Transportation Research Part E 49 (2013) 190–200

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Transportation Research Part E

journal homepage: www.elsevier.com/locate/tre

The impact of lead time reliability in freight transport: A logistics

assessment of transport economics findings
Wout Dullaert a,b,⇑, Luca Zamparini c
a
Department of Information, Logistics and Innovation, Faculty of Economics and Business Administration, VU University Amsterdam, De Boelelaan 1105,
1081HV Amsterdam, The Netherlands
b
Institute of Transport and Maritime Management Antwerp, University of Antwerp, Kipdorp 59, 2000 Antwerp, Belgium
c
Department of Law, Faculty of Social, Political and Regional Sciences, University of Salento, Via per Monteroni, snc, 73100 Lecce, Italy

a r t i c l e i n f o a b s t r a c t

Article history: This paper considers speed and reliability, measured by the average and variance of the
Received 10 March 2011 lead time, to examine the relevance of the latter variable on inventory costs. By using a
Received in revised form 27 April 2012 flexible simulation framework, it is shown that reducing variability does not necessarily
Accepted 24 July 2012
reduce costs and might in fact increase the costs of safety stock, depending on the shape
of the demand distribution during lead time and the targeted service level. This offers a
novel explanation for the wide variety of value of reliability figures obtained in empirical
Keywords:
transport economics research.
Freight transport
Value of reliability
Ó 2012 Elsevier Ltd. All rights reserved.
Safety inventory
Simulation framework

1. Introduction

The wide variety of supply chain costs, affected by the choice of transport mode, includes not only transportation costs
but also purchase costs, order costs and inventory costs. An extensive literature review by Cullinane and Toy (2000) indicates
that out of 15 criteria the following five were most often cited as having a significant impact on the freight modal choice
decision: cost/price rate, speed, transit time reliability, characteristics of the goods, and service. A decade later, Patterson
et al. (2010) survey the literature to compare how third party logistics companies and regular shippers value carrier attri-
butes. Their list of main attributes contains cost, on-time reliability, damage risk, security risk and whether the carrier would
send the shipment by rail for a proportion of the journey. Although formally comparing the two sets of criteria is not pos-
sible, speed and variability in delivery clearly remain two of the key concerns of shippers.
Over the past decades a large body of literature has therefore been devoted to estimating the Value of Time (VOT) and the
Value of Reliability (VOR) using mainly stated preference and revealed preference as techniques to gather data. Section 2
briefly reviews the empirical estimations that were proposed by the transport economic literature and identifies two pecu-
liar results. First, one notices a remarkable overall variability of absolute VOT and VOR. Moreover, there are cases in which
large variation in VOR and negative estimates for VOR (i.e. Fowkes et al., 2001) for some freight forwarders/firms in the sam-
ples considered have not apparently been satisfactorily justified on the basis of the proposed theoretical models, that con-
sider a function of utility (Winston, 1981, among many others) or of cost (i.e. Bolis and Maggi, 2003) and that assume
positive VOR.

⇑ Corresponding author at: Department of Information, Logistics and Innovation, Faculty of Economics and Business Administration, VU University
Amsterdam, De Boelelaan 1105, 1081HV Amsterdam, The Netherlands. Tel.: +31 (0)20 59 83627.
E-mail addresses: wout.dullaert@vu.nl (W. Dullaert), luca.zamparini@unisalento.it (L. Zamparini).

1366-5545/$ - see front matter Ó 2012 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.tre.2012.08.005
 W. Dullaert, L. Zamparini / Transportation Research Part E 49 (2013) 190–200 191

This paper wants to contribute to the literature by examining VOT and VOR from a business logistics point of view to ex-
plore the above issues from another angle. It is commonly accepted that the longer the lead time (the time that elapses be-
tween placing and receiving an order) and the more unreliable a transport option, the more inventory should be kept to meet
the demand during the lead time of a replenishment for a given service level or product availability. Therefore, reducing
average lead time (or the average transportation time that is part of the lead time) and reducing the variability of lead time
can offer significant benefits to companies. As such, our approach aligns with the so-called inventory-theoretic models for
freight transport demand which take transportation costs, average lead time and lead time reliability explicitly into account
when comparing transport options (see e.g. Baumol and Vinod (1970), Tyworth (1991) or Vernimmen and Witlox (2003) for
an introduction) and the standard inventory management literature (see e.g. Silver et al., 1998; Hillier and Lieberman, 2010).
Our analysis differs from previous research in the sense that we study the effect of the service level on safety stocks following
Chopra et al. (2004) and Wang and Hill (2006) to gain more insight in the nature of value of time and reliability to support
real-life managerial decision making and further empirical research on these topics.
The remainder of this paper is structured as follows. Section 2 presents a focused literature review on VOT and VOR in
freight transport to map the arguments identified for explaining the strong variability in VOR estimates. Section 3 describes
the inventory theoretic framework that will be used to offer an alternative logistics explanation for the variability in VOR and
VOT estimates. The model is implemented in a spreadsheet in Section 4 to numerically examine the impact of the service
level and the distribution of demand during lead time on VOR and VOT for real-life data. Section 5 draws conclusions on esti-
mating the value of time and reliability for policy makers and logistics practitioners.

