1 Port logistics cost of multiple countries consolidation (MCC) cargo: a comparative analysis between Kaohsiung and Hong Kong C.-S. Lu Department of Transportation and Communication Management Science, National Cheng Kung University, Taiwan, R.O.C Abstract This study attempts to compare the port logistics cost of MCC cargo between Kaohsiung and Hong Kong. A total cost analysis model, which includes static analysis and dynamic analysis, was utilized in this research for port choice decision. The trade-off possibilities between terminal handling charge (THC), documentation fee, handling fee, storage fee, and consolidation costs in port were analyzed. In general, the total port logistics cost in Kaohsiung was cheaper than in Hong Kong based on the results of this research. However, the related inventory cost factors such as characteristics, value and number of cargo were needed to consider in their decisions of port choice. This study provides a general framework for the identification of port logistics cost from a shipper's perspective. The application of this framework can be a useful approach for port operators to evaluate their competitive positions and their relative strengths and weaknesses in the MCC cargo market. 1 Introduction With the globalization of production, attempts at the liberalization of trade, the development of regional trading blocks, and the introduction of new technologies for the international movement of goods, the role of international port logistics operations has become more important than ever. Furthermore, the production methods of industrial processes have led to stock reductions, and, in turn, flexible, diverse, rapid and tailor-made transport with smaller and more frequent shipments. Stocks are moved up from manufacturers to suppliers and
2 34 Maritime Engineering and Ports II apportioned among numerous suppliers; consignments are smaller and their unit value is higher; delivery is becoming more punctual and reliable . Consequently, multiple-countries-consolidation (MCC) cargo traffic has increased tremendously in recent years. The MCC cargo is one kind of less than container load (LCL) cargo, which is insufficient to fill a shipping container. It is grouped with other consignments from foreign countries for the same overseas destinations in a container at a container freight station. In addition, due to the use of supply chain management, the logistics costs, such as transportation, warehouse, inventory, packing and consolidation charges, have been particularly emphasized by shippers. This study seeks to compare the port logistics cost of MCC cargo between Kaohsiung and Hong Kong. There are five sections in this study. Section 2 explores the concept of port logistics costs. Section 3 identifies the related variables of logistics cost in port. Section 4 presents the techniques and results of analyses. The final section summarizes the results and points out the implications of this study for future research. 2 The concept of port logistics cost 2.1 The logistics concept There have been a number of logistics definitions presented in previous studies. Logistics has been defined as those activities that facilitate product movement and the co-ordination of supply and demand in accomplishing specified cost and service objectives [ 2 ]. Shapiro and Heskett [ 3 ] further defined logistics as: ensuring the availability of the right product, in the right quantity and the right condition, at the right place, at the right time, for the right customer, at the right cost. A generally accepted definition of logistics is that put forward by the Council of Logistics Management (1998). Logistics are defined as "... that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point-oforigin to the point-of-consumption in order to meet customers' requirements." 2.2 The total cost concept Recently, total cost analysis, a decision-making approach that considers total system cost minimization and recognizes the interrelationship among system variables such as transportation, warehousing, inventory, and customer service, has been frequently applied in logistics research. It is important to consider the total system of distribution activities. Previously, port and shipping operators only took an interest in the movements of cargo from port to port. The present trend, however, is to consider the entire logistics system i.e. the various modes of transport involved, their interaction with inventory, the various service elements, production and sales. Thus, modern port and shipping operators are becoming increasingly
