The strategic design of port services based on a total landed cost approach

• Published date: 27 October 2020
• Pages: 96-120
• DOI: https://doi.org/10.1108/IJLM-01-2020-0026
• Date: 27 October 2020
• Subject Matter: Management science & operations,Logistics
• Author: Rosa G. González-Ramírez,J. Rene Villalobos,Cesar Meneses

The strategic design of port

services based on a total landed

cost approach

Rosa G. Gonz

alez-Ram

ırez

Faculty of Engineering and Applied Sciences, Universidad de Los Andes Chile,

Santiago, Chile

J. Rene Villalobos

School of Computing, Informatics, and Decision Systems Engineering,

Arizona State University, Tempe, Arizona, USA, and

Cesar Meneses

TIS Consulting, Sonora, Mexico

Abstract

Purpose –This paper explores the effect of port’s service time, particularly the mean and variability, on

shippers’total landed costs to determine the competitive position of the port and derive recommendations for

the strategic design of port services.

Design/methodology/approach –The competitive position of a port is estimated considering the service

level offered to the end-usersof the port such as port service time, its variability and its effect on the total landed

costs observed by the port users. The proposed methodology is meant to help ports to determine the required

service time levels to maintain or gain a competitive advantage against other ports, in terms of attracting

common hinterland’s customers.

Findings –Results show the advantages of considering service levels factors to determine the competitive

position of a port, and what are the minimum characteristics required to capture more traffic volumes, that can

help port managers to take strategic design decisions to better position the port in the current fierce market.

Research limitations/implications–The proposed methodology is illustrated by considering a case study,

which is the Port of Guaymas in Mexico. Data was not directly collected by the port, but based on interviews

with shippers and public information, a representative case is presented. Due to a confidentiality agreement

with the Port, specific references for most of the data used to estimate the model’s parameters are not provided.

The analysis is intended to show the potential value of this mechanism and can be used for evaluating the

competitive position, from a high-level perspective, of any port to determine potential hinterland by improving

the service level of the port.

Originality/value –The existingliterature on port choice and port competition has not previously considered

the effect of port service levels under the perspective of total landed costs of the users, being this paper a

contribution to fulfill this gap.

Keywords Total landed costs, Port positioning, Service level, Port attractiveness, Port hinterland

Paper type Research paper

1. Introduction

In today’s highly competitive environment, companies with global operations are in a

position at which very often minimizing total landed costs (TLCs) is crucial for their survival.

TLCs are defined by Coyle et al. (2003) as “The total cost of a product delivered at a given

location, the production cost plus the transportation cost to the customer”. Hence, TLCs

comprise the original price of the product plus all the logistics related costs such as

IJLM

32,1

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This material is based upon work supported by the National Science Foundation under Grant No. IIP-

0839969. Any opinions, findings, and conclusions or recommendations expressed in this material are

those of the author(s) and do not necessarily reflect the views of the National Science Foundation.

Conflict of interest: The authors declare that they have no conflict of interest.

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/0957-4093.htm

Received 23 January 2020

Revised 11 May 2020

18 July 2020

Accepted 11 September 2020

The International Journal of

Logistics Management

Vol. 32 No. 1, 2021

pp. 96-120

© Emerald Publishing Limited

0957-4093

DOI 10.1108/IJLM-01-2020-0026

transportation fees (both inland and ocean), customs, duties, taxes, tariffs, insurance,

currency conversion, crating, handling and payment fees. A related term is total logistics

costs, which includes all costs involved in taking a product from its origin to the buyer’s

facilities, excluding the price of the product.

Trade globalization and increased competition between companies have created the need

to increase transportation efficiency and reduce logistics costs (Trent and Monczka, 2003).

The focus on logistics costs is particularly important since these already represent a large

portion of the final cost of a product, accounting for at least 10% of the final cost a product

(Hesse and Rodrigue, 2004).

Ports are a critical element of the global transport chain, playing an important role in the

coordination of cargo volumes and information flows (Carbone and Martino, 2003), whose

functions have evolved from the traditional functions of transferring cargo (Notteboom and

Rodrigue, 2005) to being a key element of global supply chains (Lee et al., 2018). Since ports

are an important element of global supply chains, they deeply influence the TLC of a product.

TLCs are affected by the operations of the port from at least three different perspectives:

(1) the price charged by the port for cargo transferring, (2) the average service time taken to

transfer the cargo, (3) the variability of this service time. The second factor may result in

higher in-transit inventory costs while the third factor on higher inventory and stock out

costs. In this paper we focus on the problem of assessing how the service time variability of a

port can affect, and in some cases make it economically infeasible, the supply chains using the

port. We particularly explore the issue of how by reducing service time and its variability at

the port, companies can reduce inventory levels and overall landed costs, leading to ports

gaining a competitive advantage over other competitors. The service time at a port refers

specifically to a shipment’s sojourn time in the port. It is considered as the time that a

shipment (product, container, etc.) stays in the port, from the time the carrying vessel is put

under navigation authority of the port to the time it leaves the port’s gates. This time is

directly related to port operations (or disruptions) in addition to the transit time of a shipment

from its origin to destination. Consequently, service time variability at a port refers to the

shipment’s sojourn time uncertainty at the port. Even though that other stakeholders of the

port also affect service time variability as this is naturally a very complex sector, for the scope

of this manuscript, those interactions are not considered. Hence, the work presented here

addresses the design problem from a high-level perspective, aiming to identify opportunities

for the port to capture additional cargo and the service-level parameters to make it possible.

The specific contributions of this work consist of a methodology that allows the

quantification of the effect of port service times (derived from inefficiencies in internal

operations, vessel congestion or internal disruptions) on the end-user’s TLCs. Hence, the

proposed methodology provides a framework for ports to adjust and design their services in

such a way that they can attract additional freight flowing through, and thus maintaining or

gaining a competitive advantage over other ports serving the same hinterland. The

methodology includes (1) a definition of a proper economic model to measure the logistic

impact of port’s variability, (2) a network analysis approach to the defined problem and (3) a

systematic procedure to determine competitive service time parameters for a port to attract

additional freight passing through it. As a case study, the methodology framework proposed

in this paper is applied to the case of the Port of Guaymas (GYM) located in the Sea of Cortez,

in Mexico. The aim is to determine which are the service time parameters for this port that

yield lower TLC with respect to other competing ports such as the Port of Los Angeles and

Long Beach (LA/LB) in United States. The information used to create the case study was

based on public information and estimates based on data provided by shippers and

transportation experts.

The rest of the paper is organized as follows; Section 2 gives a summary of the existing

literature related to transportation lead time variability and its impact on TLCs, and the

Design of port

services based

on a TLC

approach

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