2. Literature review on value of time and value of reliability

Two of the most important freight transport attributes that have been taken into account by the transport economic lit-
erature are time and reliability. In this section, we provide a brief overview of VOT research and then we focus our attention
on VOR related literature.
VOT in freight transport has been defined as the marginal utility or the marginal cost reduction that is generated from a
reduction in the time necessary to ship goods from an origin to a destination. Most of the models that have been proposed in
order to estimate the VOT (see Zamparini and Reggiani (2007) for a review) have, however, only taken into account the travel
time and have foregone wider units of analysis, as lead time (defined as delivery time in the transport economic literature)
and transportation time, a measure that would also include the loading/unloading operations at a terminal, warehouse or
transshipment location (Massiani, 2003). A paper by McKinnon (1995) proposed spatial concentration of production, tighter
scheduling and market expansion as three possible economic reasons that may lead firms to pursue transport alternatives
that lead to a reduction in travel time.
An important issue to consider with respect to the aims of the present paper, is represented by the data collection tech-
niques used by the transport economic literature in order to provide empirical estimates of the VOT. It should be stressed
that the vast majority of the VOT studies in freight transport have been based on stated preference (see Zamparini and Reggi-
ani (2007) for a survey of empirical estimates). Among the drawbacks of this data collection method, it is important to
emphasize the fact that the estimations provided by these studies consider only short-term effects of the reduction in travel
times and do not include the long term ones. Among the long term effects of a reduction in lead time (including travel time)
is the possibility for firms to modify their overall logistics structure and this, amongst others, would include inventory man-
agement strategies. In some cases, the factor cost (or cost saving approach) has been used as an alternative methodology. A
survey proposed by Odgaard et al. (2005) has highlighted the most important cost factors for the firms that have normally
been taken into account by the studies. Vehicle costs (fuel, maintenance and so on), employees’ wages, overheads (training
and social security payments), and depreciation of the transported goods have normally been included. None of the studies
considered in this survey has considered inventory costs as part of the estimated VOT in freight transport.
Another important freight transport attribute is reliability. It can be defined as the consistency of travel times on a deter-
mined origin–destination for the possible repetitions of the shipment in different hours of the day or in different days; with-
out taking into account the expected heterogeneity due to foreseeable causes (i.e. peak hour traffic). The transport economic
literature has identified reliability in several different ways. The two most common definitions, in the context of freight trans-
port, consider it as the percentage of consignments arriving within scheduled time (Fowkes and Shinghal, 2002) or as the rel-
ative variation of transit times (Winston, 1981). In the latter case, reliability is estimated as the ratio (coefficient of variation)
between the standard deviation and the average transit time. The economic models that include reliability have been mainly
based on the maximization of a utility function (see, i.e., Winston, 1981; Witlox and van Daele, 2005) where reliability is one
of the considered attributes. Other models (Bolis and Maggi, 2003) have proposed a specification based on a firm’s production
function whose inputs also include transport services. Consequently, they consider a cost function whose optimization de-
pends also on the logistics attributes of the various possible alternatives. A relevant issue in the models providing the theo-
retical basis for the empirical estimation of the value of reliability is the identification of the economic actor whose utility or
cost function has to be maximized. The shipper, the consignee, and the transport firm may have heterogeneous profit func-
tions and this may be the cause of a remarkable difference in terms of the quantitative value of reliability.
From a static viewpoint, a paper by Fowkes et al. (2004) has provided a list of the possible reasons that make this attribute
important for firms, by considering both the demand and the supply side of the market for freight transport services. On the
192 W. Dullaert, L. Zamparini / Transportation Research Part E 49 (2013) 190–200

demand side, the factors that were taken into account are: deadlines for arrivals at ports, hub and spoke operations, just in
time practices, quick response operations for deliveries both in the case of primary and of secondary transport activities.
Moreover, with respect to the supply side, the importance of reliability is linked to the consolidation of heterogeneous deliv-
eries, to the efficiency of logistics operations, and to round the clock operations, labour costs connected to driving hours and
warehouse activities.
From a dynamic viewpoint, reliability is one of the key attributes considered by firms’ when planning their medium to
long term development (Muilerman et al., 2005). On-time reliability is not only important for the time based strategies to
be adopted but also for the overall logistics network and for the possibility to opt for multimodal shipments. Moreover, a
higher degree of reliability may justify a more expensive logistics’ structure. In this respect, the logistics literature offers
an established framework to estimate the effect of average lead time (speed) and variance of lead-time (reliability) on inven-
tory management costs (see Section 3).
Given the importance of reliability as one of the most relevant freight transport attributes, several authors have tried to
ascertain and estimate its value by using one of the abovementioned models. VOR is normally defined as the willingness to
pay of an economic actor in order to reduce the variability of the travel times on a determined origin–destination. This issue
may be particularly relevant for firms who send, haul, or receive shipment on a regular schedule. Tables 1 and 2 provide the
estimates of monetary values of reliability in the case of road haulage, rail and air transport, the theoretical models used in
the studies and the variables that were considered. The studies cover the period from 1981 to 2008 and are related to nine
different countries (Australia, Belgium, Finland, Italy, The Netherlands, Sweden, Switzerland, United Kingdom, and United
States).
As it can be noted, the large majority of the studies were conducted through the use of the stated preference technique.
Only two US studies (Winston, 1981; Small et al., 1999) made use of the revealed preference data collection method. It is
quite difficult to compare the empirical estimations listed in the table, due to the heterogeneity of the unit of measure. Some
studies consider an entire shipment; others are related to a single pallet or to a ton. Moreover, the improvement in reliability
is sometimes considered as a 1% or a 1 per thousand decrease in variability while in other cases the day or the hour of arrival
are considered. The studies by Fowkes et al. (2001) and Fowkes et al. (2004) takes jointly into account three possible mea-
sures of (un)reliability (value of delay time due to increased free-flow journey time, value of increased spread of actual ar-
rival times, and schedule delay in the initial departure time) and obtains quite heterogeneous estimates. Moreover, in the

Table 1
Empirical estimates of the value of reliability in freight transport. Source: based on Zamparini and Reggiani (2010).

