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Benetton - Global logistics in action
Dapiran, Peter.International Journal of Physical Distribution & LogisticsManagement. Bradford:1992.Vol.22, Iss. 6; pg. 7, 5 pgs
Abstract (Article Summary)
The Benetton, the Italian-based fasion designer and manufacturer, was formed in 1965,initially manufacturing for other retailers. In 1968, it opened its first 3 stores. A year later ittook its first global step and opened its first retail shop outside Italy. It now has over 6,000retail stores in more than 83 countries on every continent. Benetton's strategy is a truly globalone. The same garments are sold throughout the world through the same small boutique-styleshops, merchandised within strict corporate guidelines, and supported heavily with printmedia using identical advertisements worldwide. Benetton provides an example of anorganization which has truly grasped the meaning of integrated logistics across national
boundaries. Lessons to be learned from Benetton include: 1. developing a logistics vision; acomplete understanding of the strategic importance of logistics to the enterprise, 2. evaluatingthe possibility of using the concept of postponement, 3. increasing reaction speed andreducing cycle times, and 4. developing a clear understanding of the distribution channels ofwhich the organization is part.
Full Text (3552 words)
Copyright MCB University Press Limited 1992
THE MERCHANTS OF VENICE
The seed of the Benetton phenomenon was sown in the late 1950s when three brothers and asister merged their flair for fashion and their business acumen. Current chairman, leadinglight, and one of the founding siblings is Luciano Benetton who, with sister Giuliana and
brothers Carlo and Gilberto, turned $2,000 and a global vision into a multinational empire inless than 20 years.
The Benetton story has the added charm of the rags to riches theme found in fables. Lucianoand Giuliana started work early in their childhood to maintain the family, following the deathof their father. In her spare time Giuliana liked to knit brightly coloured jumpers which shedesigned. In the late 1950s Luciano convinced her that he could sell the brightly colouredgarments, which are still the company's distinguishing mark, to local stores in the Veneto area
of northern Italy. It is said he sold his accordion and young brother's bicycle to buy their firstknitting machine.
The head office, main plant and distribution centre are located on the outskirts of Treviso, 20km north of Venice, where the Benettons were raised as children.
The Benetton company was formed in 1965, initially manufacturing for other retailers. In1968 it opened its first three stores. A year later it took its first global step and opened its firstretail shop outside Italy.
The growth has been relentless with a five-year period in the 1980s during which one store a
day was opening somewhere in the world.
In 1987 Benetton faltered when it diversified into the financial services business. At the time.
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the move seemed a natural extension into an area in which it s already heavily involvedthrough its lease and financial arrangements with its suppliers and retail outlets. Thediversification proved inappropriate and, in 1989, the company sold its merchant bankinginterests and refocused, literally, on its knitting.
Conscious of the problems which can beset a rapidly growing organization, it has managed itstransition to a mature, professionally managed global marketer through judicious hiring ofoutside professionals.
It now has over 6,000 retail stores in more than 83 countries on every continent. These outletssell the 60 million garments manufactured each year. In 1977, 2 per cent of sales were tomarkets outside Italy. By 1986. this figure had swelled to 61 per cent of which 40 per centwent to other European countries and 15 per cent to North America. The proportions aresimilar today with total sales in 1990 reaching $1.7 billion.
A recent analysis of the overall performance of the top European companies has rankedBenetton third after Glaxo and Reuters Holdings.
FAST FASHION
Benetton detractors have often labelled its global products as the fast food of fashion--McFashion as it has been called. This is not the barb it may appear to be. Indeed, LucianoBenetton himself distinguishes between the artisan fashion of Italy and France, of the likes ofArmani or Chanel, and what he refers to as his industrial fashion. It is precisely the ability ofBenetton to understand the key success factors underlying the McFashion business which
gives it its competitive edge.
Benetton's strategy is a truly global one. The same garments are sold throughout the worldthrough the same small boutique-style shops, merchandised within strict corporate guidelines,and supported heavily with print media using identical advertisements worldwide. Thestrategy is to brand a "total look"--from the colour co-ordinated garments to the ambience ofthe small stores --rather than individual products.
Early print advertising concentrated on displaying the colourful Benetton garments beingworn by its youthful target market the models always multiracial and multinational. Theyunderlined the Benettons message of world peace and racial and national harmony. The
United Colors of Benetton, the company's current corporate banner, is as much a politicalstatement as it is a fashion statement.
The social agenda of the Benetton family now extends to such issues as AIDS, environmentalproblems and overpopulation. All are addressed through their company's advertisingcampaigns.
Their advertisements do not now feature clothes, in common with many other fashion housessuch as Esprit and Anne Klein and, instead, the models have been replaced by startling imageswhich have created vocal public outcry.
Some years ago double page advertisements, which featured only multicoloured condoms,were banned by some US magazines. More recently, advertisements which showed a blackwoman breast-feeding a white baby caused a furore amongst American blacks. The banned
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advertisements were replaced by the far more innocuous images of parrot sitting on the backof a zebra or multiracial Pinocchio puppets.
The most recent campaign included an advertisement featuring a photograph of a newborn
baby still attached to the umbilical cord. The advertisement was displayed as a poster inLondon. A burst of 800 complaints from the public in less than a week caused the AdvertisingStandards Authority to ban the poster but not before it had raced to the top of the UKMarketing magazine's top ten list of spontaneous recall advertisements.
Although Benetton claims the provocative advertisements are not designed simply to attractfree publicity, it does not deny that the attention is welcome. The advertisements are designedto be noticed and provoke reflection on the social issues of concern to the Benettons. The
baby advertisement was described as "a documentary-style bit of social reality" symbolizing"the beginning of life how all human beings come into the world in the same way". Theadvertisements also seem to be effective in selling clothes.
Benetton operates in a highly competitive, mature industry characterized by a fickle consumerbase demanding an increasing variety of products. The market is volatile and risky.Competitive activity can render one's product fines unfashionable overnight. Product lifecycles are planned to be short to maintain consumer interest. In fact, Benetton plans for eightfashion collections on top of the two basic fashion seasons--that is, a complete change of
product lines ten times a year. The logistics system needs to operate at a high level ofcompetency to support this incessant pace.
BENETTON HAS THE WISDOM
The strategic responses in such an environment are complex. The successful marketer needsthe vision and the skills to manage diversity. On the one hand it needs to meet the demands offashion--the rapidly changing needs of the customer. Hence, it needs to develop flexibility andspeed. On the other hand, to compete in the "industrial fashion" stakes, it needs to maintainhigh levels of efficiency. Benetton has learned how to rapidly and constantly adapt tochanging consumer tastes while gaining efficiency through economies of scale.
It has done this by clearly understanding the role of logistics in supporting the core businessstrategy.
The linchpin of this support is information systems technology. Information technology linksthe market place with the manufacturing process. Electronic Data Interchange (EDI) allowsBenetton's agents in each country to regularly transmit orders to Benetton's head office. Thisknowledge of the market updated every 24 hours allows Benetton to carefully track and reactto demand by manufacturing only those garment styles, colours and sizes required.Communications technology has allowed Benetton to "eliminate the filters between thecustomer and production" and to link the customer directly to the factory.
But the rapid transfer of information by and of itself, is not the key factor for success. The keyfactor is how to use the information technology to integrate the supply chain and maximizethe value output.
Benetton has been forced to innovate in the manufacturing process to take advantage of themarket knowledge made available through EDI. Communications technology has been
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integrated to CAD/CAM systems to give Benetton the speed and flexibility which it needs tocompete effectively in the fashion market.
As Benetton has said, in comparing itself to its competitors, "many can get the knowledge but
only we have the wisdom to be able to use it to create the competitive edge".
KNIT NOW, DYE LATER
Computer-aided design (CAD) of garments along with computerized garment cutting andassembly is the secret to a fast and flexible manufacturing operation.
The process starts with in-house garment design using sophisticated CAD technology. Videodisc storage of all past clothing ranges allows designers to call up previous styles and colours.State-of-the-art on-line software allows designers to create designs using 250-colour palettescreens. Data representing these designs can be transferred directly to computer-controlledgarment cutters cutters and knitting machines. In theory then, garment design to manufacturecan take as little as a few hours.
