Maritime Transport And Ports Commerce Essay

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Maritime transport and ports have played important role few thousand years of international business between overseas countries. Ports are significant nodes of international trade. However, a port as a node is one part of entire supply chain and volume of cargo flow through the node is depending on the supply chain strategy. Roles of a port operator vary within the supply chain strategy alignment of the supply chain owner. (Mangan et al. 2008) Ports role as a place of transferring goods from one transport mode to another and providing a link between maritime and inland transportation; roads, railways and waterways, does not meet the needs of today's supply chain (Carbone & De Martine 2003). "A role of ports has to be changed. In the eyes of customers, ports have been seen a very traditional, an old-fashioned environment and a slow implementer of new concepts. Being surrounded by an environment characteristic by a high degree of complexity, where operations are carried out in a disorganized way with high costs, poor customer service and sub-optimization of resources, the port industry needs to adopt a new attitude in the supply chain". (Paixao and Marlow 2003)

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Development of the maritime transportation system has advanced in line with global business evolution. Ports are affected by changes in international trade. In the European Union (EU), over 90 % of the EU's trade with third countries and about 30 % of intra EU-trade are handled by ports. (Mangan et al. 2008) Variation of cargo volume and need of service requirements necessitate ports to offer timely and quantitatively their services according to needs of customers. Depending on the length of sea leg and cargo types, the sea transportation mode varies between lo-lo-, container- and ro-ro vessels. Container vessels carry containers from long distance destinations, like from Asia to Europe. Inside Europe, particularly in the EU, as distances are short, the container transportation is replaced by truck transportation, as major share of the cargo crosses country borders through land points without customs formalities. Some EU countries are served by ro-ro vessels carrying a truck & trailer combinations or trailers alone between sea ports. Both transport modes are carrying transportation units, which minimize cargo handling in the delivery chain between shipper and receiver. Cargo is loaded at a shipper's premises and unloaded at a customer's. Traditional lo-lo vessels carry bulk type of cargo either long or short distance routes. Stop times at ports for lo-lo ships are longer compared to vessels carrying transportation units as handling requires more manpower on stevedoring operations.

Finland's export and import by sea, about 100 million tons in year 2011, were carried through 52 ports. 80 % of total volume was handled by 10 ports and rest of the volume has split between 42 ports. (Finnish Transport Agency 2012). Major share of the ports are owned by local municipalities and commercial terminal operators run daily operations at the ports. In addition of municipal ports, industrial ports owned by manufacturing industries, handle their specific products in these ports. Competition in providing cargo handling in ports has increased but typically stevedoring services are offered by one port operator in a port, having a monopoly or dominating market position. Reasons to the situation are small cargo flows, long traditions and ownership structures. (Developing Port Functions and Renewing Port Legislation in Finland, Ministry of Transport and Communications 2004) However, monopolistic situation does not correlate financial results among port operators. One reason for poor performance is low response to business environment changes caused by traditions and strong port workers union. Also, weak volume flow and lack of space hinder operational preconditions in the ports. Further, relatively low volume base combined with multiple ports in the country limits development options. One opinion, amount of ports proposes to have 10 ports to cover sea transportation needs instead of today's 52 ports (EVA 2012).

Unitized transportation, like containers and trucks & trailers, has grown outstandingly in consumer goods transportation mainly for two reasons. First, as production capacity has increased in South-East Asia and two remarkable consumer markets, Europe and North America are served by containers as shipping lines offer extensive service in route and schedule point views, damages for cargo are minimal in containers and containers can be moved fast and fluently by trucks from container ports to customers. Second, road transportation is fast, reliable and costs effective transportation mode for goods necessitating precise and frequent deliveries. The unitized transportation development has directed ports focus from handling break bulk cargo to handling transportation units; containers and trailers. Further, transportation units are commonly moved outside port fences and unloaded in terminals where value added services are provided to customers as port have not been able to offer this type of service.