Author Year of data Data Mode/country Value of reliability Reliability measure and unit of analysis
Winston (1981) 1975–1977 RPa Road/US US$ 404 Day, st. deviation
1975–1978 Rail/US US$ 299-4110 Day, st. deviation
Transek (1990) 1989–1990 SPb Rail/S SEK 60 same day 1% Variability reduction and shipment
1989–1990 Rail/S SEK 40 next day 1% Variability reduction and shipment
1989–1990 Road/S SEK 150 same day 1% Variability reduction and shipment
1989–1990 Road/S SEK 30 next day 1% Variability reduction and shipment
Transek (1992) 1991 SPb Road/S SEK 280 same day 1% Variability reduction and shipment
1991 Road/S SEK 110 next day 1% Variability reduction and shipment
Small et al. (1999) ? RPa Road/US US$ 371.33 Hour and shipment
Wigan et al. (2000) ? SPb Road/AUS AUD$2.56 Intercapital 1% Variability reduction and pallet
? Road/AUS AUD$1.25 Urban 1% Variability reduction and pallet
? Road/AUS AUD$1.97 MMDc 1% Variability reduction and pallet
Kurri et al. (2000) 1997 SPb Road/S-F US$ 47.47 Hour and ton
1998 Rail/S-F US$ 0.50 Hour and ton
INREGIA (2001) 1999 SPb Road/S SEK 63 1 ‰ Variability reduction and shipment
1999 Rail/S SEK 1142 1 ‰ Variability reduction and shipment
1999 Air/S SEK 264 1 ‰ Variability reduction and shipment
Fowkes et al. (2001) 2000–2001 SPb Road/UK £61.5–167.6 Hour and spread
Bolis and Maggi (2003) ? SPb Road/CH-IT CHF 2.42 1% Variability reduction and ton
Fowkes et al. (2004) 2000–2001 SPb Road/UK 107 p/min Value of delay time
2000–2001 Road/UK 85 p/min Value of spread time
2000–2001 Road/UK 66 p/min Schedule delay
De Jong et al. (2004) 2003 SPb Road/NL € 1.15–1.50 10% Decrease in items not delivered on time
Beuthe and Bouffioux (2008) ? SPb Road/B €3.60 1% Variability reduction and ton
Rail/B €0.40 1% Variability reduction and ton
Inland navigation €0.02 1% Variability reduction and ton
a
Revealed preference.
b
Stated preference.
c
Metropolitan multidrop deliveries.
 W. Dullaert, L. Zamparini / Transportation Research Part E 49 (2013) 190–200 193

Table 2
Main characteristics of theoretical models related to the surveyed VOR studies.

Author Utility/cost Attributes

function
Winston (1981) Random utility Modal attributes of the ith mode of transport, characteristics of the firm and of the transported
function commodity
Transek (1990) Utility function Travel cost, travel time, reliability, frequency
Transek (1992) Utility function Travel cost, travel time, reliability, loss and damage
Small et al. (1999) Conditional utility Travel cost, travel time, reliability (duration and frequency of unexpected delay)
function
Wigan et al. (2000) Linear utility Cost of transport, travel time, travel reliability, damage, length of haul
function
Kurri et al. (2000) Utility function Transport time, transport cost, reliability
INREGIA (2001) Utility function Transport time, transport cost, reliability, value of the goods
Fowkes et al. Utility function Own account/third party logistics, distribution/non-distribution, distance of the shipment, type of goods,
(2001) possibility to use rail, daytime only/24 h shipments
Bolis and Maggi Cost function Produced output, prices of all factors of production but transport, cost of transport, transport and logistics
(2003) attributes of the ith alternative, network size and structure of the firm
Fowkes et al. Utility function Own account/third party logistics, distribution/non-distribution, distance of the shipment, type of goods,
(2004) possibility to use rail, daytime only/24 h shipments
De Jong et al. Linear utility Transport cost, transport time, reliability, damage and loss, frequency
(2004) function
Beuthe and Expected utility Service frequency, transport time, reliability of delivery, carrier’s flexibility, and safety
Bouffioux function
(2008)

former study it appears a ‘‘regression equation with a wrong sign cost coefficient’’ (Fowkes et al., 2001, p. 7) that is accom-
modated through the use of a weighting system. The Transek (1990) study allows to compare the VOR for road and rail trans-
port and the difference in the VOR when goods have to be delivered the same day of departure or after 1 day. As expected,
same day shipments are characterized by a higher VOR. The variability of VOR between road and rail transport are not as
extreme as in the sample considered in the study by Kurri et al. (2000) in Sweden and Finland. Lastly, the study by Wigan
et al. (2000) distinguishes among urban shipments (that have the lower VOR), metropolitan multidrop deliveries with an
intermediate VOR and the intercapital (i.e. between two large cities) shipments that are characterized by the higher VOR.
If logistics issues are taken into account, it emerges that some of the surveyed studies (i.e., Wigan et al., 2000; Fowkes
et al., 2001; Bolis and Maggi, 2003; De Jong et al., 2004; Beuthe and Bouffioux, 2008) use the level of service (expressed
as the percentage of shipments that arrive to destination in due time) in order to define reliability and to estimate its mon-
etary value as percentage increases.
On the other hand, other logistics features, as the variances of demand and of lead time, or the distribution of demand
during lead time do not appear to be considered. In general, the literature review has shown a remarkable variability in
the economic estimates of VOR for freight transport, that may be partially explained through the use of some of the above-
mentioned logistics issues. The following sections will thus present a model that may provide a rationale for the heteroge-
neity of the VOR estimations.