The garment assembly is carried out by subcontractors. Any fabric and garment dyeing iscarried out by Benetton while subcontractors are again used for finishing operations.
Clothing manufacture is a mix of high technology and high labour. By retaining ownership ofthe high technology production elements, Benetton can take advantage of the economies ofscale inherent in volume manufacture. By subcontracting the labour intensive operations itsheds the high cost elements to small family owned enterprises having lower cost structures.
These cost benefits flow on to Benetton.
Traditionally, the manufacture of clothing starts with the dyeing of the yarn followed by theknitting of the garment. The problem inherent in this sequence is that the knitting process isslow--so that to meet customer service expectations requires high levels of inventory offinished garments.
The likely result of the traditional approach, as anyone who has been responsible formanaging inventory will know, is that invariably the desired colours will be out of stock whilethere are excess inventories of the unpopular colours. In a market characterized by very short
product life cycles, this mismatch of inventory and customer demand cannot be corrected
using a traditional manufacturing approach. The typical result is the end of season mark-down.
The obvious answer technically is not a simple one and involved Benetton in processinnovation. The solution was to manufacture the garments from the bleached yarn and delaydyeing until information on the preferred colours became available through EDI.
This reversal of traditional logic brings its rewards:
* cost savings by delaying addition of expensive dyestuffs;
* better customer service by matching supply and demand;
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* increased sales by having customer desired stock available; and
* fewer write-downs for the same reason.
This delayed dyeing process is an example of the principle of postponement. Postponementsuggests that value should be added in the supply chain as late as is consistent with meetingcustomer needs.
THE ROBOTIC DISTRIBUTION CENTRE
The $50 million distribution centre (DC), is more accurately described as a giant robot. Thestorage area alone of the DC measures 170 metres long b 80 metres wide by 20 metres high; athird of this height is below ground level to minimize the impact on the surroundinglandscape, in keeping with the Benetton concern for the environment. Twenty loading andunloading bays service the building.
Inbound garments from the production areas arrive below ground level. The garments arealready packed in one of two standard boxes which are barcoded and pre-addressed tocustomers. The barcoded cartons are delivered by high speed conveyors from the receipt baysto rail-guided transporters in the storage area. Each transporter can transfer up to 24 cartons ata time to and from the racking. Simultaneous put-away and retrieval occurs to maximizeefficiency.
The storage zone has a capacity of 250,000 boxes sorted randomly. The DC handles 12,000boxes a day. equivalent to 6,000 consignments a day, representing some 60 million garments
a year.
The high level of automation allows the DC to operate on three shifts with six operators to ashift. Shipment is directly to one of 6,000 retail stores in 83 countries. Distributors,wholesalers and regional centres are not used. To achieve high levels of response all exportsare airfreighted.
IMPROVED SERVICE AND LOGISTICS SAVINGS
During the transition from founder-managed organization to maturity, functions and processesneed to be formalized and the ad hoc decisions and structures appropriate in the growth stage
need to be reviewed.
The logistics functions are not immune from this process. The breathless pace of establishinga global network of shops left a wake of unco-ordinated and unintegrated movementactivities. A raft of carriers, freight forwarders and customs brokers had been used to movethe product, often with the not unexpected result of having the product arrive withoutmatching paperwork and with subsequent delay in product delivery to the stores. The poorlyintegrated activities resulted in low service quality at a high cost of distribution.
An analysis showed Benetton that economies of scale were possible in the freight-forwardingfunction. In a joint venture it established WIDE (Worldwide Integrated Distribution
Enterprise) to manage the international forwarding and customs clearance functions. WIDEwas first established to manage the North American product movements. This organizationdeals directly with air carriers--eliminating a level of freight-forwarded intervention. EDI
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technology allows Benetton to transmit documentation ahead of consignment arrivals. toallow speedy clearance through customs and onforwarding to the retail outlets. Thesefunctions are managed or performed by WIDE.
The result of this rationalization was a 55 per cent reduction in physical distribution costs anda reduction in lead times to the USA from 22 days to seven days.
BENETTON PARTNERSHIPS
Benetton operates using a blend of in-house expertise and outsourced resources throughoutthe value chain. Benetton was involved in partnership arrangements (nothing more than aversion of the Italian extended family) long before the term strategic alliance becamefashionable. Manufacturing, for example, is carried out with the help of 450 subcontractors.
The third-party manufacturers receive production planning support, technical assistance andquality control support. It is not unusual for Benetton to provide financial assistance toencourage contractors to equip with specialized machinery for special effects and to have'Benetton help financially when the equipment is no longer required. Without thisencouragement, the contractors would not have the motivation to change their technology. Itis also not unusual for Benetton to encourage employees to convert internal processes toexternally contracted ones and so assist employees to become self-employed entrepreneurs.
In return, Benetton demands exclusivity. This is essential to ensure that Benetton always hascapacity available to handle peaks and to be able to co-ordinate effectively these external
production units.
These independent labour cells give Benetton high levels of flexibility compared with acomparably sized in-house unionized labour force. Simultaneously, lower labour costs accruegiven the cost structures of family-owned businesses.
The risks and rewards are evenly shared with such an arrangement. It also appears that noneed is felt to formalize such relationships with a legal contract.
Analysts believe this blend of high labour cost third-party and high-technology in-houseoperations gives Benetton a manufacturing cost structure comparable with Asian producers.
Benetton describes itself as "vertically de-integrated". This is the process of centralizing thoseprocesses which add the highest value and decentralizing the rest.
This mix of third party and in-house operations extends to functions other thanmanufacturing--always outsourcing when in-house economies of scale cannot be obtained andwhere quality and customer service will not be jeopardized. The use of subcontractors hasalso allowed Benetton to maintain its rapid expansion rate without the need for massivecapital and labour force investment,
The purchasing function is centralized in-house given the economies inherent in large scalebuying. Benetton is one of the largest wool buyers in the world and at one stage was
contemplating establishing a wool scouring plant in Australia.
It is fairly typical for companies to be too small for some activities such as international
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transport and too large for others such as labour intensive finishing and hence there is a costadvantage if such activities are performed by a third party.
At each step of the supply chain Benetton has taken a conscious decision about whether to
process in-house or subcontract bearing in mind cost, flexibility, speed and service.
THE SHOPS
Benetton works through a network of 85 agents around the world. Agents in each country areresponsible for recruiting the retailers, showing the fashion collections, processing retailerorders, selecting retail sites, carrying out training and, importantly, feeding marketintelligence to Benetton. For this they receive commission, usually around 4 per cent, basedon sales in their territory.
Although often called franchises, the retail outlets are more accurately described as licensees.The licensees, unlike a franchized arrangement, pay no fees or royalties. This neatly allowsBenetton to sidestep the often restrictive franchise legislation in many countries. Licenseesmust agree to stock and sell only Benetton products, merchandise and display the garmentsaccording to Benetton guidelines and also follow price guidelines.
For Benetton the stores are not simply outlets for their garments but information probesmeasuring the level of customer acceptance of the Benetton "look",
In true partnership mind set, the key desirable qualities of the licensees are their commitmentto Benetton and their ability to expand the market.
The global EDI network used to keep Benetton in touch with the world is used to providesupport to the agents. They have access to information about what is in production, in the DCor in transit, Licensee billing and credit status is also made available to the agents.
In sum, then, the strategic outsourcing decisions look as follows:
* CAD/CAM design, cutting, knitting, dyeing: high tech, high capital, scale economiespossible: do in-house.
* Garment assembly, finishing: no scale economies possible, large high cost labour force
needed which could reduce flexibility: outsource to sub-contractors.
* Raw material purchasing: scale economies possible; do in-house.
* Mass distribution: scale economies possible, fast cycle times needed to meet customerexpectations with minimal inventories: do in-house.
* International transportation: scale economies not possible with Benetton volumes: outsourceto international carriers.
* Freight forwarding: scale economies became possible with increasing volumes, service
improvements possible: change from outsourcing to in-house through joint venture.
