SUPPLY CHAIN ANALYSIS IN THE MARITIME REEFER MARKET A TOOL FOR TECHNOLOGICAL DEVELOPMENT

Transcription

1 SUPPLY CHAIN ANALYSIS IN THE MARITIME REEFER MARKET A TOOL FOR TECHNOLOGICAL DEVELOPMENT Drs. L.M. VAN DER LUGT Erasmus University Rotterdam Burg. Oudlaan PA Rotterdam Phone: Fax: vanderlugt@few.eur.nl Dr. A.W. VEENSTRA Erasmus University Rotterdam Burg. Oudlaan PA Rotterdam Phone: Fax: veenstra@few.eur.nl Abstract In the reefer shipping market ongoing innovation of reefer containers takes place. Relevant aspects of the use of these reefer containers are maintenance of product quality, the energy consumption of the refrigeration unit and the environmental impact due to the use of certain harmful chemicals. A Dutch consortium of companies has initiated a technical development project with the aims to improve the functionality of the reefer container, to achieve energy savings and to improve the sustainability of reefer transport. Erasmus University Rotterdam did the global reefer market research, with the aim to determine the marketpotential and the logistical and commercial requirements for the new reefer container. This paper is directed towards the methodological frameworks that the Erasmus University applied for this market research: a supply chain analysis specifically directed towards a technological development project in ocean reefershipping and the translation of results into logistical and commercial requirements. Key words: liner shipping, reefer market, supply chain analysis, technological development, container, design

2 SUPPLY CHAIN ANALYSIS IN THE MARITIME REEFER MARKET A TOOL FOR TECHNOLOGICAL DEVELOPMENT 1. INTRODUCTION Intercontinental containerised reefer transport has significantly increased over the last decade and is expected to grow in future, due to autonomous growth and further containerisation of reefer cargo flows. In this paper reefer transport is defined as the intercontinental maritime transportation of perishable cargo that needs climate control during transport to reduce product deterioration. Difficulties with this kind of transport are related to limited lead time and relatively high losses due to bad handling or malfunction of reefer equipment, relatively expensive transport due to expensive reefer equipment and high operational costs and negative environmental impact due to bad refrigerants. In order to improve the quality of the reefer transport, while minimising costs, the Dutch CEET2005 project aims at the development of an advanced maritime reefer container that can be used in an intermodal door-to-door service. Currently, the most important capabilities of reefer containers are temperature setting and control, controlled and modified atmosphere, and humidity control. The main improvements that may result from the different configurations of the proposed new technology are twofold. On the one hand improved performance of the reefer container leading to reduction in loss and extension of shelf life of the produce and on the other hand reduced energy use. Other objectives, such as reduction of the negative environmental effects of reefer transport and increased intermodality of the reefer container also seem attainable. For better acceptance of a new product in the market it is important to take market requirements into account at a very early stage in the development process. This leading to a product that more satisfies the customer needs and, more importantly, to a product for which the customer is willing to pay. For this reason within the CEET2005 project extensive market research is conducted with the specific aims to determine the market potential for the new reefer container and to state the logistical and commercial requirements. This paper discusses the approach that forms the basis for the market research: an integrated supply chain analysis of the reefer market whereby a strong focus is put on the client. The first section argues that supply chain analysis is an appropriate method in the maritime transport markets. In the following section, supply chain analysis is applied to the reefer market. The derivation of the logistical and commercial requirements is placed in a subsequent section. The paper finishes with conclusions and some recommendations. 2. MARKET RESEARCH Market research is defined as the research into the structure and development of the market, as a base for sales strategy and as an instrument for controlling the effectiveness of actions on the market like investments [Van der Zwan, 1980]. Figure 1 gives a general illustration of market research.