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Traditionally, ports in Finland have served limited amount of customers, who transport remarkable volume through the ports. Large importers and exporters, mainly manufacturing companies and wholesalers, have had direct connections to port operators. Logistics service providers have served their customers, either large or small by combining individual shipments into rational cargo flows. Three major ports in the country are in Helsinki, Kotka and Rauma. These entire ports handle conventional, Roro/Storo and container cargo. In all these three ports, main owners have been manufacturing industries and shipping lines to ensure competitive service for their own cargo. Structural changes in business environment since new millennium have forced owners of port operators to review their portfolios. First remarkable change of an ownership was sale of Rauma Stevedoring Oy 2007, when UPM-Kymmene Corp. sold its fully owned stevedoring company to an investment fund BBI Australia. The Financial Crises since 2008 impacted remarkably volume flow in the ports in Finland. Total volume decreased about 20 % compared to previous year. As a result of missing volume port operators have to react the situation to ensure their existence on the market. This Master's thesis work concentrate on the port operators' role in the supply chain management in the Finnish context.

BACKGROUND

A port operator is important partner for shipping lines and shippers.

Figure , Port operator role in supply chain and logistics chain

Write here general port development in the world scale

Development of a port operator role in the supply chain management since 1960s in accordance with development of vessels transformation from conventional lo-lo vessels to container- and ro-ro vessesl within commodities sold in international trade is illustrated on figure 1.

Figure , Port development. Adopted from Pettit and Peresford 2009

RESEREARCH BROBLEM

The purpose of this research is to increase understanding of role of the port operator by examining its current role and challenges, and emerging needs of customers in the context of logistics and supply chain management in the perspective of a Finnish port operator. Globalization changes structures, especially among developed countries. Services, ports have offered last decades, will jeopardize their existence as customer's requirements are chancing in compliance with market development, competition is increasing between ports and logistics ecosystems, and most important, the manufacturing industry is under restructuring as a result of production capacity transfer to low cost countries. The ongoing change process impacts particularly on export cargo volume, which has been vital especially for Finnish ports. Diminishing volume increases imbalance between export and import, which will change maritime transport routes. Nature of logistics relationship impacts on various ways to ports as an adjustment occurs. Lisää tähän muutoksista

The research is also aiming to increase understanding of expectations while building co-operation among partners in the logistics network for creating value added services, which fulfill customers recognized needs. In multi-leg logistics services, a port is one part of that. Several logistics companies have to cooperate for creating a set of logistics services, which only as a whole composes a service the customer necessitates. A role of individual partner varies by a service offered. Therefore, a structure of managing the logistics network is central as the customer wants only one interface to services.

RESEARCH OBJECTIVES AND QUESTIONS

The purpose of this Master's thesis study is to utilize Transaction Costs Economic theory (TCE) in the Supply Chain Management (SCM) environment and links Resource Based View (RBV) theory with (Mentzer et al. 2004) Toward a Unified Theory of Logistics framework to explicate intentions of companies to integrate resource for producing services for ultimate customers by establishing a consortium to create a new business model. Also Chen and Pauljar (2004) have developed a theoretical framework and conceptual base of the critical elements of the supply chain management. One key driver for the study is as well an impact of globalization and its effect on port operator role in the SCM in Finland. Traditionally, Finnish forest industry has been one of the major exporters by using Finnish ports for paper, pulp, timber and panel products. Finnish forest industry has closed production capacity in Finland as competitiveness has diminished. The capacity reduction has diminished cargo volumes throughout Finnish ports and will lead to cut amount of ports in the country. As a result of the development, ports have to search new business opportunities by sharpening their role in the supply chain in order to exist in future.

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Research questions: What is the role of port operator? How do port operators see their role in the supply chain management today and in future? How do port operators increase their role in supply chain management? Are port operators prisoners of their traditional role, stevedoring and warehousing? How a port operator can increase value in the supply chain management?

Sub-questions: What kind of value added services can be offered by a port operator? How do port operators create value for customers in the supply chain management? What are possible development directions for port operators in the supply chain management?

Figure , Elements used to review port operator's role

A research is done through logistics service provider's lenses. The research subject, a port operating company enables to collect survey material from a relevant amount of participants in the supply chain. In sea connected supply chains, several companies participate in producing services needed in a supply chain from starting point to end point. Logistics related supply chain serves customers at both ends. In logistics, serving a customer, actually, it is the customer's customer being served.

