Vehicle Replacement in the International Committee of the Red Cross

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  Vehicle Replacement in the International Committee of the Red Cross Alfonso J. Pedraza-Martinez Kelley School of Business, Indiana University, 1309 E 10th Street BU 570B, Bloomington, Indiana 47405, USA, Luk N. Van Wassenhove INSEAD, Boulevard de Constance, Fontainebleau, 77305, France, T his article studies 4  9  4 vehicle replacement within the International Committee of the Red Cross (ICRC), one of thelargest humanitarian organizations. ICRC policy sets the replacement of vehicles at 5 years or 150,000 km, whichevercomes first. Using field data collected at the ICRC headquarters and national level we study the ICRC policy. Our resultssuggest that the organization can make considerable savings by adjusting its replacement policy. This study contributes tothe area of logistics and transportation research in humanitarian operations. Key words:  humanitarian logistics; vehicle replacement; transportation; decentralized supply chains  History : Received: December 2008; Accepted: September 2010, after 1 revision. 1. Introduction Humanitarian organizations face many challengesto deliver the right goods and services to the rightpeople at the right time and at the right price (VanWassenhove 2006). Transportation, the second largestcost to humanitarian organizations after personnel,offers some interesting research opportunities toimprove operational efficiency.4  9  4 vehicles are the most widely used in humani-tarian operations. These vehicles serve humanitarianprograms to transport personnel, aid, and beneficia-ries in field operations. The Fleet Forum, a humanitar-ian interagency association, estimates that the totalnumber of 4  9  4 vehicles in the international humani-tarian sector is between 70,000 and 80,000 units. TheInternational Committee of the Red Cross (ICRC)operates a fleet of 1700 4  9  4 vehicles in more than 80countries, including 69% of the emerging economieslisted in the Morgan Stanley Emerging Markets Index(Hedge Fund Consistency Index).The mandate of the ICRC is to provide assistanceand protect the lives and dignity of victims of warand internal violence. This often involves the trans-port of people and aid across territories in conflict.For that reason, the ICRC needs reliable and costeffective 4  9  4 vehicles to support relief operations.This article studies 4  9  4 vehicle replacementwithintheICRC,oneofthelargesthumanitarian orga-nizations. The ICRC Standard Replacement Policy(SRP) sets the replacement of vehicles at 5 years or150,000 km, whichever comes first. The SRP is sug-gested by the vehicle manufacturers to commercialcompaniesoperatinginnormalconditions.ThisSRPisquickly becoming the standard since the ICRC is gen-erallyacceptedasthebenchmarkintermsoffleetman-agement by the humanitarian sector. The SRP is alsofollowed by the World Food Programme (WFP),WorldVisionInternational(WVI),andtheInternationalFederation of Red Cross and Red Crescent Societies(IFRC) which together account for more than 10% of thewholeinternationalhumanitarian4  9  4fleet.However, humanitarian organizations face operat-ing conditions that are very different from those of commercial fleets in developed countries. Somehumanitarian organizations, including the ICRC, havea duty-free status. This implies a lower vehicle pur-chasing cost compared to commercial companies.Humanitarian vehicles are usually driven in poor roadconditions in rural areas of developing countriesincreasing the cost of maintenance and repair, and spe-cific accounting rules may affect vehicle disposal andsalvage value. For instance, ICRC vehicles are sold inlocal markets by ICRC National Delegations but salesrevenues go to ICRC headquarters (HQ). These areonly some of the differences suggesting that commer-cial fleet replacement policies may not be relevant forhumanitarian fleets. However, humanitarian fleets douse recommendations for commercial fleets.Altay and Green (2006) indicate the need for betterunderstanding of sources and types of critical datato improve productivity and efficiency in Disaster1 Vol. 0, No. 0, xxxx–xxxx 2012, pp. 1–12  DOI  10.1111/j.1937-5956.2011.01316.x ISSN  