3. Methodological framework

To introduce the framework to examine VOR and VOT from a logistics point of view, consider a receiver of goods with an
annual demand of D units, costing C per unit. Assume that the receiver advocates the following well-known and widely ap-
plied continuous review policy (see a.o. Silver et al., 1998; Hillier and Lieberman, 2010).
Given that there are fixed costs S involved in placing an order (administrative costs, transportation costs, handling costs at
the supplier and receiver) and the cost for keeping one unit in stock for 1 year H is equal to the holding rate h (cost of capital,
obsolescence cost, ffi storage costs, etc.) times the value of the goods C, the receiver can determine the optimal order quantity to
pffiffiffiffiffiffiffiffiffiffiffiffiffiffi
be Q  ¼ 2DS=H. The well-known economic order quantity balances the costs of placing orders of size Q⁄ and the cost of
keeping the associated cycle stock Q⁄/2, but does not tell us when to order.
If the demand during the time that elapses between placing and receiving an order (the so-called lead time) would be
constant, the receiver would have to place a replenishment order of size Q⁄ when his inventory level would equal the average
demand per period D times the average lead time L. In other words, for a reorder point ROP ¼ D  L, the receiver would have
sufficient inventory to meet the demand during the lead time (DDLT) as the shipment would arrive at the time that the last
unit of stock was consumed. As a result, no stockout would occur and the cycle service level would be 100%.
In reality, demand and lead time are rarely, if ever, truly constant. To focus ideas, let us assume that DDLT follows the
symmetrical normal distribution, a common assumption in the literature (see Fig. 1). If the receiver places an order of Q⁄
when his inventory level is equal to the expected demand during lead time D  L, there is a 50% risk of a stockout during
the replenishment cycle (cycle service level = 0.50). If the receiver would prefer a higher service level of (1  a), he should
194 W. Dullaert, L. Zamparini / Transportation Research Part E 49 (2013) 190–200

1−α α

D × L + SS
Fig. 1. Symmetrical demand during lead time.

place the order when the inventory level is equal to that value of the DDLT distribution for which the probability of having a
larger demand during the lead time is a.
If one standardizes the values of the DDLT distribution by deducting the average and dividing the difference by the stan-
dard deviation of DDLT, the amount of safety stock SS can be written as

SS ¼ krDDLT ð1Þ

in which k is the safety factor that specifies how many times the standard deviation of DDLT has to be kept as safety stock.
When DDLT is normally distributed, the value of k that corresponds to a probability mass of a in the right tail of the distri-
bution can be derived from a table of the standard normal distribution. When demand and lead time distributions are inde-
pendent and identically distributed, the standard deviation of DDLT can be calculated using the approach of Fetter and
Dalleck (1961):
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
rDDLT ¼ Lr2D þ D2 r2L ð2Þ

in which r2D and r2L denote the variance of demand and the variance of the lead time respectively.
During transport, the shipment size Q is kept in stock. The inventory in transit (TS) is therefore equal to the average lead
time multiplied by the shipment size

TS ¼ L  Q ð3Þ
If we relate the well-known Eqs. (1)–(3) to the issue of estimating VOT and VOR, we can already draw a number of impor-
tant conclusions. Because the average lead time L is multiplied by the variance of demand r2D and the average demand
squared D2 by the variance of the lead time r2L , the cost impact of a reduction in L (VOT) or in r2L (VOR) depends on the aver-
age demand D and variance of demand r2D for the company under consideration. As an illustration, if the variability in de-
mand and in lead time would be very small to nonexisting, r2D  r2L  0, VOR and VOT would be (almost) zero as no safety
stock cost saving would result from reducing the average lead time or variance of the lead time. Because lowering L will re-
duce the inventory in transit, VOT will still be positive.
Another aspect that affects VOT and VOR profoundly is the required service level and the distribution of DDLT. If DDLT is
normally distributed, the safety stock has to be equal to k = 1.29 times the standard deviation of DDLT to achieve a 90% cycle
service level. To achieve a cycle service level of 94% under the normal distribution, k has to be equal to 1.56 and for a 98%
cycle service level k = 2.05. For higher service levels, the required amount of safety stock grows more than proportionally,
both for the cycle service level as for the fill rate that measures the fraction of demand satisfied and which is capable of tak-
ing differences in shipment size into account (Dullaert et al., 2007). If demand is non-normally distributed, the required
safety factor can be significantly higher than the one suggested by the normal distribution (see a.o. Vernimmen et al., 2008).
The cost of maintaining inventory further depends on the value of the product C and the holding rate h of the product.
Their product is the cost of holding one unit in stock for one period, H. VOR and VOT can therefore differ significantly
amongst companies characterized by differences in service levels, variances of demand and of lead time, distributions of
DDLT, and holding costs of the goods. These dimensions have insufficiently been taken into account by the transport eco-
nomic literature that has provided models and empirical estimates of VOT and VOR (see Section 2).
The above framework does not explain how a negative VOR can occur in practice for cycle service levels larger than 50%. If
DDLT is symmetrically distributed, a reduction of the variance of the lead time will always reduce the safety stock. If on the
other hand DDLT is positively skewed (with a tail stretched in the positive direction as illustrated in Fig. 2), reducing the
variance of the lead time does not necessary reduce the safety stock required. When a distribution is positively skewed, it
means that there is more data in the right tail than would be expected in a normal distribution.
DDLT has a tendency to be positively skewed. If the order fulfilment process goes exceptionally well and the order is
immediately shipped from stock to the receiver, there is still a physical limit to the lead time required (the handling and
transportation time to bring the goods to the receiver). Although this optimistic lead time might be significantly shorter than
the most common lead time (the mode of the distribution of DDLT), the pessimistic lead time resulting from e.g. stockouts at
 W. Dullaert, L. Zamparini / Transportation Research Part E 49 (2013) 190–200 195

Fig. 2. Non-normally distributed demand during lead time (10,000 simulation runs).

the supplier, strikes in ports, loss of cargo or a combination of these is – although the probability of occurrence is small –
most likely to be a lot larger than the difference between the optimistic lead time and the mode of the distribution.
Fig. 2 plots the DDLT distribution for a receiver facing a Gamma distributed demand C(a, b) = C(2.39, 40.39) and a
Gamma distributed lead time C(250, 0.015). As the average of the demand distribution is equal to ab and the variance equals
ab2, the average demand D ¼ 96:53 and the average lead time L ¼ 3:75. As discussed earlier, the reorder point is equal to:
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
ROP ¼ D  L þ k Lr2D þ D2 r2L ð4Þ