As the purpose of this study is to create understanding of the port operator's role in the supply chain management, a following research question was formulated: which elements of the port operator's every day jobs may be identified being important for the supply chain management?

LIMITATIONS

The study focus on a multi-leg logistics route including a sea transport, two sea port operations and two land transportations between a customer and its ultimate customers in the business to business environment. Results of the study are mainly applicable for similar cases, where…

This study covers operational part of the port but administrative parts like port ownership, regulations and land infrastructure development are out of scope.

The research is limited to three major multi-ports in Finland.

DEFINITIONS

A port called "seaport" means a place on seashore, where vessels are loaded and discharged. In general, term "port" refers to waterway connection, as it may relate sea, lake, river, inland waterways or canal locations (Bichou and Gray 2005). In this document, a term port used, means seaport and focuses on international trade cargo.

Port as an entity is divided into two main parts, port ownership with administration and port operations. Ports are mainly owned by local municipalities. Land and terminal buildings are major properties, which are rented to port operators for commercial businesses. A port owner administers the port area and collects various fees of port users. Port operations are handling transportation units and loose cargo between vessels and terminals on shore.

Port operator is a company, who serves shipping lines, importers & exporters and logistics companies by managing physical cargo flow in various ways. Another important task of port the operator is to manage information flow from customers to customs authorities, shipping lines, logistics companies and ports vessels are discharging cargo by creating electronic messages and printed documents needed in international trade.

Multi-leg transportation is a transportation event of combing various transportation modes for moving a delivery from one place to another. As an example of port related multi-leg transportation for a delivery lot involves transportation by rail from inland production point to the port of loading, at the port the delivery lot is moved onto a vessel, the vessel sails to the port of discharging, the delivery lot is discharged from the vessel to the terminal at the port and from the terminal, the delivery lot is transported by a truck to buyer.

Supply Chain Management (SCM) is a way to define, how a company has organized its acquisition of raw material, production and deliveries of products to customers. Logistics is a physical movement and warehousing of raw materials and products from a source point to customers. In next chapter, official definitions of SCM and Logistics are presented

REVIEW OF LITERATURE

Logistics and SCM as terms in the literature were mentioned in 1980's (Oliver and Webber 1982). Diffusion in the field of SCM took place at mid of 1990's as most of theoretical and empirical investigations start. In the beginning, SCM definition focused on flow of goods, management of relationship and a concept from supplier to ultimate customer (Giunipero et al. 2008). Debate of the definition continues until early 2000, as Mentzer et al. (2001) brought encompassing definition of the SCM. Their definition expands SCM from major parties; a company, a supplier and a customer in a business transaction to cover all organization between and beyond initial parties. Authors draw a clear distinction between Supply Chain and Supply Chain Management. The supply chain exists as a phenomenon in business, whether it is managed or not. Supply chain management requires management efforts of the organization along the supply chain.

SUPPLY CHAIN MANAGEMENT (SCM)

Logistics and Supply chain management (SCM) are intertwined terms. SCM concept started in the logistics literature and continued to have significant influence on the concept (Min & Mentzer 2000). The Council of Logistics Management (CLM) was merged into council of Supply Chain Management Professionals (CSCMP) in 2004 and the merge become effective in 2005. CSCMP (2011) defines both, SCM and Logistics as follows:

"Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies".

"Logistics management is that part of supply chain management that plans, implements, and controls the efficient, effective forward and reverses flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers' requirements".

The definition emphasizes of the role of SCM as a body of coordinating and collaborating with supply chain participants. Logistics have inside the SCM an important role of working with storing and moving goods, and services related to fulfilling customers' needs. Logistics is a motor of the SCM. Without physical movements of goods, the chain does not work. Even the SCM's broader strategic approach, many statements are addressing to logistics discipline. (Anderson et al.2011)