3 Figure 1:Illustration of market research. Better decisions about investments Wisdom Testing Monitoring Hypotheses about the Future Knowledge Information Data Today Source:Duboff and Spaeth, 2000 For a new reefer container the market to research is difficult to determine. One could choose the perspective of the product flows for which reefer containers are used. A first remarkable fact is the enormous variety of products on numerous geographical routes for which a reefer container can be used. In this field Drewry Shipping Consultants Ltd. and Ocean Shipping Consultants Ltd have done a lot of work. These market research reports give a broad overview of developments of production and consumption, imports and exports of all kind of reefer commodities in all relevant regions of the world. However, for the determination of marketpotential and logistic and commercial requirements for an innovative reefer container a productflow perspective is not sufficient. It is the decision-maker for the logistics concept in the supply chain that determines the marketpotential and sets the requirements. And as a reefer container is a loading unit that can be used throughout the whole maritime based logistics chain and as almost all actors in the supply chain, both commercial and logistical, deal in one way or another with the reefer container, the decision maker is hard to determine. Besides, the variety in products and geographical routes mean a variety in clients, all with their own characteristics and own transport requirements. A first essential step in the market research for a new container is to find a way to structure the market, or better markets, in such a way that an effective analysis can be conducted. Given the extend variety of door-to-door flows of perishable products, combined with the observation that different actors exist which play various roles at certain

4 points along the origin-destination link and which have vertical and horizontal relationships, it is helpful to concentrate on the complete customers' supply chain as the focal point for analysis. This allows the inclusion, not only of the individual products, or actors, but also of all their interrelationships and interests into the analysis. Den Hengst-Bruggelink [2000] also focuses on a chain management approach in her attempt to design an interorganisational co-ordination system to support the container transport chain. The main reason for this approach is the statement that interorganisational relationships are increasingly important. Interorganisational relationships can be illustrated as in figure 2. Figure 2: interorganisational relationships Combination of functions NETWORK Industry Horizontal Relationships A1 A2 A3 B1 B2 B3 C1 Chain C2 C3 Dyad Final Customer Vertical relationships Source: Den Hengst-Bruggeling, 1999 Furthermore, Den Hengst-Bruggelink justly emphasises the importance of the customer, arguing that a chain is structured starting from the customer s demand. "From the customer demand the processes can be traced back to the other end of the chain." [Den Hengst-Bruggelink 1999] And also Duboff & Spaeth focus on the client: "Understanding buyer values can lead to major strategy decisions, in particular around investments. If the client values the attribute it is worth investing to improve and/or market that attribute, if the client doesn t then investment is likely to be wasted. Thus main importance is to understand who makes the purchase decision and then determine the true drivers of that decision (i.e. selection criteria). [Duboff & Spaeth 2000]

5 3. SUPPLY CHAIN ANALYSIS FOR A TECHNOLOGY PROJECT IN THE MARKET OF CONTAINERISED REEFER TRANSPORT A first step in the application of chain analysis in the market of containerised reefer transport is to define the complete chain of actors with their functions. A first division is made between the commercial functions, involved in the transformation of ownership of the goods, and the logistical functions involved in the physical transformation and movement of the goods. In practice, actors often combine commercial and logistical functions. Nevertheless, this division makes the structure of the chain more clear. The hypothetical chain is depicted in Figure 3. Figure 3. Complete chain of actors involved in the supply chain of maritime reefer cargo COMMERCIAL FUNCTIONS IN CHAIN Growing / selling Goods-ownership Money Export Goods-ownership Money Import Goods-ownership Money Retail / wholesale Picking/ Packing Transport Storage Loading of vessel Sea Transport Unloading of vessel Storage Transport Storage VAS Crossdocking Transport Final distribution PHYSICAL FUNCTIONS IN CHAIN Source: CEET2005/ERBS The potential clients of a new reefer container in this chain can be divided into two categories, i.e. the clients of (parts of) the complete supply chain and the direct clients of the reefer transport. The clients of (parts of) the supply chain are the final consumer and the retailer. The consumer is client of the final products and therewith client of the complete supply chain. The consumer sets the requirements for the final products in terms of variety, appearance, smell, taste, price, but also in terms of indirect aspects like healthiness and the environmental impact of the whole chain. The retail organisation serves the final customer with the final product that satisfies his needs and is client of the complete supply chain up to its own organisation. For the retail organisation, the logistics costs of the fresh and frozen produce are a significant part of total price. The direct clients of the reefer transport are the actors that are responsible in the chain for the sea transport according to the incoterms. They are the actors that really pay for the reefer transport and can be categorised according to commodity shipped or according to function. The first criterion for the segmentation of the direct