1059-1478| EISSN  1937-5956|12|0|0001  ©  2012 Production and Operations Management Society  Operations Management. Even though fleet costs arehigh for humanitarian organizations, optimizing fleetis hard because of the huge difficulty in finding reli-able field data. This study is the first attempt to do so.Using quantitative and qualitative data collected both at the HQ and field level, we study the SRP andits application in ICRC operations. We empiricallyanswer two research questions: (1) Do the ICRCNational Delegations follow the SRP? (2) Is the SRPoptimal from a cost perspective? We find that theICRC can do better by studying its operating condi-tions and its decision-making structure. Our empiricalresearch also points to gaps in knowledge and impor-tant areas where more data needs to be collected byhumanitarians.Section 2 introduces the data used in our studywhile section 3 describes 4  9  4 vehicle managementin the ICRC and the SRP. Section 4 discusses parame-ter estimation based on the ICRC field data. Section 5presents the dynamic programming model to find theoptimal replacement policy and shows the results androbustness checks using stochastic simulation.Finally, section 6 presents the conclusions and thefuture research agenda. 2. Field Study and Data Transportation and logistics literature in humanitar-ian operations has been focused on theoretical modelsfor preparedness and efficient response to disasters.The role of transportation in response has been stud-ied for evacuating victims and distributing aid. Math-ematical models for victims evacuation can be foundin Sheffi et al. (1982), Sherali et al. (1991), Barbaro-soglu et al. (2002), and Yi and Ozdamar (2007). Aiddistribution models can be found in Viswanath andPeeta (2003), Barbarosoglu and Arda (2004), Yi andKumar (2007), Tzeng et al. (2007), and Balcik et al.(2008). Most of these studies build optimization mod-els to maximize aid delivery, and minimize casualtiesand time of response or cost. Frequently these modelsare listed on generated data.Altay and Green (2006) signal the need for empiri-cal research in disaster operations management. Theauthors identify budgeting for and acquiring vehiclesand equipment as one of the typical activities of pre-paredness for disaster response.We collected quantitative and qualitative data onhumanitarian vehicle replacement. We visited the HQin Geneva and their field operations in Africa to get a better understanding of the way they run their 4  9  4fleet. The data collection process took about 1 year. Itwas difficult because the ICRC logistics staff spendmost of their time in field operations. Preparing thedata for analysis was an additional issue. Althoughthe ICRC is one of the most advanced humanitarianorganizations in data capturing, data are very noisyandincompletebecausetheyareoftencapturedduringemergency operations. Field staff face a trade-off  between allocating time to capture data and helping beneficiaries. The Global Fleet Unit located at HQ offi-ces makes a remarkable effort to control data qualityand keep up-to-date records. However, the five peopleworking in the Fleet Unit are not enough to cover morethan80nationalmissions aroundthe world.According to the ICRC Global Fleet Manager,Afghanistan, Ethiopia, Georgia, and Sudan are someof the operations with the most reliable data. Thesefour countries are also representative of the types of conditions the National Delegations (ND) vehicleshave to operate in once they travel outside of themain cities. Table 1 shows the percentage of pavedroadways in these countries. In terms of size theUnited States has 2.2 times the land area of thesefour countries but it has 130 times more paved roads(CIA 2008).In terms of quality, according to the ICRC GlobalFleet Manager Afghanistan has very bad qualityroads and vehicles are required to travel throughextremely rocky terrain. Ethiopia combines sandyterrain with both mud and tarmac. Georgia hastarmac surfaced roads although they have seriousproblems with potholes. In Sudan the ground is verysandy making short journeys in terms of mileage intovery long journeys in terms of time.We had access to four data sets of 4  9  4 vehiclescontaining the following: procurement and sales,monthly mileage, monthly operating costs, and acci-dents in the four countries mentioned above. Our datacovers the period 2002  –  2006. The procurement dataset includes cross-sectional data of 645 vehicles. Theoperating costs data is a panel data set with dates andrepairs not included in the preventive maintenanceschedule. The third data set is a panel data withmonthly records of mileage for 461 vehicles. The acci-dents data set includes cross-sectional data of 599accidents from 2002 to 2006. 