MAJOR THEORIES APPLIED IN THE SUPPLY CHAIN MANAGEMENT

TRANSACTION COSTS THEORY

The transaction cost theory of the firm (TCE) introduced by Coase (1937) has become a standard framework to explain why some firms to organize functions internally, while other firms choose to outsource a function to an external party. (Everaert et al. 2008) Coase argued that the firm and the market represent two alternative ways to organize the same transactions and aimed to explain what exactly fore grounded the choice between two alternatives. Basically, markets do not operate without costs as the economic system is being coordinated by the price mechanism. The market creates a place where a firm can discover what relevant prices are, and what costs arises of negotiating and concluding a separate contract. The theory explains how companies are organized to operate on markets by considering relative costs of its own personnel on the one hand and external companies on the other hand. Transaction costs differ in the degree to which type of exchange related elements are involved in the transactions; assets specific investments, environmental uncertainty and transaction frequency. Asset specificity is a significant driver in the decision to determine to make itself or outsource to a company on the market. Two common types of specific assets; physical assets, referring to relationship specific equipment and machinery, and human assets, which describes transactions specific skills, knowledge and human capital achieved by through special training or learning-by-doing. (Klein 2005). In general, specific assets are not re-deployable in for alternative use. When investments on these kind of assets are made, both parties, supplier and buyer are tied-up as the specific assets have limited value or no value elsewhere.(Williamson 1985) The specialized assets have lower transaction costs within the firm, because the company has an ability to measure and reward behavior (Eisenhardt 1989)

Coase identified certain limitations for understanding relationships between firms. He argued that in order to understand what a firm does, at first has to be understood why firms exist and what are the forces governing firms' economic activity. There are transaction costs of using market mechanism and these costs guide firms decision between its own production and buying from market. A firm must know its internal costs of production and comparing these costs to market offered price, a firm has two options. When costs are by internally produced lower and other things are equal, then it is better to carry activities out by a firm. Transaction costs also are the cost arising of conducting an exchange between vertically integrated firms in a market place. Classification of transaction costs into three classes, information costs, negotiations costs and monitoring costs, defines nature of the cost arising of carrying a transaction. Information costs arise of searching information about products, prices, and suppliers. Negotiation costs result from the physical act of the transaction, such as negotiating a contract, preparing and signing a contract or using an intermediary in the transaction. Monitoring costs arising after an exchange has been negotiated and can include monitoring quality and behavior of supplier to ensure that all the agreed element of the contract are fulfilled including possible enforcing costs of completing the contract. In all these three classes, role of information is essential as its availability or absence impacts on costs arising. (Hobbs 1996)

Hobbs continues…

In addition of transaction costs classification, four exchanges related concepts, bounded rationality, opportunism, asset specificity and informational asymmetry are involved in the transactions. Bounded rationality has been defined as an intention of people to make a rational decision but their capacity to assess precisely possible alternatives is physically limited. In a negotiation situation, an individual can evaluate own beneficial directions of a movement but cannot draw a conclusion of opponent's reaction and outcome of the movement done. Bounded rationality becomes a problem in situations of uncertainty or complexity where people to make a rational decision is hindered.

Opportunism means a self-interest seeking with guile (Williamson 1985). Businesses and individuals behave occasionally opportunistically to exploit a situation for their own advantage. It does not mean that opportunistic behavior is present in all transactions but a risk of opportunism is often present. In certain situations, for example, when a small number of suppliers are available for a buyer, a risk of current supplier's opportunistic behavior grows to ask a higher price, as the buyer's alternative sources are limited, compared to a situation of large portion of suppliers are available, where a risk is low. (Hobbs 1996)

Asset specificity arises in an exchange contract situation, in which a supplier firm has invested specific resources to the exchange and value of the investment is low or no value at all in an alternative use. In such situation, the supplier firm is strongly tied to the buyer firm. Asset specificity can exist in various forms, like physical, human, site specific and dedicated (Tadelis & Williamson 2010). Assets specificity can arise from purposeful investments and spontaneously, the latter take form of knowledge and skills that incidentally acquired by supplier and buyer firms working together.