The average DDLT is D  L ¼ 362 units but since the distribution is not symmetrical, the average is not equal to the med-
ian and does therefore not correspond to a 50% cycle service level. The median is equal to 333. If the receiver aims for a 50%
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
cycle service level, the safety stock k Lr2D þ D2 r2L would have to be negative as the first term of (4) is already equal to 362.
Reducing L would therefore not lower, but increase the required safety stock (make it less negative) and the reorder point
ROP.
The case study of Section 4 shows that this effect is also valid for cycle service levels larger than 50%; an observation first
made by Chopra et al. (2004). The effect of lead time uncertainty on safety stock levels has been further explored by Wang
and Hill (2006), but in both papers focus is on identifying zones in which this behavior can be observed (for a given demand
and lead time distribution), without drawing any conclusions on the issue of VOR and VOT. By shifting the focus from iden-
tifying ranges of varying impact of lead time uncertainty to estimating the VOR and VOT for varying values of average lead
time and variance of lead time for any underlying distribution, we want to provide specific guidance to business managers on
whether they should focus on shortening lead times or variability of lead times. Instead of relying on generic ranges, a
spreadsheet model will be used to estimate these effects based on specific real-life data. Amongst others, the spreadsheet
simulation model will estimate the safety inventory that will guarantee the targeted cycle service level. In this way, logistics
managers no longer have either to rely on the inappropriate normal approximation or to resort to advanced statistical cal-
culation procedures. Moreover, we want to illustrate how logistics parameters influence the actual values of VOR and VOT in
real-life settings, to have them embedded in future transport economic research.

4. Case study and simulation framework

To illustrate the simulation framework for estimating VOT and VOR, we use the case from Vernimmen et al. (2008) as a
starting point. A receiver of liquid bulk goods has six different transport options at its disposal for sourcing an annual de-
mand of 35,000 tons per year: road transport (from Antwerp) and inland navigation (from the ports of Antwerp and Flushing
using 500 or 1000 ton barges and from Rotterdam using 1000 ton barges only). The value of the goods (C) amounts to 600
euro per ton and the inventory holding costs (h) are 20% per year (including interest, depreciation, insurance and warehouse

Table 3
Gamma distribution parameters and key data for period demand (tons) and lead time (days).

Distribution of: a b Average Standard deviation Coefficient of variation

Daily demand 2.39 40.39 96.53 62.44 0.65
Lead time road 30 ton 2.10 0.10 0.21 0.14 0.69
Lead time barge Antwerp 500 ton 190.13 0.03 5.70 0.41 0.07
Lead time barge Antwerp 1000 ton 38.42 0.16 6.15 0.99 0.16
Lead time barge Flushing 500 ton 53.26 0.11 5.86 0.80 0.14
Lead time barge Flushing 1000 ton 73.56 0.08 5.88 0.69 0.12
Lead time barge Rotterdam 1000 ton 85.63 0.08 6.85 0.74 0.11
196 W. Dullaert, L. Zamparini / Transportation Research Part E 49 (2013) 190–200

costs). Both the demand per period as the lead times of all transport options were found to be Gamma distributed with the
parameters summarized in Table 3.
As the lead time for road transport and 1000 ton barge transport from Antwerp have the highest relative variability (coef-
ficient of variation = 0.69 and 0.16), we use them to illustrate the simulation framework for estimating VOR by varying the
standard deviation of the lead times. VOT can be assessed by varying the average lead time, possibly taking the straightfor-
ward effect on inventory during transport into account as well. The company under consideration used a service level of
99.5% per delivery cycle (i.e. the receiver only accepts a stockout in five out of 1000 cases). This is a very high service level
as cycle service levels between 50% and 70% usually correspond to being able to meet 97–99% of the demand during the per-
iod (fill rate) (Chopra et al., 2004). Given the high service level, reducing the variability of lead time more or less guarantees
to have a positive effect on the required safety stock. To illustrate the impact of the cycle service level on VOR, we consider
cycle service levels ranging between 50% and 95% in steps of 5% in an EXCEL based simulation framework.
Table 4 summarizes the simulation results for 10,000 replenishment cycles for each lead time reliability scenario when
shipping cargo in 1000 ton barges from Antwerp. Each replenishment cycle is constructed by first generating the lead time,
e.g. 2.648588089 days from the Gamma distribution of the lead time. Subsequently, a demand is generated from the demand
distribution for each day in the lead time. For the third day, only a fraction of .648588089 is taken into account, leading in
this case to a DDLT of e.g. 18.72729538 + 14.50153526 + 0.648588089  62.77620502 = 73.94473 units. Random numbers
are generated by means of the leading Mersenne Twister random number generator as the internal random number gener-
ator in EXCEL 2007. Although the internal EXCEL random number generator has been Matsumoto and Nishimura (1998) sig-
nificantly improved compared to the EXCEL 2003 implementation (e.g. by increasing the period and fixing the bugs leading
to negative random numbers) is less established as a reliable random number generator for large simulation studies. The
variance reduction technique of common random numbers is used for each of the scenarios to be able to compare the dif-
ferent levels of lead time variability under similar experimental conditions. The basic implementation is capable of simulat-
ing 100 days of DDLT per replenishment cycle, a number which can easily be extended, and takes about 3 min to run 10

Table 4
Simulation results VOR for 1000 ton barge transport from Antwerp.