* Global communications network: scale economies not possible with Benetton volumes:
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outsource to GE Information Systems.
* Retail stores: high capital needed, potential labour cost and motivation problems, highcustomer service levels needed: outsource to licensees.
The speed and flexibility of the entire system is such that it is capable of filling a retail shopreplenishment order mid-season within two to four weeks. This includes the time tomanufacture the garments. Mid-season ordering is beyond the capacity of most fashion
businesses. This is possible with minimal inventories by manufacturing only what is ordered.In addition, this is possible only with the aid of information technology, flexible high speedmanufacturing, high speed distribution and an organizational structure capable of handlingthis.
SOME LESSONS FROM BENETTON
There are a number of lessons we can learn from the Benetton example:
(1) Develop a logistics vision, what Benetton describes as a 360 degree vision; that is, acomplete understanding of the strategic importance of logistics to the enterprise. The focusshould be on customer satisfaction and on how each functional area can be integrated todeliver that satisfaction. The competitive advantage for Benetton lies in its ability toeffectively integrate the components of the value chain. We should aim to acquire Benetton's"wisdom".
(2) Evaluate the possibility of using the concept of postponement. This is a cost and risk
reducing strategy effectively adopted by Benetton.
(3) Increase reaction speed and reduce cycle times. Time management has been highlighted asone of the key competitive strategies for the 1990s. Cycle time management is not simply acase of doing things faster but necessitates redesigning operating processes and, if necessary,the organization. Process review can lead to shorter cycle times by changing from sequentialto simultaneous operations and by reducing the number of delaying interfaces.
(4) Develop a clear understanding of the distribution channels of which the organization ispart. Benetton's analysis led to a channel design involving licensed retail stores and theabolition of all the intermediaries typically found in the garment trade.
(5) Develop a customer-oriented manufacturing process; one which is flexible and responsiveto customer demand.
(6) Understand the customers' total need. The Benetton product is clearly more than just thegarment.
(7) Determine the right blend of in-house competences and outsourcing.
(8) Use appropriate technologies to measure customer demand, develop fast response times,flexibility and responsiveness to the market.
Benetton provides us with an example of an organization which has truly grasped the meaningof integrated logistics across national boundaries. Benetton has created for itself a borderless
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world. It has linked 180 raw material suppliers, 450 manufacturers and 6,000 retailers todeliver 60 million garments a year to satisfied customers in 83 countries. To the consumer theBenetton product may be a fashionable "look" but the real Benetton product is nothing lessthan integrated logistics.
FURTHER READING
Bruce, L. "The Bright New Worlds of Benetton", International Management, November 1987,pp. 24-35.
Chiodini, G., "Logistica Distributiva e Telenlatica", Trasporti Industriali, No. 368, 1989. pp.65-9.
Dapiran, G.P., "Benetton Site Visit Notes", unpublished, 1991.
Jarillo, J.C. and Stevenson, H.H., "Co-operative Strategies--The Payoffs and the Pitfalls",Long Range Planning, February 1991, pp. 64-70.
Levin, G., "Benetton Gets the Kiss-off", Advertising Age, 22 July 1991, p. 1.
Pepper, C. B., "Fast Forward", Business Monthly, February 1991, pp. 25-30.
"Tasteful", The Economist, 20 July 1991, p. 82
Zakon, A. and Winger. R.W., "Consumer Draw--From Mass Markets to Variety",
Management Review, April 1987, pp. 20-7.
Peter Dapiran is a Lecturer in Logistics at Monash University, Caulfield, Victoria, Australia
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The Role of Transportation in Logistics
The Role of Transportation in LogisticsPresented December 13, 2000
Logistics
The definition of logistics adopted by the Council of LogisticsManagement is "the process of planning,implementing, andcontrolling the efficient, effective flow and storage of goods,
services, and related information from point of origin to point ofconsumption for the purpose of conforming to customerrequirements." Note that this definition includes inbound, outbound,internal, and external movements, and returns of materials forenvironmental, salvage, repair and recall purposes.
Every business firm, regardless of what it produces or distributes,requires the movement of goods from one point to another and,therefore, is involved in transportation. Transportation essentiallyconcerns the spatial dimension of the business firm. "The spatial
dimension refers to geographical relationships and reflects thejuxtaposition of firms with respect to their materials sources, markets,and competitors, plus the spatial relations of the latter to theirsources and markets". The purpose or function of transportation is toserve as a connecting link between the spatially separated units withina firm's own organization (such as between plants and warehouses)and between units of the firm and units of other firms and individuals(such as suppliers and customers). Good transportation has the effectof holding to a minimum the time and cost involved in the spatialrelationships of the firm.
It is imperative that we understand that the modern logistics structurerests on efficient motor carrier transportation. Techniques such as JITand Efficient Consumer Response (ECR) would not be possible withoutthe highly developed trucking industry.
Robert Delaney, Vice President of Cass Logistics and Consultant toProLogis indicated in his 11th annual "State of Logistics Report thatthe motor carriers have an 82 percent share of the freight market andfreight expenses constitute 50 percent of the total costof logistics.
Delaney also points out that the efficient motor carrier network hasmade possible the lowering of the level of safety stock with itsresultant reduction in inventory carrying cost.
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Creating Economic Utility
In economic theory terms, transportation's function is to create placeutility for the goods produced or distributed by the firm. The word"utility" means usefulness or ability to give satisfaction. Place utilityexists when goods are in the place where they can be consumed.Goods that are not in the place where they are needed have less thanfull value and so transportation creates value by creating place utility.Along with the necessity to have goods in the right place, the goodsmust be there at the right time (time utility) and in the right form(form utility) and in the possession or ownership of the person(s) whowants to consume them (possession utility). Whether it is deliveringgoods to a warehouse to serve markets, moving goods into storagefor future use, or forming an integral part of a Just-In-Time systemand delivering goods at the exact point in time they are needed,
transportation adds value to the goods by providing time utility. Formand possession utility are the result of the production process and ofmarketing, respectively.
Our current consumer driven economy is driven by our ability to offera wide choice of competing products with wide scale or "intensive"distribution. Consumers take for granted the choices availablewhether for a "commodity" such as milk or high value products suchas electronics. Store direct delivery and delivery of Internet purchaseswould not be possible without the trucking industry.
Without place, time, form, and possession utility, goods have no valueto the customer. In a broad sense, the production process is really notcomplete until all four utilities have been created because until thengoods are not capable of giving satisfaction and would not prompt acustomer to exchange something of value for something with novalue. Thus, transportation is an essential part of the total productionprocess that cannot be overlooked.
Market and Pricing Decisions
Because transportation creates time and place utility, both of whichare necessary for economic exchanges to take place, its availability,adequacy, and cost have an effect on several kinds of decisions madeby a business firm in addition to decisions related to managing thetransportation function itself. Customer delivery requirements oftenrequire the timeliness which can only be achieved by the use oftrucks.
Product Decisions
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For those firms that deal in tangible products, one such decision is theproduct decision, or the decision as to what product or products toproduce or to distribute. The transportability of a product in terms ofits physical attributes and the cost, availability, and adequacy oftransportation enters into any product decision.
Market Area Decision
Closely related to the product decision for firms dealing in tangibleproducts is the decision relative to where the product(s) should besold.This decision is affected by the transportation characteristics ofthe product(s) itself as well as transportation availability, adequacyand cost.
Purchasing Decisions
What to purchase and where to purchase are also affected bytransportation considerations, regardless of whether the firm is amanufacturer, wholesaler, retailer or service organization. The goodsinvolved may be component parts, raw materials, supplies, or finishedgoods for resale. The transportation characteristics of the goods, theavailability, adequacy and cost of transportation have a bearing onthe "what and where" decision.
Location Decisions
Although decisions relative to where plants, warehouses, offices,stores, and other business facilities should be located are influencedby many factors, transportation availability, adequacy, and cost areextremely important in such decision making. The core business ofthe firm will dictate the mode of transportation services required.Proximity to highway services is a key factor in the location decisionfor new manufacturing facilities. The significance of the transportationfactor varies widely from industry to industry, but transportation
requirements always need to be considered in location decisions.
