Maritime Transport

Part 4
Logistics
Defining logistics
• Logistics means directing material flows all the way from the source of
raw materials to the end customer so that the product is available in
the right place at the right time, and that all costs and other adverse
effects related to operations, eg negative environmental impact or
safety risks, are minimized.
• In addition to the actual materials flow, which consists of transport
and storage, logistics also includes planning related to information and
cash flows and monitoring societal and environmental impact.
• An integral part of logistics is minimizing all unnecessary
transportation and storage.
CASE: IKEA
• The Swedish furniture company IKEAwas founded in 1943 and has become one of the most
successful companies in the world. IKEAaims to offer its customers a wide variety of well-designed
and practical furniture.
• IKEA’s cheap prices are enabled by minimized logistics costs. The stores also function as
warehouses, so there are no distribution costs. Also, product packaging is designed to be easy to
transport in a sedan or a van and to be easily assembled at home.
• IKEA’s products are modular, which means that there are only a few basic types of furniture parts
available (eg table leg and table top models), but it’s possible to combine them in many different
ways.
• In this way, IKEAhas successfully minimized the amount of transportation by reducing the number
of product variants held in warehouses. Since IKEAhas no extensive network of retail stores, the
company can focus on transportation between factories, terminals and the warehouse-stores,
and there’s only a minimal number of staff working in the warehouse and at the cashiers.
Logistics costs
• Logistics costs management plays a key role when companies are
competing with similar products. The company with the lowest logistics
costs can allocate more resources, for example, to product development
or customer service, increasing their competence and productivity.
• Improvements in logistics operations considerably reduced logistics costs
in the 1980s in Europe, but these started rising again in the 2000s, mostly
because of rising oil prices and transportation costs.
• The most significant logistics costs can be divided into two categories:
• costs from storage;
• costs from transportation.
Costs of tied-up capital (1/2)
• There is always capital tied into a supply chain when a product is stored or being
transported.
• The money used to buy those goods could have been invested somewhere else to gain a
profit, and thus storing the goods causes loss of potential profits.
• Additionally, there is also always the risk of the product breaking down or its value being
otherwise reduced during shipping or storage, for example due to being spoiled or
because of changes in seasonal demand.
• If a company wants to become more competitive and reduce logistics costs, reduction of
capital tied to storage is one of the first considerations.
• This can be done for example by reducing the amount of products held in storage, though
this can cause delays and worse service quality, as inventory can run out quickly,
preventing the product from being delivered to the customer on time.
Costs of tied-up capital (2/2)
• Capital tied up in inventory can also be reduced with these two techniques:
• reducing the number of warehouses;
• reducing the number of individual product lines by modularization.
• Each warehouse also has fixed costs which are not directly affected by the
amount of products stored in them. Combining warehouses into one can
reduce these base costs.
• In modularization, the number of individual product lines is reduced by
assembling products according to the needs of the customer only after the
order has arrived. This enables a significantly wider selection of end
products without a large inventory.
ECONOMIC ORDER QUANTITY (EOQ)
• The relationship between the cost components of logistics is depicted by
the economic order quantity formula (EOQ), also called Wilson’s formula:

• The basic principle of the formula is that the higher the costs of capital
tied up in inventory, the smaller the inventory should be.
• The higher the transport costs – for example, the price of fuel – the more
profitable it is to transport large batches and make orders as infrequently
as possible. For maritime transport, this means even larger ships.
JUST-IN-TIME PRODUCTION
• Just-in-time is a production model developed by Toyota to reduce capital tied up in the supply
chain.
• In principle, there is only one piece of each product in the intermediate storage or the store.
When a customer buys a product, a replacement is shipped into the store, and an additional
product is produced for the storage. This enables reduction of the total inventory in the supply
chain.
• Wastage is also reduced because when production errors are detected, there is only one faulty
product that has to be repaired in storage.
• An important aspect of just-in-time production is the requirement for perfect product quality.
Because there is only one product in the supply chain waiting to be processed, it cannot be faulty.
• Just-in-time production is used especially in production of expensive serial-produced consumer
and investment goods such as cars.