6 client groups in the reefer market is the commodity shipped. For the different commodities clients require different services and different equipment, and also revenues differ amongst commodities. Concerning the client's function, there is a difference between cargo owners (importers, exporters, produce boards) and cargo intermediaries (forwarders, brokers, agents). The main difference is in the fact that for cargo owners logistics is only part of their business while for cargo intermediaries logistics ìs their business. Cargo owners see logistics services as a cost while cargo intermediaries see logistics services as revenue. This means that factors like extension of network, reliability of services, efficient documentation processes is of more importance for a cargo owner than for a cargo intermediary. For the latter actor prices and costs are more important. Once a chain is structured and roles and functions of each actor are analysed, a translation should be made towards the future: It is the future potential client of the new container that is most important. In the reefer market, several trends can be seen for the future configuration and working of the supply chain. During the market analysis, these trends and the likely influence on the actors in the chain were discussed with all parties involved through in-depth interviews and so-called groupdecision sessions 1. Some of them are: ICT developments will have a strong influence on the complete configuration of the logistics chain and on the function and role of individual actors. Incoterms for imports to western countries will increasingly change from CIF to FOB, therewith giving the importing actor more and more control over the transport. As a consequence of concentration, retail organisations are gaining power in the supply chain, dictating how the logistics should be arranged and what they may cost. Consequently new technologies should match their specific demands and requirements. One of the changing requirements that retailers impose on their logistics service providers will be higher frequency and smaller parcel sizes. The consequence of this can already be seen at a coldstore operator in the port of Rotterdam, adapting part of its storage facility for smaller parcel sizes. In order to determine the potential market for a new reefer container it is important to state which actors in the supply chain benefits from the improvement, which actors should pay directly for the development and whether they are willing to pay for this. In other words: will the actor who initiates and pays for the improvements be paid sufficiently to benefit in the end. Table 1 (following page) gives a listing of the potential investor and clients of a new reefer container, their direct benefits and costs and the willingness to pay for the benefits. From the table, it can be concluded that the actors in the chain that determine the logistical and commercial requirements for the new container are the final 1 Group decision sessions allow efficient structuring of group discussions and can be well used for the validation of results of earlier research. Group decision sessions make use of specialised software to guide and monitor group discussions, and to offer online feedback to participants, while at the same time, participants can make comments anonymously. Important aspect is the right composition of participants and a well thought preparation. Two session were held during this study, one with a group of participants representing the whole chain of reefer transport, another with a group of participants representing the shippers (cargo owners and forwarders) in particular.

7 consumer, the high quality retailer, the importer (if transport is under FOB conditions), the exporter, (if transport is under CIF conditions) and the carrier itself. The logistics service provider and the forwarder follow the requirements from their clients and are mainly price focussed. Another conclusion from the table is that the willingness to pay seems to be rather limited. Importers and exporters are willing to pay for equipment that allows a shift from air transport to sea transport and therewith reducing their transport costs. This is however a limited and besides fluctuating market. For a carrier investment in new equipment is only interesting if it concerns a significant scale, if operational costs can be reduced, or if it's market can be extended significantly. It is clear, however, that carriers are dependent of the shippers wish to make use of the new equipment and that they have to take into account the shipper's requirements for this new equipment. This clearly raises the issue of ownership of a new container: it is likely that combined ownership lies with all parties that have an interest in determining the configuration of the container. The actual logistics and commercial requirements are discussed in the next section.