Pricing Decisions
Since transportation is a critical cost factor in business operations, itcan have a bearing on the pricing decisions made by business firms,especially those firms that have a cost-oriented pricing policy. In facttransportation is one of the nation's "basic" economic activities. Thisdoes not mean that in any individual firm there is an automatic cause-and-effect relationship between transportation cost changes and the
firm's prices, but transportation cost is one of the factors that usuallyshould be considered in pricing decisions.
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Transportation's Place in the Economy
Our freight transportation system enables consumers to enjoy theavailability of goods which are not produced in their immediate localebecause of climate or soil conditions, the lack of raw materials,utilities, or labor, or the cost of production. Such a system allowsconsumers a choice of goods which would not otherwise be available.A good transportation network makes possibly the mobility of peoplefor economic, educational, social, or other purposes while reducing oreliminating isolation, while promoting economic, social, and politicaldevelopment and economic and political unity in the country.
Geographic specialization
There are many ways to categorize and describe the economicimportance of transportation. For society or the economy as a whole,transportation makes possible geographic specialization or territorialdivision of labor. Geographic specialization takes place when a nationor region or state or city produces those products and services forwhich it is best suited in terms of its capital, labor, raw materials andother resources and talents. California and Florida specialize in theproduction of citrus fruit because of a climate while the Great Lakesregion produces much of the nation's steel because of the proximity ofraw material and low-cost transportation. Chemicals aremanufactured in Texas and Louisiana for the same reasons. In thisway the most efficient utilization of each areas' resources and talentsare made. If such geographic specialization does not occur, then anation, region, state, or city will be forced to devote some of itsresources and energies to production of goods and/or services forwhich it is not well suited thus resulting in economic inefficiency and alower standard of living for all concerned.
Transportation's role is critical but so accepted that it may be takenfor granted. Consider a simple example, where area A specializes inproducing widgets, then area A must rely on shipments from other
areas for the things other than widgets that its population wants orneeds. Area A must also depend on other areas to import the surplusof widgets that A will produce. If, however, there is no adequatetransportation between A and the areas it wishes to trade with, or ifthe transportation charges are so high as to make the price for thevarious products involved too high, then trade between A and theother areas will not take place and geographic specialization by A willbe impossible.
If international or inter-regional or interstate or intercity commerce is
to exist and geographic specialization exists, adequate transportationat a reasonable cost must be available. Speed of service is another
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factor in allowing wide ranging trade as many items have a finite shelflife.
Large-Scale Production
The role of transportation in large-scale production is similar to thatdiscussed in connection with geographic specialization in that theavailability of an adequate transportation system is a requirement tosustain large-scale production. The benefits of large-scale productionin terms of economies of scale, production efficiencies and lowerprices are well-known. The United States has been the leadingexponent of the principle of large-scale production. But large-scaleproduction by a firm requires that raw materials, parts, and suppliesbe collected from a variety of sources and a large geographic marketfor the product(s) produced be accessible at reasonable cost.Therefore, adequate transportation service at reasonable cost isindispensable to large-scale production.
The transportation system in the United States evolved and matureddue to the needs of a manufacturing economy. However, without aviable transportation system, our economy could not survive.
Land Values
Improvements in the transportation network are usually credited withhaving a positive effect on the value of the land that is adjacent to orserved by the improvements. The principal factor is one ofaccessibility. If land is suddenly accessible to a new transportationfacility, an airport for example, the value of the land will ordinarilyincrease because the land has been given greater access to economicmarkets and hence is more useful. The same can be said if land isalready served by some form of transportation, and transportationaccess is improved, for example, when a new interstate highwayinterchange supplements a conventional two-lane highway,accessibility of the land has been increased and the time, effort, and,perhaps, the cost involved in getting to and from the land have beenreduced. This greater accessibility should result in an increase in thevalue of the land.
Competition Among Sellers
Transportation facilitates geographic specialization, large-scaleproduction and land accessibility by providing time and place utilitythereby permitting diversely located sellers of the same product to
compete in a given geographic market. Because goods can betransported anywhere in the country, transportation availability tendsto prevent captive markets and local monopolies. The net effect is to
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keep prices lower than they would be if access to markets wererestricted due to the unavailability of transportation services.
National Defense
The adequacy of transportation of military personnel and supplies canmake or break a military operation, as Napoleon learned in hisinvasion of Russia, and the Confederacy learned after much of itsrailroad system was destroyed during the Civil War. In modern timesmilitary logistics is truly the lifeblood of military operations. SirWinston S. Churchill wrote: "Victory is the beautiful, bright coloredflower. Transport is the stem without which it could never haveblossomed."
With the great emphasis on military and defense activity in the UnitedStates since World War II including the Desert Shield and DesertStorm operations, it is not surprising that the connection betweentransportation and national defense should exist. It is, in fact, wellrecognized that an adequate domestic transportation system is vital tonational defense. The result has been that some governmentalexpenditures designed to improve our transportation system havebeen partly justified on the ground that they will contribute to thenation's ability to defend itself. Thus, federal expenditures to improveour waterways are partly justified this way and the official title of theInterstate highway system is "National System of Interstate andDefense Highways." Without delving into the wisdom of suchexpenditures at this point, it is enough to say here that nationaldefense and transportation are inextricably interrelated and,consequently, makes transportation "important" to the economy andto society in general.
Trucking's Importance to Commerce
Highway transportation has become an important part of ourtransportation system since 1920, and it accounts for almost half ofour intercity ton-mileage and most of the local transportation ofproperty. The phenomenal growth of the industry since the early dayshas been in large part due to the technological advances made inequipment as well as infrastructure improvements. The constructionof the Interstate Highway System provided an advantage to truckingby allowing faster travel times and consistent size and weight.
Facts About the Trucking Industry
Employs 9.6 million people in jobs relating to trucking- more than thepopulations of 42 of the 50 United States.
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Had 1997 annual revenues equal to nearly 5% of the Gross DomesticProduct- a total of $372 billion.
Comprises more than 450,000 companies
Businesses chose trucks for 81 cents out of every dollar they spend onshipping. By weight, trucks carry 60 percent of all freight- 6.7 billiontons in 1997.
Exclusively serves more than 70 percent of all communities in the USfor the products and goods they receive.
The nation's trucking fleet consists of more than six million trucks,weighing more than 10,000 pounds, travels more than190 billion
miles per year and purchases more than 44 billion gallons of gasolineand diesel fuel annually.
More than 360,000 companies in the U.S. are involved in interstatetrucking. 82 percent of U.S. motor carriers operate 6 or fewer trucks;96 percent operate 28 or fewer.
(Source American Trucking Association)
Although deregulation has prompted many companies to disband
private carrier operations, more than 54% of the shipment volumehandled by trucks still moves in proprietary private carriage. In 1994,approximately 55 percent of the total for-hire traffic moved by truckwith that percentage rising approximately another 2 percent by theyear 2004. Rail traffic experienced similar percentage growth fromabout 15 percent while pipeline and water carriage will lose tonnageto rail and truck. Intermodal traffic will increase slightly from today's2 percent. This according to a study by the American TruckingAssociations and DRI/McGraw Hill.
It is interesting to look at the make up of commercial fleets operatingover the highway. There are 83,609 fleets, each operating more than10 vehicles. The overall composition of these fleets is:
Number of fleets 83,609
For-hire 24,806
Private 41,753
Government, Schools Utilities, Busses 17,050
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Total Vehicles operated 11,729,468
For-hire 5,963,297
Private 3,025,896
Government, Schools Utilities, Busses 2,740,275
Straight Trucks operated 3,161,285
Tractors operated 2,229,620
Trailers operated 4,836,324
Buses operated 566,915
Service Characteristics
A significant reason for the success of trucking has been the ability toprovide door-to-door service. Trucking service usually includes pickupof the cargo at the shipper's place of business and delivery to theconsignee's (receivers') place of business. In fact, many trucking firmsbegan by providing service to and from railroad freight houses insupport of the railroads' less-than-carload traffic. Rails provided
service from station-to-station instead of door-to-door, requiringshipments to be brought to and from the railroad terminal by theshipper and consignee or the shipper and receiver had to pay therailroads an extra charge for doing so. By the 1970s, trucking hadcaptured most intercity freight shipments of less than 10,000 poundsdue in part to the railroads abandoning this service. With the adventof Just In Time Manufacturing and the corresponding reduction ininventories and shipment sizes, the inherent advantage of door-to-door service became paramount and allowed many of the newlogistics techniques to be used.
