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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

imp of transport in mgt

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