3 Maritime Engineering and Ports II 35 interested in providing door to door services and the provision of local distribution services, including warehousing and distribution set up, to companies which cover all aspects such as warehousing, delivering according to order, and inventory control. Therefore, in the context of costs it is important to consider the total system. If individual activities are considered separately in order to achieve low costs, total costs may in fact increase. 2.3 The port logistics cost The efficiency of port and shipping operators can affect the total distribution costs of a company. Freight rates and port charges are direct costs related to the port/shipping operation. However, inefficient and perhaps unreliable terminal operations, port congestion, warehousing, documentation processing, etc. May cause customers to keep a large safety stock in order to ensure an even flow of production. Nevertheless, the costs can be reduced through reliable and efficient transport services, making it possible, in turn, to reduce safety stock and costs . In particular, the prime task of a port is to provide shelter for the ship, the cargo and means of transport other than the ship, so that transfer of cargo to and from the ship may take place with a minimum of risk of damage to both cargo and ship. With the globalization of production and market, stocks are moved up from manufacturers to supplies and apportioned among numerous suppliers; consignments are smaller and their unit value is higher; delivery is becoming more punctual and reliable. The role of international port logistics operations is therefore more important than ever. A port choice decision based on total logistics costs has consequently become extremely more important. The variables of port logistics costs and analyses will be discussed in the subsequent two sections. 3 The variables of port logistics cost According to logistics theory in the literature, the major types of logistics costs include inventory carrying costs, order/setup costs, expected stockout costs, intransit inventory carrying costs, and warehousing costs. The inventory carrying cost can be divided into four major components which include capital cost, storage space cost, inventory service cost, and inventory risk cost. An important cost affecting total cost is ordering cost or setup cost. Ordering cost refers to the expense of the product itself. Setup cost refers more specifically to the expense of changing or modifying a production or assembly process to facilitate product line changeovers [ 5 ]. In addition, another cost critical to inventory decision making is stockout cost. A stockout occurs when desired quantities of finished goods are not available when and where a customer needs them. When a seller is unable to satisfy demand with available inventory, the seller may lose a sale or lose a customer. Generally, the cost of lost sales is difficult to measure it. The carrying inventory cost in transit is another important cost. When the "product" inventory is company-owned until delivered to the customer, the
4 36 Maritime Engineering and Ports II company should consider its delivery time part of its carrying cost. The faster delivery occurs, the sooner the transaction is completed and the company may receive payment for the shipment. Since faster delivery typically means higher transportation cost, the company may need to analyze the trade-off between transportation cost and the cost of carrying inventory in transit. An important function, warehousing serves several value-adding roles in a logistics system: consolidation, product mixing, service, contingency protection, and smoothing. The cost of warehousing can be divided into two main expenditures: direct handling and direct storage. The former expense refers to the costs of labor, handling equipment and other handling expenses, while the latter expenses include the cost of facility, storage equipment, facility modification, utilities, maintenance and security. An understanding of logistics costs from previous studies, provides a fundamental concept in this research. However, the primary objective of this study is to evaluate the port logistics costs of MCC cargo between Kaohsiung and Hong Kong ports. The scope of this study is specifically focused on a port area. From a practical maritime perspective, in addition to ocean freight, shippers need to pay a terminal handling charge (THC), less than container load charge (LCL), storage, documentation and handling fees etc. The various costs are dependent on the characteristics and volume of cargoes, which are described as follows: 3.1 Terminal handling charge (THC) Terminal handling charge is a "charge payable to a shipping line either for receiving a full container load at the container terminal, storing it and delivering it to the ship at the load port or for receiving it from the ship at the discharge port, storing it and delivering it to the consignee". 3.2Less than container load (LCL) charge (consolidation charge) LCL is a container freight rate whereby the carrier is responsible for the packing and unpacking of the container. 3.3 Documentation fee The documentation fee primarily includes B/L and delivery order charges. 3.4 Handling fee The handling fee consists of the charges for telex, phone and B/L amendment. 3.5 Storage fee When cargoes stay in a warehouse over free time, the cargo owner needs to pay a storage fee. Usually, the free time is three days.
