/or designed without the use of simulation.
- Improves capacity planning or dispatch controls in such a way that less barges or tugboats are needed, e.g. through higher degree of certainty or more efficient usage.
- Improves dispatching and routing strategies in such a way that customer satisifsaction is improved to an extend that increases future revenue, e.g. thanks to flexibility and reliability.
In the example that I discuss in this article, I demonstrate how a barge transport simulation study has a return on investment of at least 53% annually – if it manages to improve capacity planning, dispatching controls, and routings in such a way that the total barge requirement is reduced by just one barge. Reducing requirement by more than one barge obviously implies even higher returns!
Financial impact of barge transport simulation study
In a barge transport a simulation study can address three major levers for achieving cost reductions:
- The amount of tugboats deployed.
- The amount of barges for cargo transport.
- The amount of distribution points, for e.g. breaking and rearranging barge groups.
In this article I focus on barges. Barge requirement reductions and cost reductions result from e.g. uncertainty reduction, as system operators are equipped with information and insights and thus no longer need to purchase barges as “safety buffers”. The simulation study delivers these insights. In financial terms you could also say that a simulation study mitigates investment risks, and the “market” rewards this with higher returns. As system operators are equipped with more insights and information, and face less uncertainty, they purchase and deploy the appropriate amount of barges for effectively maintaining dynamic barge transport. Barges that were initially only intended as a safety buffer due to risks and uncertainties are no longer needed.
Improved dispatch and routing policy design also contributes to a reduction in the amount of required barges. The simulation study delivers these improved dispatch and routing policies
A new barge costs between $200,000 and $400,000. To keep things simple I here assume that the price of a new barge is $250,000. If a simulation study leads to results that imply that just one barge less is required, compared to the amount which the system operator would have otherwise foreseen, then this would reduce costs for the operator. In fact, as I will show with below projection data, the simulation study would be so profitable for the operator that it would equal an investment into a stock or other commercial undertaking that generates returns on investment equivalent to 53%, anually!
Below table summarizes the value of the barge, and how that value would develop over a 10 year time period, assuming a 20% annual depreciation. In a second column the original capital invested into the barge is projected assuming 4% annual inflation, and assuming that this capital is invested with nominal returns on inflation level instead of being invested into a barge. This is is the CPI value column. The table also shows the annual alternative investment returns that could be generated on the US stock market (SP 500) if the capital invested into the barge would otherwise have been invested on the stock market. The assumed annual nominal return in this case is 10%. Fourth, a column displays the assumed maintenance costs that are avoided if the barge is not bought. These costs occur for every barge owned, anually. If the barge is not bought and not owned, then these costs do not occur and this is to considered to be a saving, i.e. cost reduction. This results in the fifth and last column. It shows the projected capital value projection at stock market level, adding to this the saved maintenance expenses that were avoided because the barge is not bought. The “saved” maintenance expenses are assumed to be invested with returns equivalent to the SP 500 (10%). Investment returns are cumulative figures, while the maintenance column projects annual maintenance cost (inflated with a 4% inflation rate).
|Year||Barge value||CPI value||Investment returns||Maintenance||Alternative value|
Comparing the depreciated barge asset value after 10 years with the projected alternative stockmarket value (including saved maintenance expenses), the decision of not buying the barge returned $739,883 – $26,844 = $713,040. Assuming that the price of the simulation study is $10,000, this equals an internal rate of return of 53% annually.
Concluding remarks and related content
In this article I demonstrated how a barge simulation study, estimated at a price of $10,000, can be a very attractive investment. It should be treated as an investment decision, since a reduction in the amount of capital deployed into the barge transport system (in this case a reduction of just one barge), translates to more effective and efficient resource and capital allocation, ultimately resulting in higher profits. If you treat a barge transport simulation study as an investment then there is a very good chance that it will generate abnormally high returns for you.
If you are interested in barge transport simulation you can also check out my SimPy simulation template for barge transport simulation. It is available here: Barge transport SimPy simulation.
Data scientist focusing on simulation, optimization and modeling in R, SQL, VBA and Python