Cost and Value of Service
Motor service can be cheaper on some shorter hauls than that ofsome other modes because of its cost structure. Trucking may oftenbe at a price disadvantage on longer hauls because of the high laborcontent in the cost structure which increases relative to the distancetraveled. Some modes such as rail achieve significant economies ofscale on longer hauls as they can move many trailers or carloads withless labor. This is partially offset by the higher cost of rail intermodal
terminals.
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LTL rates may be lower than those of competitive modes on smallershipments, regardless of distance traveled, because operations areoften geared primarily to less-than-truckload traffic rather than tomovement of large quantities of freight. Rates are based on
the size and weight of the shipment combined with the length oftravel. Truckload carriers typically "sell" the entire trailer capacityregardless of the actual size and weight of the shipment.
In addition, trucking service is often faster and more frequent for bothless-than-truckload and truckload shipments than that of itscompetitors except package carriers such as UPS. This serviceconsideration permits shippers and consignees to maintain smallerinventories which reduce inventory carrying costs which mayapproach 30 percent of the cost of sales (Council of LogisticsManagement and Cass Logistics). Trucking service also offers costadvantages because of less damage and reduced packaging costs ascompared some other modes.
Time Utility
The ability to provide time utility to its customers has been a majorreason for the success of the motor carrier industry. Motor carrierservice is often faster than that of other modes, particularly over shorthauls where schedule flexibility that doesn't exist in other modes suchas air or rail can minimize terminal delays. Rail or air carriers mayonly depart at the end of the day because of schedules or otherconstraints while motor carriers can depart when the loading isfinished. Truckload carriers may operate without any terminal delayby moving from the shipper's door directly to the receiver's door. Thisadvantage is diminished as distance increases because of enhancedintermodal service by the railroads. The elapsed time of motor carrierservice on long hauls can be reduced by using team drivers in acontinuous twenty-four-hour operation (one driver is driving while asecond driver is asleep) or by relaying drivers at spaced intervals
along the route.
Another time advantage inherent to trucking is the ability to providemore frequent service than their competition. This is possible becauseof the flexibility of operating over the highways as opposed toscheduled departures as may happen with railroads and airlines. Onecould use personal travel as an analogy. With a choice of driving toChicago or taking Amtrak, the time advantage usually rests with thepersonal auto because of Amtrak's terminal time to load and unloadpassengers at stations along the way for trips less than 500 miles.
There may be only one or two scheduled departures while theindividual may leave when they choose.
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Flexibility of Service
An important advantage of motor carrier service is its flexibility.Trucks can go anywhere there are roads and streets. One can find asegment of the industry that can provide a type of equipment meetingeven the most unusual needs of a customer. Today's truckingcompany will often design unique equipment for a specific customerunder a long term transportation contract so that adequateopportunity exists to recoup the cost of capital.
Consistency of Service
One of the challenges of the motor carrier industry is to maintaintightly scheduled transit times to meet customer requirements. ManyLTL carriers have made significant advances in their ability to delivereither overnight or second morning at the latest. Motor carriers aremore affected by weather conditions than are some other modeswhich can impact service levels. Trucking companies also suffer fromcongestion on city streets and on metropolitan area roads. A tripthrough a major metropolitan area may vary well more than one hourin length depending on the time of day.
Trucking companies are better than some other modes in terms ofamount of loss and damage. Unless an exception to liability ispresent, the carrier assumes liability for the full value of the shipmentwithout making an extra charge for that liability. This trend haschanged in recent years as the value of products has escalatedsignificantly. Carriers, particularly LTL carriers are seeking ways tolimit their liability, a trend that has been resisted by shippers
factors infulcing and carrier selection:
The methods and various modelling techniques employed in the various literature on theinter-relationship between shippers and carriers will now be discussed.
Despite the fact that mode and carrier selection are inter-related, mainstream studiessuchas Brand and Grabner (1985) and Stock and LaLonde (1978) have tried to differentiate theissues and make them distinguishable from each others. The process of transport selectioninevitably involves the loyalty and repeat purchase behaviour as described by Wind (1970),Saleh and LaLonde (1972) and Whyte (1992). Their views have reinforced the generalunderstanding of industrial purchase behaviour in the commercial world. However, in thisdissertation the above concept will be modified slightly because the targeted intervieweesaremainly Chinese shippers. Fang (2001) pointed out that in order to better understand theworkings of inter-firm adaptation in business relationships in China the culture metaphormust be included. In other words, the inter-firm relationship in China is mainly treated as an
inter-personal relationship.When China started their open door policy in 1978, the incoterms widely used within theChinese shippers community were Free On Broad (FOB) and Ex Work/ factory (EX
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WORK), thus the carrier and transport mode selection were mainly controlled b by overseasbuyers. A decade ago, shippers in China preferred to use Cost, Insurance and Freight (CIF)orCost and Freight (C&F) for their international shipments, as they could control the market 69price of their products at the destination. The selection of transport hence fell back to thehands of the Chinese shippers.
3.4 Mode Selection
This section is divided into three parts. First, the principles of mode selection are examined.Second, the nature of the selection process is discussed, with reference to four choicemodels.Third, the attributes governing carrier selection are presented. Finally, various modellingmethods employed in previous literature will be discussed and assessed.
Mode Selection Principles
Faller (1985) indicated that in general, goods of high value (general time sensitivity) tend touse the faster modes. The selection of mode may also be based on the nature of the product(specific time sensitivity) and the selling price (circumstantial time sensitivity) of goods indestination countries.Traditional mode selection has been focused simply on determining the mode whichachievesthe lowest transportation cost. However, current supply chain management concepts meantransportation involves multimodal combination and the goal of mode selection has beenstated as obtaining the cheapest option that meets service requirements as well asproductionand marketing strategies.McKinnon (1989a) summarised the basic principles of mode selection as:
Compare alternatives; Compare options at regular intervals; Use a broad range of criteria for evaluatiEmploy a rigorous selection procedure
However, at a later date, McKinnon (1989b) suggested that these principles are not widelyapplied in practice. For example, it is considered desirable to evaluate mode options atregular intervals, but Sharp (1970) found that firms tend to re-evaluate modes in response tochanges in their internal organisation or the external mode performance.Krapfel and Mentzer (1982) illustrated these principles within a general model oftransportation choice. The buying centre member with information sources is the ultimatedecision maker on the mode choice. Similarly, Slater (1990) showed three methods available
to the logistics manager to find the "optimum" mode. They are judgement, a cost trade-off orutilising distribution models. A buyer can combine all three of these in a systematic selectionprocess.
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Carrier selection
The purpose of this chapter is to review past literature that has been made
available regarding the subject of carrier selection. The first section of this
chapter will begin with global maritime overview. Next, the concept of
logistics management and the issues related to transport and customers
will be discussed. Finally, the end of the chapter will review the issues
related to carrier selection including important determinants in shippers
making decision process.
2.2 Global Maritime Overview
According to UNCTAD (2008), over 80 percent of world merchandise trade
by volume carried by sea because it supports international trade and
globalization. In 2007, the volume of international seaborne trade reached
8.02 billion tons. The volume increased of 4.8 percent from the previous
year. Dry cargoes were the largest share of good loaded. The world
merchant fleet expanded by 7.2 percent during 2007 to 1.12 billion
deadweight tons (dwt) at the beginning of 2008. Major loading areas were
located in developing countries which are 63.2 percent while developed
countries accounted as 33.3 percent. Because of high demand for shipping
capacity, vessel order increases at highest level which it is 12 times higher
that it was in June 2002. The top 35 shipowning countries together
controlled 95.35 percent of the world fleet. By May 2008, the world
containers fleet reached 13.3 million TEUs. In addition, the containershipsector is investing in larger ship to achieve economies of scale to reduce
costs. However, in the year 2007, the containership market was effected
by higher fuel cost, a weakening US dollar, a strengthening Euro, and an
increased supply of newbuilding coming online. Oil price impacted directly
to bunker cost level which resulted higher bunker fuel price for 73 percent
in Rotterdam, 76 percent in Singapore and 79 percent in Los Angles.