Average lead time (days) 6.1500 6.1500 6.1500 6.1500 6.1500 6.1500 6.1500 6.1500 6.1500 6.1500
Variance of lead time 0.3528 0.4802 0.6273 0.7939 0.9801 1.1859 1.4113 1.6564 1.9210 2.2052
Standard deviation 0.594 0.693 0.792 0.891 0.990 1.089 1.188 1.287 1.386 1.485
Change stdev lead time (%) 40 30 20 10 0 10 20 30 40 50
Cycle service level Reorder level (tons)
0.95 883.73 889.81 897.71 907.52 914.23 923.12 932.52 942.89 954.35 965.87
0.9 806.18 812.38 817.09 820.31 827.23 835.26 843.24 853.36 861.37 870.53
0.85 761.29 764.73 767.65 773.03 778.90 783.27 787.71 793.85 799.09 806.73
0.8 725.98 727.18 729.27 733.05 738.19 742.03 746.23 750.10 753.42 758.35
0.75 693.70 694.71 695.34 700.01 702.51 706.22 711.11 715.57 718.56 722.06
0.7 666.82 668.53 670.76 672.21 675.03 676.96 678.67 681.37 683.26 686.41
0.65 642.37 642.85 643.69 645.07 646.97 647.79 649.13 652.01 652.45 653.51
0.6 620.32 620.85 621.10 622.29 622.26 622.82 623.67 624.66 622.76 622.83
0.55 600.16 600.63 601.25 600.84 599.89 599.98 599.09 597.50 595.82 595.83
0.5 580.88 579.96 579.77 579.06 577.66 575.94 575.21 573.04 571.03 569.51
Expected demand during lead 593.62 593.42 592.96 593.12 592.99 592.93 592.62 592.68 591.91 591.90
time
Cycle service level Safety inventory (tons)
0.95 290.11 296.39 304.75 314.40 321.25 330.19 339.90 350.21 362.45 373.97
0.9 212.57 218.97 224.14 227.19 234.24 242.33 250.62 260.68 269.47 278.63
0.85 167.68 171.31 174.69 179.91 185.91 190.34 195.09 201.17 207.18 214.83
0.8 132.36 133.77 136.31 139.94 145.20 149.11 153.61 157.42 161.51 166.45
0.75 100.09 101.30 102.38 106.89 109.52 113.29 118.49 122.89 126.65 130.16
0.7 73.20 75.12 77.80 79.09 82.04 84.03 86.05 88.69 91.36 94.51
0.65 48.76 49.44 50.73 51.95 53.99 54.86 56.51 59.33 60.55 61.61
0.6 26.70 27.44 28.14 29.17 29.28 29.89 31.05 31.98 30.85 30.93
0.55 6.55 7.21 8.29 7.73 6.90 7.05 6.47 4.82 3.92 3.93
0.5 12.74 13.46 13.18 14.06 15.33 16.99 17.41 19.64 20.88 22.39
Overall inventory cost savings (Euros)
0.95 3736.28 2982.99 1979.66 821.55 0.00 1073.57 2238.17 3475.05 4943.69 6327.08
0.9 2600.45 1832.80 1212.40 845.98 0.00 970.55 1965.47 3172.33 4227.20 5326.42
0.85 2188.30 1752.07 1346.66 720.26 0.00 531.02 1100.95 1831.16 2551.90 3469.61
0.8 1540.83 1372.24 1066.50 632.04 0.00 468.39 1008.84 1466.06 1957.44 2550.12
0.75 1132.42 987.30 857.03 316.09 0.00 452.32 1075.58 1604.35 2055.50 2476.60
0.7 1060.63 831.23 508.73 354.42 0.00 238.34 481.24 797.93 1117.59 1495.76
0.65 628.05 546.20 390.71 244.92 0.00 104.76 303.06 640.39 786.70 914.47
0.6 308.91 220.96 136.33 13.09 0.00 73.50 212.72 324.93 188.85 198.75
0.55 42.03 37.27 166.87 99.11 0.00 17.85 52.10 249.02 358.01 355.99
0.5 311.14 224.73 257.31 151.91 0.00 198.87 249.70 517.66 666.06 847.22
 W. Dullaert, L. Zamparini / Transportation Research Part E 49 (2013) 190–200 197

different scenarios. Given the limited average and variance of lead time in the case at hand, a shorter simulation period could
be used and computation times could therefore be cut at the expense of model flexibility.
The parameters of the lead time distribution for the various scenarios are obtained by adjusting the initial average and
standard deviation of the lead time and using EXCEL solver to determine the corresponding parameters of the Gamma dis-
tribution by the method of moments. As the parameters of the Gamma distribution for all scenarios are determined based on
the 2-digit averages and standard deviations reported in Table 2, the parameters for the benchmark scenario (0%) deviate
slightly from the Gamma parameters reported in Table 2. It goes without saying that the spreadsheet can be adjusted to
accommodate other distributions of demand and lead time.
To identify the reorder level (ROP) that corresponds to each service level within a scenario, the 10,000 replenishment cy-
cles are sorted from small to large and the corresponding reorder level is determined: e.g. for a 85% cycle service level, the
8500th largest DDLT obtained over the 10,000 simulation runs is reported.
By deducting the expected DDLT, determined as the average DDLT over the 10,000 simulation runs, from the reorder
point, we obtain the values of the safety stock for each cycle service level.
Given that the shipment size and the average lead time is fixed in each scenario, inventory savings can be obtained by
valuing the deviation from the safety stock inventory level of the original lead time variability (0.00% case), at 600 EUR
per ton times the holding rate of 20%.
Table 4 clearly shows how reducing lead time variability for cycle service levels between 0.5 and 0.55 in this particular
case can increase the required amount of safety stock or in other words can lead to a negative VOR. Along the same lines, the
data illustrates how increasing lead time variability within the same service level range can lower the costs of safety stock.
Table 5 summarizes the simulation output for the road alternative (30 ton) which is characterized by a higher initial lead
time variability (coefficient of variation of 0.69 compared to 0.16 for the barge alternative above). Whereas the computa-
tional results of Wang and Hill (2006) suggest that for cycle service levels above 70% reducing lead time variability would
lower safety inventory, the specific shape of the DDLT distribution for the case at hand leads to a significantly higher thresh-

Table 5
Simulation results VOR for road transport.