Critics

Klein 2005 concludes that in the strategic management research includes alternative theories of the firm based on capabilities, power, and trust, and these variables are becoming rivals to the transaction costs view. For example impact of trust in service firms has become to be significant in entry model choice because of people-intensive nature of the service firm. (Brouthers and Brouthers)

Williamson (2005) made the transactions costs operational and transforming Coase's explanatory model into a genuine paradigm. His analysis is laid on the concepts of bounded rationality, opportunism, assets specify, transaction frequency and uncertainty. Transaction costs for Williamson is the main reference point when looking for the best contractual arrangement. (Iacouta 2009)

Bounded rationality and opportunism

Briefly, bounded rationality can be explained that a human behavior originally is rational but limited as an individual has cognitive limits to obtain information and process it. Further, information obtained could be incomplete, which leads to a wrong conclusion. (Williamson 2002) Rational behavior is satisfying not maximizing as judging of a decision can be evaluated ex-post. However, an individual can satisfy personal interest by behaving opportunistically, which refers to seeking self-interest with guile against other party.

RESOURCE BASED VIEW

Wong & Caria 2011. According to resource based view theory, firms gain sustainable competitive advantage by ensuring access to resources which are valuable, rare, inimitable and non-substitutable (Barney 1991). In the area of logistics, identifying types of resources and their relationship to the elements of sustainable competitive advantage, a company can utilize the elements for creating their service offering to current and potential customers. Question for having answers are, what logistics resources to be accessed, how are different resources bundled together, and what are characteristics of accessed resources.

Generally, competitive advantage of a firm has been explained by referring to strategies, process capabilities and resources (Porter, Barney etc.) Asset based strategies can be one of the explanatory factors for competitive advantage. Tangible and intangible asset division can be used for identifying resources related to logistics competitive advantage creation. One important character is to exploit the elements of competitive advantage in such way that potentially valuable services are available for customers.

Assumptions of the fundamental elements of RBV theory (Barney 1991, Wong & Caria 2011) are resources are heterogeneously distributed among firms and resources are imperfectly mobile. These two assumptions collectively allow for differences in firm resource utilization to exist and remain over time by becoming resource based competitive advantage. In the logistics industry environment, resources are distributed heterogeneously across different actors in the supply chain. Further, some of the resources are tacit and functional in one firm environment and cannot be transferred from one firm to another without costs. RBV can be used in explaining how a firm may acquire, sustain and exploit its competitive advantage bringing resources. Resources have to be developed over time as those mature and emerging new way of using resources will change the competition arena. Firms must continuously update their current processes to maintain those useful in the rapidly changing environments.

To gain competitive advantages, firms have to follow their business plan of accessing resources (VRIN) by acquiring, accumulating and divesting continuously. A collection of strategic resources has to be bundled into groups of useful capabilities which support the firm's business plan. In addition, the bundled resources have to also be protected against threats which may weaken the current competitive advantage setup. The resources have to be leveraged by mobilizing, coordinating and deploying for advantaging market opportunities. As a result of the process, the firm may gain a long-term competitive advantage in financially and operationally. Since, the nature of competitive advantage is temporarily, resources have to be regularly reviewed and always, when business environment requires adjusting the current setup.

THEORETICAL FRAMEWORK

Figure , Theoretical framework of supply chain

METHOD OF RESEARCH

Research is a methodological and systematical process of obtaining information for analysis aiming to increase knowledge (Amaratunga et al. 2002). Further, idea of a qualitative research is to create understanding, interpret and construct a model of research phenomenon. (Pihlaja 2006) A framework provides lenses for examining collected qualitative data. A nature of qualitative research is situation bounded and unique. Therefore, understanding of a context has an important role, how the phenomenon is linked in its environment.

Comparative studies between three major multi-ports in Finland with face-to face interviews and literature review have been carried out in order to create understanding of the port operator's role in the supply chain management. Also, secondary sources as reports, peer groups and company web pages were used. Further, a comparative study done of one US West coast port operator will shed light a port operator role North America to find similarities and differences.

Empirical data have be collected by in-depth interviews using four topics; port environment, service offering, cooperation and competitive advantage. In-depth interviews often go off-track and open interesting angels and examples. (Lee and Lings 2008) Furthermore, respondents' answers come from their own experiences, feelings and opinions, which may reveal tacit information as respondents are given a freedom to discuss

Port operator role-research perspective is strategy related, which helps management to evaluate current situation and select direction to accomplish a company strategy.