2.1. Procurement and Sales Three out of four active fleets (Afghanistan, Ethiopia,and Georgia) have average ages above 4 years andmedian ages of 5 years (see Table 2). All the countries Table 1 Paved and Total Roadways in the Four Countries Land area Total roadways Paved roadways(km 2 ) (km) (km) % PavedAfghanistan 647,500 42,150 12,350 29Ethiopia 1,119,683 36,469 6980 19Georgia 69,700 20,329 7854 39Sudan 2,376,000 11,900 4320 36Source: CIA (2008). Pedraza-Martinez and Van Wassenhove:  Vehicle Replacement in the ICRC 2  Production and Operations Management 0(0), pp. 1–12,  ©  2012 Production and Operations Management Society  appear to be replacing around the eighth year butAfghanistan and Ethiopia seem to be following themileage replacement policy. In both countries vehicleswere sold at an average age of 7.7 years while themileage was around 150,000 km. We use the procure-ment and sales data set for determining the drivers of vehicle replacement in section 3 and for estimatingvehicle salvage value in section 4. 2.2. Monthly Mileage The srcinal database of monthly mileage contained20,341 observations corresponding to 459 vehicles.Only 13,272 observations (66.8%) representing 454vehicles were reliable. Five vehicles were excludedfrom the sample because their mileage was inconsis-tent due to problems of data migration at the ICRC.Table 3 shows the descriptive statistics of monthlymileage. This data set is used for solving the optimalreplacement model in section 5. 2.3. Operating Costs The operating costs data set contains dates andrepairs of any maintenance not included in the ICRCpreventive maintenance schedule. It includes repairsdue to accidents, part failures, and vandalism amongothers. Figure 1 plots monthly cost vs. age in monthsfor all the vehicles in the data set for all the countries.In total we have 4286 observations. We use operatingcosts in section 4 to check the ICRC miscellaneous costfunction. 2.4. Accidents We collected a database with 599 records of accidentsfor the period 2002  –  2006. These records correspond to300 vehicles. This gives an average of two accidentsper vehicle for the vehicles in the database. The data- base includes a wide range of damage from brokenmirrors to total loss but accident descriptions are notavailable. Additionally, accident costs are not veryreliable. We use these data in determining the driversof replacement in section 3 and the drivers of salvagevalue in section 4. 2.5. Qualitative Field Data To have a better understanding of vehicle use inthe ICRC we performed field trips and conductedinterviews. We interviewed six staff at the HQlevel in Europe: The Head of Fleet Unit, the GlobalFleet Manager, the Deputy Head of OperationsWest Africa, the Senior Purchaser, the Head of Administration Division, and Asset Manager. Addi-tionally, we interviewed logisticians at the regionaland national level in Africa: The Regional FleetManager based in Kenya, the Regional WorkshopManager, and the Parts Manager. In Uganda weinterviewed the National Logistics Coordinator, theNational Fleet Manager, and a National Logistician.The interviews were recorded and two researcherswere present in all of them. We use the qualitativedata for describing the 4  9  4 life cycle and for bet-ter understanding of the cost structure within theICRC. 