Average lead time (days) 0.2100 0.2100 0.2100 0.2100 0.2100 0.2100 0.2100 0.2100 0.2100 0.2100
Variance of lead time 0.0071 0.0096 0.0125 0.0159 0.0196 0.0237 0.0282 0.0331 0.0384 0.0441
Standard deviation 0.084 0.098 0.112 0.126 0.140 0.154 0.168 0.182 0.196 0.210
Change stdev lead time (%) 40 30 20 10 0 10 20 30 40 50
Cycle service level Reorder level (tons)
0.95 50.92 52.91 54.66 56.91 58.60 60.60 63.05 65.14 67.35 70.02
0.9 40.46 41.51 42.24 43.27 44.12 45.02 45.95 46.58 47.41 48.61
0.85 34.19 34.60 34.89 35.38 35.53 35.81 36.29 36.87 36.96 37.11
0.8 29.82 29.80 29.86 30.15 30.16 30.12 29.96 29.97 29.83 29.93
0.75 26.49 26.44 26.13 25.96 25.87 25.87 25.77 25.47 25.03 24.73
0.7 23.74 23.56 23.32 23.21 22.99 22.62 22.25 21.82 21.46 20.98
0.65 21.46 21.10 20.87 20.43 20.06 19.58 19.17 18.79 18.27 17.71
0.6 19.29 19.06 18.62 18.20 17.72 17.28 16.73 16.16 15.62 15.05
0.55 17.55 17.08 16.66 16.18 15.64 15.02 14.43 13.90 13.32 12.70
0.5 15.92 15.37 14.81 14.26 13.70 13.16 12.56 11.95 11.28 10.65
Expected demand during lead time 20.13 20.09 20.06 20.02B 19.98 19.93 19.89 19.83 19.82 19.77
Cycle service level Safety inventory (tons)
0.95 30.79 32.81 34.60 36.89 38.62 40.67 43.15 45.31 47.54 50.25
0.9 20.33 21.41 22.19 23.25 24.13 25.08 26.06 26.75 27.59 28.83
0.85 14.05 14.51 14.83 15.36 15.55 15.87 16.40 17.03 17.14 17.33
0.8 9.68 9.70 9.80 10.13 10.18 10.19 10.07 10.13 10.02 10.16
0.75 6.36 6.34 6.08 5.95 5.89 5.94 5.87 5.64 5.21 4.95
0.7 3.60 3.46 3.26 3.19 3.01 2.69 2.36 1.99 1.64 1.20
0.65 1.33 1.00 0.81 0.41 0.08 0.35 0.73 1.04 1.55 2.07
0.6 0.85 1.03 1.44 1.81 2.26 2.65 3.16 3.68 4.19 4.73
0.55 2.58 3.01 3.40 3.84 4.34 4.92 5.47 5.93 6.49 7.08
0.5 4.21 4.72 5.24 5.76 6.28 6.78 7.33 7.88 8.54 9.12
Overall inventory cost savings (Euros)
0.95 939.76 696.71 482.15 206.89 0.00 246.39 544.48 803.32 1070.48 1395.76
0.9 456.75 326.46 233.84 105.76 0.00 113.91 230.80 313.28 415.03 564.02
0.85 179.56 124.81 86.53 23.09 0.00 38.92 101.51 177.88 191.09 213.98
0.8 59.00 56.69 44.90 5.45 0.00 1.20 13.03 5.14 18.91 2.12
0.75 56.62 54.59 22.72 7.09 0.00 6.06 1.54 30.10 80.81 112.22
0.7 71.32 54.43 30.14 22.11 0.00 38.17 77.92 122.31 163.79 216.50
0.65 149.20 110.60 87.56 39.27 0.00 52.11 96.97 135.22 195.48 257.96
0.6 169.22 147.04 98.02 53.02 0.00 47.32 108.88 170.37 232.43 296.65
0.55 210.82 159.64 113.31 59.89 0.00 69.11 135.08 191.33 258.28 328.30
0.5 248.35 187.59 124.91 63.22 0.00 59.23 125.81 191.74 270.21 340.85
198 W. Dullaert, L. Zamparini / Transportation Research Part E 49 (2013) 190–200

Fig. 3. Demand during lead time distribution (tons) for the base scenario for road (left) and barge transport (right).

Table 6
Summary statistics for the demand during lead time distributions for road and barge transport.

Road Barge
Mean 19.98 593.01
Median 13.70 577.75
Standard deviation 20.23 179.55
Sample variance 409.12 32158.33
Kurtosis 11.01 0.50
Skewness 2.61 0.55

Table 7
Simulation results VOT for road transport.