Transportation costs (1/2)
Transportation costs depend on six factors :
1. Distance.
2. Economies of scale.
3. Trade balance.
4. Type and value of products.
5. Competition and transportation connections.
6. Ports and other trading environments.
Transportation costs (2/2)
Companies can reduce their transportation costs by:
• removing excess transportation and handling processes, for example
transportation errors and handling damage;
• economies of scale, ie increasing the size of cargo batches, enabling more
products to be transported at once and the costs of transportation per transport
unit to be reduced;
• slowing down the ships and reducing fuel consumption;
• switching to a cheaper form of transport;
• reducing indirect transport costs, such as order processing costs and staff costs;
• minimizing extra fees and costs related to shipping.
DAMAGE DURING SHIPPING
• The total amount of shipping damages is in the tens of millions of euros a year, and the
final bill is paid by customers.
• The most frequent damage caused during shipping is breakages, which happens both on
land and sea. The most common cause of breaking is mishandling – for example if an
item is poorly fastened in a truck or a ship, the load can move around and break.
• Reliable transport, or the ability to keep transported goods undamaged, is a competitive
advantage. It reduces logistics costs and affects the reputation of the company, the
operational reliability of customers that are dependent on transport and the amount of
buffer stock required.
• A major part of damage is caused by human error and could be prevented by eliminating
incorrect practices and encouraging workers to keep an eye on and avoid common
causes of damage.
Modes of transport (1/2)
• Transport can be divided into long-distance transport (also called line haul), and delivery
and pick-up.
• Road transport is the most flexible mode of transport and most suitable for delivery and
pickup of relatively small batches of goods that are transported over short distances.
• Rail transport is usually used when the transporting distance is long and the batches are
large.
• Maritime transport is usually suitable for less valuable products like raw materials, if the
needed transport speed is less than that of road transport or air freight.
• Air freight is expensive and best suited for small and light product batches.
• In combined transport, the long-distance transport is carried out by train or a waterborne
vessel, and short distance pick-up and distribution transport use road transport.
• In intermodal transport, the goods are always in the same transport unit and this unit is
transported on multiple different modes of transport.
Modes of transport (2/2)
• The mode of transport is usually determined by the amount of time available: the more
expensive and the lighter the product, the faster it should be transported.
• Other factors influencing the mode of transport are also the size of the product, distance,
time pressure, agility and flexibility of transport, packaging and the ease of keeping the
product secured and protecting it against theft, as well as how dangerous the product is
and any special provisions related to it.
• The more developed the logistics infrastructure and service network of a country is, the
more likely it is that the transport service provider will be chosen based on its punctuality
and ability to following the schedule.
• Similarly, the longer-term the need for transport services, the more likely is a long-term
subcontracting contract that is based more on trust, reliability and cooperation than on
price.
Short-sea shipping
• There are three main advantages maritime transport:
• the adverse effects of maritime traffic are in many ways lesser than those of road traffic;
• transferring traffic away from roads reduces the costs of building and maintaining road networks;
• traffic congestion within the EU is seen as an barrier to the free movement of goods and people
• Changing the mode of transport increases costs significantly and makes tracking shipments more
difficult.
• Maritime routes have more capacity for traffic, and they rarely get congested apart from routes near
ports, channels and very narrow routes. On the other hand, maritime transport has weaknesses like
inflexible cargo handling, difficulty of tracing products and less reliability.
• Transporting the product through maritime routes requires handling at two different ports, and this
adds to the costs. If sea transport is sufficiently cheaper than road transport, combined transport can
have a competitive price or even a price advantage.
• Attention should be also paid to good practical operation of transportation and the exchange of
information at ports and on the sea. Maritime transport should also be able to compete with road
transport in the main factors that make a mode of transport attractive: speed, regularity and reliability.
Revision questions
1. What does logistics mean?
2. What do logistics costs consist of?
3. What does it mean when capital is tied up in inventory, and how can this be reduced?
4. What is just-in-time production?
5. What factors affect transport costs?
6. How can a transport company reduce its costs?
7. What do long-distance transport and delivery and pick-up transport mean?
8. What is combined transport?
9. What is intermodal transport?
10. What factors are considered when choosing a mode of transport?
11. Why does EU favour maritime transport? What practical measures is it taking to increase the
use of maritime transport?