3. Vehicle Management in the ICRCand the SRP The 4  9  4 vehicles are mainly used by humanitarianprograms, the core of humanitarian action, to coordi-nate and execute last mile distribution of aid (Balciket al. 2008). Vehicles are used for transporting relief items to beneficiaries and for transporting staff and materials related to development programs like Table 2 Descriptive Statistics for Procured and Sold Vehicles (FourCountries, 2002  –  2006) Mean Median SD Min. Max.Afghanistan, Obs  =  162, 101 activeActiveAge (years) 4.59 5 1.75 1 8Odometer (km) 41,965 44,533 29,637 0 111,368SoldAge 7.70 8 1.95 4 12Odometer 145,384 138,963 55,550 30,678 254,682Salvage value 7197 6510 2809 1287 13,536Ethiopia, Obs  =  131, 95 activeActiveAge 4.61 5 2.41 1 14Odometer 76,308 86,956 47,028 0 167,012SoldAge 7.75 8 1.92 2 14Odometer 155,217 156,008 62,056 8,255 243,997Salvage value 16,555 16,486 6305 6349 27,612Georgia, Obs  =  112, 44 activeActiveAge 4.55 5 1.15 1 8Odometer 91,454 87,819 39,649 0 170,631SoldAge 7.84 8 1.24 5 11Odometer 208,131 212,470 50,674 49,713 303,380Salvage value 7545 8211 1887 2608 12,459Sudan, Obs  =  240, 189 activeActiveAge 3.47 3 1.41 1 10Odometer 17,569 10,516 20,661 0 103,256SoldAge 7.12 8 2.82 1 12Odometer 100,424 90,754 64,957 0 270,827Salvage value 12,470 11,000 7305 3030 45,139 Table 3 Monthly Distance (km) 2002  –  2006 (Four Countries) Obs Mean Median SD Min MaxAfghanistan 89 1177 1027 997 0 17,396Ethiopia 114 2164 1846 1848 0 9213Georgia 69 2282 2196 1410 0 25,313Sudan 182 1135 750 1576 0 18,350 Pedraza-Martinez and Van Wassenhove:  Vehicle Replacement in the ICRC Production and Operations Management 0(0), pp. 1–12,  ©  2012 Production and Operations Management Society  3   building schools, hospitals, water sanitation, etc.(Pedraza-Martinez et al. 2011).The ICRC vehicles are procured by HQ directlyfrom a Japanese manufacturer using the HQ budget.ND compiles programs’ transportation needs andmakes a vehicle requisition to the HQ that approvesprocurement. From our interviews with the SeniorPurchasing Officer and the Global Fleet Manager atHQ we know that purchasing cost does not changeacross countries. Transportation plus equipment costsare assumed to be 8% of the purchasing cost.The ICRC has a duty-free status. They do not paythe registration taxes in the countries where theyoperate. In some emerging countries registration costscan be more than 100% of the purchasing cost of thevehicle. For instance, if the ICRC would decide to pur-chase locally, the manufacturer’s suggested retailprice for a 2008 model Toyota Land Cruiser in Ethio-pia would be approximately twice the global purchas-ing cost for the ICRC.The lead time from placing the order to the manu-facturer in Japan to the time vehicles reach the ND isapproximately 4 months. As soon as vehicles reacheither the replenishment warehouses in Brussels(commercial), Nairobi (ICRC) or Amman (ICRC), oroccasionally the ND, they are fitted with a radio andpainted. Once equipped, vehicles are sent to ICRCfield operations.National registration takes place at the country of operation. The biggest problem for the ND is toimport the vehicle duty free. Governmental proce-dures can delay the registration. The whole processusually takes 3 months but in some cases can be aslong as 6 months due to political or conflict reasons(Figure 2).The fully operational stage of the vehicles starts justafter national registration. Vehicles are sent to thesubdelegations in the field according to operationalneeds. Once in the field, the vehicles are used inten-sively in ICRC missions to transport personnel, bene-ficiaries, and aid. Approximately at the end of thesecond year vehicles start a moderate operation stage.Vehicles are still driven in the field but in safer areasand shorter missions. The moderate operation lastsuntil the end of the fourth year.In the next stage in operational life, vehicles per-form administrative tasks in the field or in the ND.Usually vehicles spend most of the time in urbanareas and they are used to transport personnel. At thisstage in life it is rare to send vehicles to field missions.The decrease in vehicle use observed in Figure 2could be related to a possible excess of fleet sizecaused by an incentive problem. Vehicles in thefield are mainly used by humanitarian programs.These programs are service oriented. In terms of transportation their objective is to have a vehicle Figure 1 Miscellaneous Cost vs. Age (Four Countries) Pedraza-Martinez and Van Wassenhove:  Vehicle Replacement in the ICRC 4  Production and Operations Management 0(0), pp. 1–12,  ©  2012 Production and Operations Management Society
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