Furthermore, maritime transport tends to have further discussions such as
security and air pollution and climate changes. The industry is moreconcerns on environmental issues because heavy oil burned in shipped
results in higher level of sulphur oxide and nitrogen oxide emissions.
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Figure 2.1
Source: UNTAD Review of Maritime Transport 2008
International trade is the main driver of container flow. In the year 2005,
North and East Asia is the most significant driver of container trade which
was accounted for 50 percent of export trade. In the year 2015, North and
East Asia is expected to increase its world market share by approximately
12 percent while North America and Europe are expected to lose market
share by 5 and 7 percent respectively. In other world, North and East Asia
trade was the key driver of global container flow in the year 2005, and it
has potential to grow until the year 2015. The estimated and forecast
growth rates for full container trade (Figure 2.1) tend to reach up to 235.7
million TEUs in the year 2015, and the compound growth rate during theperiod 2005 2015 is 7.6 percent per annum. This estimation is full origin-
destination containers only. The empty containers are not
included.According to Drewry Shipping Consultants ( ) as cited by UNCTAD
(2008), container trade is expected to reach 287 million TEUs and exceed
371 million TEUs by the year 2020.
2.2.1 Impacts of Credit Crisis on International trade
2.3 Logistics Management
Logistics management is the process that relates to plan, implement and
control the efficient, effective flow and storage of goods, services, and
information in both the manufacturing and service sector from the point of
origin to the point of consumption in order to meet customers
requirement. Logistics management is to control raw materials, in process
inventory and finished goods(Stock and Lambert, 2001).
Gecowets (1979) explains about logistics concept that
The five rights of a logistics system are supplying the right product at the
right place at the right time in the right condition for the right cost to
those customers consuming the products.
According to Quayle and Jones (2001), logistics is defined as the process
that needs management and co-ordination of all activities from sourcing
and acquisition, through production and through distribute channel to
customers. The authors also explain that the goal of logistics is to create
competitive advantage through the simultaneous achievement of high
customer service levels, optimum investment and value for money. In
addition, the authors explain about the business functions within the scope
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of logistics management or know as logistics mix which include planning
and marketing strategy, purchasing, production planning, storage and
material handling, inventory management, warehouse and stores,
transport, customer service, and technical support. Relevant toBowersox
et al. (2007), logistics relates to the management of order processing,
inventory, transport, and the combination of warehousing, materials
handling, and packaging (Figure 2.2).
However, Croom, Romano, and Giannakis (2000) do research on critical
literature review of supply chain, and they conclude that supply chain has
lack of universal definition because the way of supply chain has been
developed, so it leads to different point of view.
Figure 2.2 Business functions in logistics management
Facility Network
Warehousing, Material Handling, and Packaging
And
Integrated Logistics Management
Order Processing
Transport
Inventory
Logistics requirement have increased to serve consumers who want and
demand quicker response times and more convenient offerings. Moreover,
it is also pressured by consumers related to the prices, so the company
needs to control its supply chain as efficiently as possible (Coyle, Bardi,
and Langley, 2003).
2.3.1 Importance of Logistics
Ballou (1999) explains that logistics is about creating value in terms of
time and place, so good logistics management means the activities that
contribute to the process of adding value. Logistics management is related
directly to minimising the cost which can derive benefits to the consumers
and to the firms shareholders. Logistics management can result of the
profit squeeze and potential profit leverage because it is the area to
significantly save cost which has greater impact in the firms profitability
that increasing sales volume would have(Stock and Lambert, 2001).
2.3.2 Challenges in Logistics Management
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Meixell and Norbis (2008) claims there are many forces that bring about
new challenges in logistics management. Some of them originate in the
shipper community, carrier community and consumers themselves such as
the growing concern for the environmental impact of the products they
purchase. In the research, the authors also explain five logistics challenges
that influence transport choice which are transport capacity shortages,
international growth, economies of scale, security concern, and
environmental and energy use concerns.
Transport Capacity Shortage
The issue is relevant to all transport modes. In motor carriers, capacity is
limited due to tighter hours-of-service regulation, driver shortage, and
higher toll that strain truck capacity (Meixell and Norbis, 2008). Maloni andJackson (2005) report that international marine container volumes have
increased over recent years, but North America ports and their supporting
container distribution have not increased capacity accordingly. LaLonde
(2004) reports that fuel cost impact the large carriers which can lead to a
wave of bankruptcy and a consequence of reduction of industry capacity.
The author also mentions about driver shortage which has resulted in
some truck parked against the fence for the lack of drivers. Railroads are
operating at or near capacity and they have been reluctant to make ahuge investment, so it put more pressure on motor carrier industry and
more truck on road.
International Growth
Meixell and Norbis (2008) claim that international growth is a challenge for
logistics management because it involves activities related to international
trade such as providing adequate transport and storage, getting items
through custom, delivering to foreign location in timely fashion at an
acceptable cost. According to Hines (2004), customers have become more
demanding in terms of requiring special features or adaptations to a
standard product. Therefore, the challenge is that suppliers have to fulfill
the individual customer demand profitably by integrating the supply chain
process to satisfy the demand.
Economies of Scale
The issue relate to shipment size because full truckloads can minimize the
cost associated with the capital expenditure for equipment. Economies of
scale also involves in handling of inventory. It is cheaper to ship cases
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than ship individual units and also cheaper to ship in pallets than to ship
individual cases (Meixell and Norbis, 2008). The concept is similarly to
Stock and Lambert (2001). The authors explain that inventory is required if
a firm is to realize economies of scale in purchasing, transport, and
manufacturing. Moreover, when the firm purchases material in larger
volume, it reduces transport cost per unit because full truckload and rail
car shipments receive lower transport rate than smaller shipments of less
than truckload (LTL) or less than carload (LCL) quantities.
Security concerns
Security issue and supply chain must relate together because terrorist
attack can impact the business operation (Meixell and Norbis, 2008). Sheu,
Lee, and Nihoff (2006) also do research about logistics securityprogrammes, and they claim that the efficient operation of international
logistics affected by the September 11 tragedy. In Unites States, new
security measure added cost approximately $151 billion annually.
However, the need of security and efficiency should stay balance because
if the need is overwhelming, it can cause delay of logistics process.
Environmental and Energy Concerns
A growing concern over the environment and energy challenges tologistics managers (Meixell and Norbis, 2008). According to Wu and Dunn
(1994), logistics is a part of firm that should become environmental
friendly, and the role of logistics managers have been increasing because
their decision have a major impact on environment. They should deliver
the green products to consumers to maintain the good image of the firm.
However, the challenges of logistics managers is that how to incorporate
environmental management principles into their daily decision making
process. The author also mentions about mode selection impacting on the
environment. Rail and barge use less energy than road haulage and air
cargo. Marphy, Poist, and Braunschweig (1994) claim that logistics
managers have the greatest ability to influence environmental issue
involving pollution and natural resources preservation.
According to Benson, Bugg, and Whitehead (1994), International Maritime
Organisation (IMO) and similar regulatory bodies provide a wide range of
study to increase environmental awareness and consequent tougher
regulatory on the environment. Marine pollution is a matter of oil pollutionafter accidents at sea or the deliberate discharge of pollutants in the
process of washing tanks. The pollution also comes from the loss
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overboard of containers or deck cargoes of chemicals, fertilizers and
similar products. Air pollution results from emissions, and noise pollution
also come from busy roads or near major airports. In the result, companies
need an environmental audit to review their operation regularly with the
preparation and adoption of training programmes to create awareness of
environmental issues.
