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

Author:Rosa G. González-Ramírez, J. Rene Villalobos, Cesar Meneses
DOI:https://doi.org/10.1108/IJLM-01-2020-0026
Pages:96-120
Publication Date:27 Oct 2020
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 ports service time, particularly the mean and variability, on
shipperstotal 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 hinterlands 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/implicationsThe 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 models 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 todays 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
96
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 buyers
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 shipments 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 ports 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
shipments 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-users 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 ports 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
97

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