8 Table 1: overview of actors' benefits and willingness to pay Actors Direct costs Direct benefits Willingness to pay Final Higher product price Better product quality Maybe customer Retail Higher product price Better product quality Not organisation due to higher logistical Flexibility in buy Maybe costs pattern Extension of supply Yes Importer Higher product price, if Better product quality Not delivery is CIF, higher More flexibility in sales Maybe transport costs if delivery is FOB process Reduction in damage Maybe Reduction in transport Yes cost by moving cargo from air to sea Exporter Higher transport costs Opening of new Yes if delivery is CIF markets Reduction in transport Yes costs by moving cargo from air to sea Logistics service provider Higher sea transport costs Better service to client If additional price can be transferred to the Forwarder Carrier Higher sea transport costs Higher investment costs Better service to client Reduction operational costs in Better service towards client Opening up new markets by competing with air transport Reduction in claims Source: expert-interviews, Group Decisions Room session client If additional price can be transferred to the client Yes, if costs savings compensate for additional investment costs Yes, if it is sure that sufficient clients are willing to pay more for service, so additional investment costs are compensated Yes, if market is substantial Yes, if savings are substantial

9 4. LOGISTIC AND COMMERCIAL REQUIREMENTS Table 1 has led to an inventory of the parties that determine the logistical and commercial requirements. This paragraph lists these requirements and some remarks on requirements that were formulated at the start of the project. Logistics requirements One of the initial objectives for the development of the new reefer container was to develop a container with which the cold chain (the maintenance of the same conditions in the complete door-to-door chain) should not be broken. The market research has shown that there is not actually such a logistical requirement: reefer goods always have to be inspected at some points in the supply chain. In addition, the trend towards smaller parcel sizes and higher frequencies implies that value added services like labelling, repackaging move up-stream in the chain. An optimised maritime reefer container would be different from a continental reefer container: European continental supply chains differ substantially from intercontinental supply chains, in terms of optimal equipment dimensions, handling requirements etc. Commercial requirements Retailers or their logistics service providers, the shippers of the future, are not clearly willing to pay an additional price for investments solely aimed at the improved performance of the maritime reefer container. For a carrier the only real benefit of the new development can be the energy savings, leading to a reduction in operational costs: these savings should at least compensate for the additional investments to make it attractive for the carrier to invest. The benefit of potentially opening up new markets is only interesting for a container carrier if the new market is significant in volume (which is not expected) and/or if the new market is willing to pay an additional price for the transport (which is still unclear). One actor alone in the chain should not invest in an advanced reefer container a priori. It is very likely that the other benefiting actors in the chain will not pay the initial investor sufficiently. Solutions are that the shipper itself invests in the container, or that investment are done in co-operation with different actors in the chain, or, finally, that firm and chain wide contracts are set up for use of the new reefer container against a acceptable price. Pricing policy in the whole supply chain should be changed. At the moment, each part of the supply chain measures transport costs in different units (mostly on the basis of assets used), while the final customer pays on a per carton and count base. This leads to an unclear and in most cases suboptimal situation for the different actors. The pricing for reefer container transport should be done based on the unit for which the final customer pays the transport costs. 5. CONCLUSIONS

10 This paper describes the approach that has been followed by Erasmus University Rotterdam in the analysis of the international reefer market. This market research is part of a larger project that aims to develop the reefer container for the year Market research in support of a technological development project in the maritime reefer market is highly complex due to the variety in actors with different functions along the transport chain, and the variety of products. This makes the target markets difficult to identify. A proper market analysis is therefore in need of a structuring approach. A customer oriented supply chain analysis has proven a useful instrument to structure the markets. Based on the customer oriented supply chain analysis, the actual potential customers can be identified together with their main logistical and commercial requirements for the new development.

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