2.4 Role of Transport in Logistics Management
Transport is a major component of the logistics management because it
relates to the movement or flow of goods from point-of-origin to point-of-
consumption. Transport is a factor in creation of time utility because it can
determine how fast and how consistently products move from one point to
another (Stock and Lambert, 2001). The decisions about logisticsmanagement related to transport includes operating ones own transport
versus hiring transport, mode, carrier, and service selection, method of
freight consolidation, vehicle routing and crew and trip scheduling, and
equipment selection, replacement, and acquisition (purchase, lease, or
rent)(Vogt, Pienaar, and Dewit, 2002). According to Coyle, Bardi, and
Langley (2003), transport cost represents approximately 40 to 50 percent
of total logistic cost and 4 to 10 percent of the product selling price, so the
authors conclude that transport decisions directly affects the total logisticscosts. In logistics perspectives, three factors that are fundamental to
transport performance include cost, speed, and consistency. The cost of
transport is the payment for moving between two places and the expenses
related to maintaining in-transit inventory. Logistical system should utilize
transport that minimizes total system cost, so it means that the least
expensive method of transport may not result in the lowest cost of
logistics. Speed of transport is the time required to complete a specific
movement. Faster transport service may charge higher, so selecting
method of transport should stay balance between speed and cost of
service. Finally, consistency reflects the dependability of transport which
always shows as the most important attribute of quality transport
(Bowersox et al., 2007). Quayle and Jones (2001) also mention similarly
that firm should concern with the factors relating to reliability, time, and
price.
2.4.1 Mode of Transport and Characteristics
Railroads
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According to Ballou (1999), the railroad is a long hauler which moves the
raw materials and low valued manufactured products. The author also
explains that there are two legal forms which are common carriers and
private carriers. A common carrier sells its transport service to all
shippers, but private carriers are owned by shippers with the usual intent
of serving only the owner. The advantage of railroad is to transport large
tonnage over long distance, but disadvantage of railroad is having high
fixed cost due to expensive equipment, right-of-way and tracks, switching
yards, and terminal. However, railroad has low variable operating cost
(Bowersox et al., 2007).
Motor Carriers
Motor carrier is a part of any firms logistics supply chain because almostevery logistics operation needs the motor truck from the smallest pickup
truck to the largest tractor-semitrailer combination. Similarly to railroads,
motor carriers have two types which are for-hire and private carriers.
Motor carriers commonly transport manufactured commodities over
relatively short distance. The commodities include textile and leather
products, rubber and plastics etc. The major advantage is ability to
provide service to any location. However, weather condition and highway
traffic can disrupt motor service and effect transit time reliability. Contraryto railroads, motor carriers have high variable cost, but low fixed
cost(Coyle, Bardi, and Langley, 2003).
Air Carriers
Air carriers offer a very fast and fairly expensive mode of transport.
Airlines have a high fixed cost in infrastructure and equipment. The
commodities are the high-valued items or time-sensitive emergency
shipments that have to travel a long distance. The shipments that are less
than 500 pounds including high-value but light weight and high-tech
products are suited for air carriers (Chopra and Meindi, 2007). According
to Benson, Bugg, and Whitehead (1944), the advantage of air carriers are
direct flight possible to all ports of the world and speed much higher than
any other mode of transport. However, disadvantages are high freight
rate, possible delay due to bad weather, more restrictions on size and
weight.
Water Carriers
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Cuneo (2003) claims that more than 90 percent of world trade travels in
containers aboard ocean going ships, and about 20 million containers
move through 220 ports around the world every year. Shipper can use
water carriers in combination with other mode of transport. Water service
on the average is slower than rail and availability and dependability can be
effected by bad weather. Loss and damages cost from water carriers are
considered low relatives to other modes. However, packaging is more
concerned to protect goods during handling when loading and unloading
operation(Ballou, 1999).
2.4.2 Critical Changes in Transport
According to Coyle, Bardi, and Langley (2003), there are five major areas
of change which are deregulation of the U.S. ocean liner industry,intermodalism, shipment control, trade policies, and currency fluctuation.
The Shipping Act of 1984 and the Ocean Reform Act of 1998 is the greater
reliance on the market place to control rate. Therefore, the elimination
results in more rate negotiation, the right of conference carriers to take
independent action on rates and service agreement which response to the
laws of supply and demand. According to Stock and Lambert (2001), the
deregulation has resulted in increased inter-intrafirm competition, greater
pricing freedom, flexibility in routing and scheduling. It has increased theneed of marketing oriented, and shippers have more carriers to choose.
Secondly, intermodalism means the use of two or more transport mode
which can provide a service to the shipper-customer that appears to be
seamless (Coyle, Bardi, and Langley, 2003). Intermodal transport is a
combination to take advantage of the inherent economies of each and
thru provide an integrated service at lower total cost (Bowersox et al.,
2007). Next, shipment control means high tech communication system
that can deliver effective communication and control system. Customer
can track the progress of the shipments. In addition, trade policies can
impact the way of transport. Some countries set up protective barrier to
restrict import goods, so delay of custom procedure can happen which
also result in delay shipments. Finally, fluctuation in world currency can
significantly affect logistics decision such as choice of transport mode and
carrier. Definitely, value of currency also affects freight rates and
importing and exporting volume which also affect traffic of transport
(Coyle, Bardi, and Langley, 2003).
2.5 Logistics Strategies Related to Customers
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Logistics and Marketing
Zinn (2000) mentions that logistic and marketing should come together
because logistics management is developed to deliver value to customers
and fulfill customers need. Therefore, the need of marketing and logisticsintegration has been more increasing. Customer service is often the key
link between logistics and marketing.Coyle, Bardi, and Langley (2003)
claim that if the logistics system has problems, and customers will not
receive a delivery as promised, the company could lose future sales. The
logistics process is to deliver and produce the good products at the right
cost, but if there are some mistakes with the process, the customers will
be satisfied. Therefore, it has a link between marketing and logistics
management. Innis and LaLonde (1994) found that both of logistics and
marketing contribute to customer satisfaction because marketing is
responsible for creating and managing demand while logistics is
responsible for fulfilling demand.
The Role of Logistics in Establish Customer Service Levels
Logistics operation serves a particular important advisory function
because the goal of marketing department is to increase sales, but
sometimes they ignore the cost to achieve them. The logistics department
can outline the alternative means of delivering products to customers and
help to calculate the cost for different level of service. They can help to
determine the level of customer service and pricing policies (Marphy and
Wood, 2004). According to Coyle, Bardi, and Langley (2003), there are four
dimensions of customer service from a logistics perspectives. They contain
time, dependability, convenience, and communication. Time is related to
order cycle time, lead time, and replenishment time. Order cycle should be
consistent with reasonable length. Dependability is more important than
lead time for some customers. It affects directly to inventory level andstockouts cost. Moreover, dependability also means safe delivery and
correct order. Communication involve with accurate information and
electronic flow of information. Finally, convenience is understood as
flexibility. Logistics service should be adaptable for different customers.
2.5.1 Partnering Relationship between Carriers and Shippers
Ellram and Hendrick (1995) explain partnership as a relationship between
two firms that committed for a period of time share mutual information,risks, and rewards of the relationship. Relevant to Mohr and Spekman
(1994), partnership is defined as independent firms who share goals, strive
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for mutual benefit, and acknowledge a high level of mutual
interdependent. Cooke (2000) claims that supply chain management and
collaborative transport management propel transport buyers and their
service providers toward stronger mutually beneficial relationships. Dwyer
et al. (1987) explain that buyer-seller relationship should have a basic list
of critical success factors for strategic alliance. It includes detailed
planning foe future exchange, increased measurement and qualification,
sharing benefits and burden, reduced uncertainty, shared efficiency and
high switching costs. Ellram (1991) also identify that trust between firm,
transfer of necessary information, mutual dependence, and sharing of new
technology are the key attributes of successful relationship in buyer-seller
partnership.