5 3.6 Port due Maritime Engineering and Ports II 37 Port due is a charge levied against a shipowner or ship operator by a port authority for the use of a port. Currently, the rate of port due in Kaohsiung port is 0.3 per cent of cargo value. 3.7 Ocean freight Ocean freight is calculated based on the service routes from South East Asia to Los Angeles via Hong Kong or Kaohsiung. A comparison of port logistics costs with general logistics is undertaken are summarized in Table 1. Due to limitated of data, other logistics costs are assumed constant between Hong Kong and Kaohsiung. For example, expected stockout costs, and in-transit inventory carrying costs are excluded in this analysis. Techniques for port logistics costs analysis are examined in the next section. Table 1: A comparison of general logistics costs and port logistics costs Port logistics costs Terminal handling charge (THC) Less than container load (LCL) charge Documentation fee Handling fee Storage fee Port due Ocean freight General logistics costs Inventory carrying costs Warehousing cost Order/setup cost Order/setup cost Warehousing cost Inventory carrying cost Transportation cost 4 Techniques of logistics cost analysis In this section, a total cost analysis, which includes a static analysis and dynamic analysis, are examined for port choice decision. 4.1 Static Analysis One general approach to total cost analysis for port logistics is known as static analysis. Essentially, this method analyzes costs associated with a logistics system based on various components at one point in time or at one output level. In the present instance the various components are the several logistics port costs described previously. In many business situations, the variables affecting the decision regarding the approach to cost management are so many as to be almost overwhelming. Therefore, models developed to aid the decision process are frequently abstract or represent a simplified reality. In other words, models generally make
6 38 Maritime Engineering and Ports II simplified assumptions about the real world they attempt to represent. Typically, the more the model assumes, the easier the model is to work with and understand. However, a simple model output is often less accurate. Consequently, it is necessary to consider a suitable balance between simplicity and accuracy. Although there are several ways to analyze opportunities for using port logistics costs, a useful method is to calculate and compare the total costs based on a trade-off analysis. The following symbols and assumptions are used in the following analyses below: Port logistics cost (PLC) = terminal handling charge (THC)+ documentation fee (DOC)+ less than container load charge (LCL)+ handling fee (HANDLING) + port due (only for export cargo in Kaohsiung port) Total port logistics costs in Kaohsiung port (TPLCk ) = Import port logistics cost (IPLCk) + Export port logistics cost (EPLCk) Total port logistics costs in Hong Kong port (TPLCh ) = Import port logistics cost (IPLCh) + Export port logistics cost (EPLCh) Qc = volume of LCL cargoes (CBM) (annual) Tk = terminal handling charge rate per TEU in Kaohsiung port Lk = less than container load charge rate per CBM in Kaohsiung port Hk = handling fee rate per B/L in Kaohsiung port (assume each TEU includes a 10 houses bill of lading) Dk = documentation fee rate in Kaohsiung port (assume each TEU includes 10 documentations) Thi = terminal handling charge rate per TEU in Hong Kong port for import cargo The = terminal handling charge rate per TEU in Hong Kong port for export cargo Lh = less than container load charge rate per CBM in Hong Kong port Hhi = handling fee rate per B/L in Hong Kong port for import cargo (assume each TEU includes a 10 house bill of lading) Hhe = handling fee rate per B/L in Hong Kong port for export cargo Dh = documentation fee rate in Hong Kong port (assume each TEU includes 10 documentations) Qteu = number of twenty foot equivalent containers (annual, assume each TEU includes 20 CBM) Pd = port due rate ( 0.3 per cent of cargo value) V = value per TEU (assume one million New Taiwanese Dollars per TEU) Assume each TEU includes 20 CBM, the total port logistics cost (TPLC) per TEU is calculated as follows: IPLCk = Tk+10 Dk +20Lk +10 Hk EPLCk = Tk+10 Dk +20Lk+Pd V TPLCk = IPLCk + EPLCk IPLCh = Thi+10 Dh +20 Lh +10 Hhi EPLCh = The+10 Dh +20 Lhc+10 Hhe TPLCh = IPLCh + EPLCh
7 Maritime Engineering and Ports II 39 The equations of total port logistics costs per shipment can be described as follows: TPLCk =2 Tk+20 Dk Qteu+40 Lk Qteu +10 Hk Qteu + Pd V Qteu =(2Tk + 20Dk +40Lk + lohk+pdv) Qteu TPLCh =Qteu Thi+Qten The+20 Dh Qteu+40 Lh Qteu+10 Hhi Qteu +10HheQteu =(Thi+The+20Dh+40Lh+Hhi+1 OHhe)Qteu Table 2. Static analysis of port logistics costs between Kaohsiung and Hong Kong Terminal charge Documentation LCL charges Handling fee Import port cost Terminal charge Documentation Import Port Logistics Cost Kaohsiung handling NTD 4819/TEU KHD Fees 300/Do. x 10 Do. = /CBM x 20 CBM = /BillxlOB/L =8000 NTD Hong Kong 1800/TEU KHD 110/Do x 10 Do. =1100 KH D 198/CBM x 20 CBM =3960 KHD 200/Bill xlob/l =2000 logistics KHD 8860 x3.93 NTD /KHD = NTD Export Port Logistics Cost Kaohsiung Hong Kong handling NTD 4819/TEU HKD 2140 /TEU fees NTD 300/Do. x 10 Do. 110/Do. x 10 Do. =1100 =3000 LCL charges NTD 360/CBM x /CBM x 20 CBM =3960 CBM =7200 Port due NTD 1,000,000/TEU 0 x0.3d=3000 Handling fee 0 110/Bill xlob/l=1100 Export port logistics NTD KHD 8300x 3.93 NTD /KHD cost = NTD Total port logislics cost NTD NTD Ocean freight USA 1725 x 30.8 USA 1725x30.8 NTD/USA=NTD53130 NTD/USA = NTD Total logistics cost NTD NTD Source: Pacific Shipping Agency Co., Ltd. (Taiwan and Hong Kong) (March, 2000) Note: 1. Ocean freight is based on service routes from South East Asia to Los Angeles via Hong Kong or Kaohsiung. 2. The case assumes that MCC cargoes are stored in warehouses within three days. Therefore, the storage fee is zero. 3. In general, from a practical point of view, ocean freights are similar between Kaohsiung/Los Angeles and Hong Kong/Los Angeles.