Need analysis, theoretical trade-offs and methodical ground together create a wholeness of a research

Hermeneutics is understanding and interpretation

Reliability and validity

Qualitative research is a case-study

Qualitative research is as well of finding similarities and differences of the collected data….

Port environment

Service offering

Cooperation

Competitive advantage

A firm gains competitive advantage by performing strategic activities more cheaply or better than its competitors (Porter 1998). Porter value chain system recognizes logistics, inbound and outbound, being major elements of the value chain and source of competitive advantage. Importance of logistics varies by industries. Logistics is more important for companies producing or selling physical products, which demands transportation and warehousing at various stages in the supply chain, than for pure services offering companies. Typically, firms using port operator services are dependent on multi-leg logistics services. Further, total logistics costs constitute a significant share of total costs. Competitive advantage is a result of performance by multi-leg actors.

Source of competitive advantage in logistics come from value and costs advantages (Christopher 2005). Value advantage is composed of tailored services, reliability and responsiveness. Costs advantage is based on capacity utilization, asset turn and synchronous supply. In the port operator business area, capacity utilization is vital for performance as personnel costs are the biggest cost element in the firm. Therefore utilization of workforce requires strict planning between vessel port calls and manning at the port that a vessel's stop time will be as short as possible. Handling of cargo is done mainly by machinery as manual handling has declined during years. Load lashing and securing require handwork in the port. Continuous investments for material handling fleet ensure efficiency in operations as ports work 24/7 schedule. New machinery prevents stoppages and repairs. Also, continuous investments enable using latest technology in material handling. Tailoring services to meet customers' needs reflects a supplier's ability to understand customer requirements and competence to create a solution. Tailored services can be group or particular customer specific. The group specific services are created to meet one designated need of a customer group. Tailoring can be done for one customer, if it resolves a problem or improves a process and beneficial for both. In the port environment, changes in vessels schedules and cargo into port fluctuate substantially; the port operator has to adopt flexibility using its resources for managing peak hours. Synchronization in supply chains realize through sharing information between supply chain members. IT solutions are enabler of transferring information needed, like demand/sales information, orders, track and trace data and invoices. Further, obtaining visibility and transparency, synchronizing necessitates using standards and common processes in the communication. Advance planning data of customers creates a base for planning operations and allow using resources efficiently. As a result, supply chain performance improves when capacity utilization grows, errors reduce and reliability increases.

One significant factor is supplier superiority over competitors by offering services which will bring benefits at acceptable prices and value for a customer.

Competitive advantage sustains a certain time (Barney 1991). Any change in the existing business structure may shift a current advantage in to useless.

EMPIRICAL FINDINGS

In general, Finnish multi-port activities can be categorized into three groups: ship operations, terminal operations and administration of information flow.

Customer or supplier lead supply chain management? In port related supply chains, a managing role can vary between customer and supplier. Major share of supply chains are led by customers, which means that suppliers concentrate on fulfilling its clearly defined task in the port environment. This type of set-ups is common among manufacturing industry, where companies themselves manage a supply chain. If a port operator manages a supply chain, it's then a part of the supply chain activities to manage. In port environment, a supplier led supply chain is rare. In these cases, one can say the company carrying out operation is third party service provider. Port operators are planning to develop these operations to stick on customers' business in future.

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

A port operator is part of its customers' supply chains as a nature of the major operations; stevedoring, terminals operations and administration. Stevedoring is the major service needed by shipping lines that a stop at the port stays as short as possible. Shipping lines expect to have a berth based on their arrival on schedule or not. Shippers anticipate flexibility of terminal space and operating hours to respond on demand fluctuation. For every customer, an IT-connection between companies plays important role. The port operator must have interface to various systems to been able to receive and deliver information needed in the supply chain.

A port operator's own supply chain is short, almost all tasks are carried out by own personnel. Outsourcing has not

SUMMARY OF MAJOR FINDINGS

MANAGERIAL IMPLICATIONS

FURTHER RESEARCH SUGGESTIONS

How much port operator business development depends on a land-lord's strategy; are there conflicting interest between actors in the port environment?