Traditionally, relationship between shipper and carriers was arm length
transaction. Each of them tries to maximize its own interests with little
interest in their both relationship. However, both of them have begun to
recognize the mutual benefits by developing alliance (Lambert and Stock,
2001). According to Gibson, Rutner and Keller (2002), the research found
that trust, effectiveness, and flexibility are the most important
determinants to develop and manage long term cooperative partnership
between carriers and key shippers. Byme (2004) explains that when fuel
price are rising dramatically, carriers have no choices, but have to
increase price. It can affect relationship between carriers and shippers.
The solution of the problem is to increase collaboration between shippers
and carriers. Carriers should have end-to-end processes such as load
planning, tendering and delivery confirmation. Technologies such as
sharing tracking and transaction information are also important to
collaborate. Lu (2003) claims that effective services result in successful
partnering relationships.
2.6 Carrier Selection Decision
The decision making process is the stage that includes mode choice and
carrier selection which can identify relevant transport performance
variables, select mode of transport and carrier, negotiate rates and service
levels, and evaluate carrier performance (Monczka et al., 2005). Stock and
Lambert (2001) claims that mode and carrier selection is important
because shipper can reduce the number of carriers with whom they do
business. When shippers have high volume, they get bigger discount andhigher level of service that result in lower transport costs. Meanwhile,
carriers prefer to deal with fewer shippers with large consistent volume
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over long period of time. Burdg and Daley (1985) claimed that the process
of selection is involved with behavioural approach which includes
environmental and organizational factors. The performance of the
transport carrier may influence the effectiveness of the entire logistics
function of a company and the process of carrier selecting is an important
to the companys success. However, the research explored that regulatory
and market changes are drivers for change in transport choice attributes
(Norbis and Meiwell, 2008).
In addition, Gattorna and Walters (1996) claim that there are five factors
that are influent the choice of transport containing company
characteristics and philosophy, market structure, product characteristics,
customer characteristics, and environmental issues. Firstly, the company
should concern its marketing, financial, and operation strategies.
Marketing can determines customer service offer and customised to meet
different customers needs. Financial is also involved with the profit
objectives. Secondly, market structure is essential consideration. In
competitive market, delivery may be the key factor influencing customers
selection. Thirdly, product characteristics are involved with weight, size,
and shape. Next, customer characteristics can impact on profitability. The
company should check customer profile, order cycle, and customer after-
sales service requirements. Finally, environmental issues can influence
transport decisions because in some countries, government is influent in
transport policy.
2.6.1 Selecting and Making Decision Process
Figure 2.3 Four decision stages
Search
Choice
Post-choice Evaluation
Problem Recognition
According to Stock and Lambert (2001), there are four decision stages
(Figure 2.3) occur in the mode/carrier selection decision which are
problem recognition, search, choice, and post-choice evaluation. Firstly,
the problem recognition is the stage that is affected by a variety of factors
such as customer orders, dissatisfaction with existing mode/carrier, and
changes in the distribution patterns of firm. Next, customers will come tosearch process which they scan a variety of information sources. The
possible source can be their past experiences, carrier sales calls, existing
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company shipping record, printed materials such as advertising brochures,
and customers. This process can take a considerable of time. Then, the
important stage is choosing. There are many critical attributes concerned
in this stage, and executives will choose the mode/carriers that satisfy
their requirements. Finally, transport executives evaluate the choice
performance. Many firms use many techniques such as cost studies,
audits, on-time pickup and delivery performance, and damage/claims
reviews while some of them use statistical analysis.
2.6.2 Behavioural Approaches Related to Transport Study
Gray (1982) presented three assumptions associated with carrier choice.
First, Economic Positivism is explained that economic value related to the
firm which determines the use of transport. This approach related to priceand profit. The firm attempts to maximize short term revenue and
minimize short term cost in a trading. The second approach is called
technological positivism which is associated between the physical aspects
of commodity such as weight and volume and the transport system such
as speed and frequency. The last approach is perceptual approach which
related to user interpretation of the situation rather than on physical
attributes.
2.6.3 Important Attributes in Selecting Carriers
Shipper Perspectives
To make a decision, customers need to realize value in order to make a
selection, so this part will review the important attributes for shipper to
make the selection carrier criteria. Lu (2003) surveyed Taiwan Shippers
and found that the five most important carrier service attributes are
availability of cargo space, low damage and loss record, accurate
documentation, reliability of advertised sailing schedule, and courtesy ofinquiry. The research also found that there is a significant correlation
between timing related, pricing and warehouse service, so it can imply
that to satisfy customers, carrier service should combine these things
together. Mater and Gray (1993) explored that shippers in Irish Sea market
concerned the most five factors to select carriers which are a fast
response to problems, on time collection and delivery, value for money
price, and good relationship with carriers. According to Kent and Parker
(1999), the mail survey was sent to 125 companies which divided into 50import shippers, 50 export shippers, and 25 international containership
carriers. Shippers identified the top factors for selecting carrier which are
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reliability, equipment availability, service frequency, rate changes, loss
and damage, and financial stability. The research also found that the
factors of selecting carriers between import and export shipper are
different in the factor of door to door transportation rates. The research
also concluded that service factor is important factor for export customers.
Gibson et al. (1993) reported that the key criteria for carrier selection
includes a willingness to meet service expectation, an established track
record of outstanding performance, a willingness to focus on continuous
improvement, the ability to handle special needs and emergencies and a
willingness to meet cost goals.
Tengku Jamaluddin (1995) investigated the service attributes that are
important in carrier selection process, and the result indicated the top five
service factors which are knowledgeability, freight rate, cargo care and
handling, punctuality and transit time, and service frequency. Chiu (1996)
assessed the performance of liner shipping in shippers perspectives. The
result indicated that the six most important service attributes contains a
prompt responses from a carrier to any problems, transit time, reliability,
documentation services, a notice of delay, and assistance with loss and
damage claims.Lu (2007) reviewed from past research and questionnaire
survey of 230 shipping executives to find out the important key of
capabilities for liner shipping services. The review concluded that transit
time and frequency of service are ranks as important criteria in the
context of liner shipping services. Saleh and Das (1974) found that
reliability of transit time, consistency in service, company image and
special handling abilities are important carrier attributes. Coulter et al.
(1989) reviewed the past research and used the relevant criteria to
develop questionnaire. The resulted showed that reliability of performance
is considered first and follow by Insurance of service provision, quality of
service, personalizing factors and handling service. McGinnis (1990) foundthat there are six factors influent transportation choice which are freight
rate, reliability, transit time, loss/damage/claims processing/tracing,
shipper market consideration and carrier considerations.
Carrier Perspectives
Carriers do not really understand which selection criteria tend to influence
a shippers choice of carriers. Carriers can lose competitive advantage if
they still understand differently with shippers which definitely results in adecrease in market share. Moreover, the research found many carriers
perceptions that are significantly different from what shippers want.
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Carriers rated personal relations with the carriers as highly important while
shippers rated the factor only moderately important. Regular calls by
carrier sales representatives, gift and gratuities offered are overrated by
carriers, but shippers rated as slightly important or not important. In
addition, the research concludes that four criteria which were important to
shippers were underrated by carriers, and four criteria which were less
important to shipper were rated too highly by carriers. It appears that
carrier so not properly appreciate the level of significance placed on some
of selection criteria by shippers(Abshire and Premeaux, 1991). Gibson et
al. (2002) survey both of shippers and carriers and found that carriers rank
trust, effectiveness, and flexibility as the top attributes. According to
Evers, Harper, and Needham (1996), if carriers fail to provide in accurate
picture of services, it can lead to dissatisfaction and ultimately thereplacement of that carrier with another carrier. Burdg and Daley (1985)
claim that different perceptions between carriers and shippers have
managerial implications for carriers to reevaluate their marketing
strategies to improve its effectiveness.
2.6.4 Cost Determinants
According to Benson, Bugg, and Whitehead (1994), costing is an
accounting process which allocates expenditure to particular activities.Coyle, Bardi, and Langley (2003) explain that if efficiency is measured by
cost, an individual part of the system not operating at its lowest cost may
contribute to the systems overall efficiency. Water transport is the
cheapest mode in logistics context, but if firm has more cost in inventory
holding with associated with increases in warehouse, the additional cost
can be greater by using water transport. Therefore, transport decision
need to con
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