8 40 Maritime Engineering and Ports II On the basis of the data shown in Table 2, the total port logistics costs per TEU ( Qteu = 1) for TPLCk and TPLCh are: TPLCk =2x x300+40x x x1,000,000 =NTD$41038 TPLChk = x110+40x198+10x200+10x110 = KHD$ (= NTD$ 67439) As shown in Table 2, the total logistics cost per TEU in Kaohsiung port was cheaper than in Hong Kong port by 26,401 New Taiwanese Dollars. Under the consideration of costs, the result indicates that shippers would derive greater cost benefit if Kaohsiung port selected as a transshipment port. However, this section specifically deals with a static analysis based on the assumption that cost variables are constant. A dynamic analysis is necessary to compare between these two ports. 4.2 Dynamic analysis The second way to project the optimum system is to mathematically calculate the point of equality between the two ports. From a shipper's perspective, the model can be adjusted to consider the following cost relationships associated with cargo value, number of house B/L and CBM in a container, etc. On the basis of the result of a static analysis, in general, the total port logistics cost of Hong Kong is higher than that of Kaohsiung port as the number of TEU increase (See Figure 1). Hong Kong Kaohsiung Number of TEU or CBM Figure 1: A comparison of the costs of Kaohsiung and Hong Kong A number of product aspects will have a direct bearing on logistics cost. First, the product's dollar value will typically affect warehousing costs, inventory costs, transportation costs, less than container charge, and even the handling cost of materials. Under the assumption of change in cost variables remains constant in both Kaohsiung and Hong Kong ports, only port due is charged in Kaohsiung
9 Maritime Engineering and Ports II 41 port. As Figure 2 indicates, as the cargo's dollar value increases, the level and slope of port logistics cost function in Kaohsiung port rise and steeper from A to B. The total port logistics costs of the two ports will be equal at the value of 9.8 million dollars in a TEU. A point of indifference between Kaohsiung and Hong Kong is calculated as follows: TPLCk =2Qteu Tk+20 Dk Qteu+40 Lk Qteu +10 Hk Qteu + Pd V Qteu =2x x300+40x360+10x xv TPLCk =Qteu Thi+Qten The+20 Dh Qteu+40 Lh Qteu+10 Hhi Qteu +10 Hhe Qteu= x x x x110 = KHD$ (= NTD$ 67,439) Trade-off point 38, xV=67,439 => V = 9,8000,333 If we use a longer-run perspective to look at this example, we find that although Kaohsiung port gives a lower cost at a value of below 9.8 million dollars in a twenty foot equivalent container, Hong Kong becomes less expensive than Kaohsiung. Therefore, a company producing a high value cargo may want to plan a shift to Hong Kong. Kaohsiung B S n Hong Kong Kaohsiung A H m c 9.8 Dollar Value Per TEU (million NTD) Figure 2: The relationship of cargo value to the total port logistics cost 5 Conclusion and Implication This study provides a general framework for the identification of port logistics cost from a shipper's perspective. The results indicate that total port logistics cost in Kaohsiung was cheaper than in Hong Kong. However, the non-cost related factors such as customer service, location, turnaround time of cargo handling, availability of space, frequency of ship call, and marketing competition etc., are needed to consider in the future analysis. In addition, the costs of
10 42 Maritime Engineering and Ports II inventory carrying cost, order cost, in-transit inventory carrying cost are also important to consider in a total cost system based on the economic order quantity (EOQ) approach. On the other hand, the application of this framework can be a useful approach for port operators to evaluate their competitive positions and their relative strengths and weaknesses in the MCC cargo market. It is helpful for port operators to develop their logistics strategies. However, owing to limited data, the cost analysis of MCC cargo only focused on the transfer route from South East Asia to Los Angels could via Kaohsiung or Hong Kong. Another worthwhile direction for future research could be an examination of different shipping trades or ports. References  UNCTAD's Report, Facing the Challenge of Integrated Transport Services, New York: United Nations, UNCTAD/SDD/MT/7,  Heskett, J.L., Logistics-Essential to Strategy, Harvard Business Review, 55(6), pp ,  Shapiro, R.D. and Heskett, J.L., Logistics Strategy: Cases and Concepts, West Publishing Co. USA,  IMO, Port Logistics, Compendium for Model course 5.02, International Maritime Organization, London,  Coyle, J.J., Bardi, E.J. and Langley, C.J. The Management of Business Logistics, The Sixth Edition, West Publishing Company, 1996.