Variance lead time 0.0196 0.0196 0.0196 0.0196 0.0196 0.0196 0.0196 0.0196 0.0196 0.0196
Average lead time (days) 0.1260 0.1470 0.1680 0.1890 0.2100 0.2310 0.2520 0.2730 0.2940 0.3150
Change avg lead time (%) 40 30 20 10 0 10 20 30 40 50
Cycle service level Reorder level (tons)
0.95 44.27 47.48 51.15 54.73 58.60 62.79 66.58 70.17 74.42 78.25
0.9 29.90 33.33 36.99 40.63 44.12 47.75 51.30 54.59 58.20 61.44
0.85 22.58 25.88 29.41 32.33 35.53 38.99 42.12 45.33 48.45 51.76
0.8 17.72 20.91 24.03 27.10 30.16 33.20 36.01 38.89 41.75 44.71
0.75 14.46 17.46 20.51 23.30 25.87 28.56 31.34 34.13 37.00 39.72
0.7 12.04 14.93 17.64 20.32 22.99 25.47 27.95 30.45 32.94 35.37
0.65 10.08 12.67 15.22 17.57 20.06 22.45 24.89 27.19 29.48 31.81
0.6 8.39 10.83 13.17 15.51 17.72 19.96 22.18 24.38 26.63 28.74
0.55 7.05 9.20 11.27 13.46 15.64 17.76 19.81 21.81 23.83 25.82
0.5 5.79 7.77 9.79 11.78 13.70 15.65 17.59 19.47 21.46 23.43
Expected demand during lead time 11.84 13.87 15.91 17.95 19.98 22.02 24.05 26.09 28.13 30.16
Cycle service level Safety Inventory (tons)
0.95 32.43 33.60 35.23 36.78 38.62 40.78 42.52 44.08 46.29 48.09
0.9 18.07 19.45 21.08 22.68 24.13 25.73 27.25 28.50 30.07 31.28
0.85 10.74 12.01 13.50 14.38 15.55 16.97 18.07 19.24 20.33 21.60
0.8 5.88 7.04 8.12 9.15 10.18 11.18 11.96 12.80 13.63 14.55
0.75 2.63 3.58 4.60 5.35 5.89 6.54 7.28 8.04 8.87 9.55
0.7 0.20 1.06 1.73 2.37 3.01 3.45 3.90 4.36 4.81 5.21
0.65 1.76 1.20 0.69 0.38 0.08 0.43 0.84 1.10 1.36 1.64
0.6 3.44 3.04 2.75 2.44 2.26 2.06 1.87 1.71 1.50 1.43
0.55 4.79 4.67 4.65 4.49 4.34 4.25 4.25 4.28 4.30 4.35
0.5 6.05 6.10 6.12 6.17 6.28 6.37 6.47 6.61 6.67 6.73
Inventory in transit 3.78 4.41 5.04 5.67 6.30 6.93 7.56 8.19 8.82 9.45
Cycle service level Overall inventory cost savings (Euros)
0.95 1044.90 828.40 557.43 296.35 0.00 334.73 620.02 882.87 1223.27 1514.85
0.9 1030.68 788.48 518.19 250.41 0.00 266.96 524.86 750.89 1014.85 1235.54
0.85 879.88 651.64 397.57 216.19 0.00 246.13 453.30 669.50 875.60 1103.70
0.8 817.38 603.55 398.47 199.06 0.00 196.56 364.92 541.42 716.58 902.42
0.75 693.57 503.15 306.13 140.35 0.00 153.66 318.64 485.19 660.23 818.08
0.7 639.20 460.53 304.84 152.47 0.00 128.62 258.31 388.47 518.83 642.30
0.65 523.51 380.35 243.99 130.64 0.00 117.41 242.18 348.46 455.10 565.36
0.6 444.66 320.59 209.92 97.34 0.00 99.15 197.09 292.07 393.38 477.60
0.55 356.08 266.25 188.25 93.84 0.00 86.09 162.51 234.59 307.47 377.35
0.5 274.53 204.93 132.00 61.51 0.00 65.73 129.43 187.11 256.32 324.34
 W. Dullaert, L. Zamparini / Transportation Research Part E 49 (2013) 190–200 199

old value. Reducing the variance of the lead time is only beneficial for cycle service levels of at least 80%, which stresses the
importance of modelling the DDLT in detail.
Tables 4 and 5 illustrate that both for the road and for the barge alternatives, negative VOR can occur, depending on cycle
service level chosen by the receiver of the goods. The effect is more pronounced for road due to the fact that its distribution
of the lead time in the base scenario C(2.25, 0.09) results in the DDLT distribution with a higher skewness than for the barge
alternative C(38.59, 0.16) as illustrated by Fig. 3 and Table 6.
The positive excess kurtosis with respect to the normal distribution clearly signals a peaked distribution for road trans-
port. For barge transport, both the kurtosis and the skewness measuring the asymmetry of the distribution around its mean
remain close to value of the normal distribution (skewness = 0). The large positive skewness of road transport, but also the
relative difference between median and mean signal an asymmetrical distribution and could therefore be used as an indi-
cation to whether the benefits of reducing lead time variability should be examined in more detail.
Table 7 shows how reducing the average lead time increases safety stock levels for cycle service levels up to 65%. How-
ever, this effect is more than offset by savings in inventory during transport. This evidence seems to suggest that the service
level has a smaller impact on VOT than on VOR and that VOT is more likely to remain positive, regardless of the service level
chosen.

5. Conclusions

Reliability of transport, expressed by the variance of the lead time, is one of the key concerns of logistics decision makers.
As a result, one of the relevant streams of research in the transport economic literature has focused on the Value of Reliability
(VOR) providing both theoretical models and empirical estimates. It has emerged that there is a remarkable heterogeneity in
the VOR values, including one negative estimate that cannot be explained on the basis of the theoretical models used.
Recent logistics literature (e.g. Chopra et al., 2004; Wang and Hill, 2006) had already suggested that reducing the variance
of lead time does not always imply a reduction in safety stocks. In this paper, we have related these findings to the issue of
estimating VOR.
This paper contributes to the literature by first demonstrating how the distribution of demand during lead time and the
required service level can explain the wide variety of VOR estimates (including negative estimates) obtained in the transport
economics literature. Further (transport economic) research on VOR may therefore include these as relevant explanatory
variables. Second, a flexible simulation framework is provided to support logistics practitioners decision-making on improv-
ing the speed or reliability in supply chains. Simulation results for a real-life case have illustrated that managerial intuition
derived from symmetrical demand during lead times could be counterproductive and that a detailed analysis is desirable.

Acknowledgements

The authors would like to thank Michel Beuthe and Bert Van Wee for their helpful comments and useful suggestions.

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