Service purchasing and market-entry problems in a shipping supply chain

https://doi.org/10.1016/j.tre.2020.101895Get rights and content

Highlights

  • Dual-service purchasing and market-entry problems are investigated.

  • Dual-service purchasing benefits the stakeholders.

  • The market-entry is a self-interest behavior and hurts the forwarder.

  • Mutual inhibition exists under the high effort level of cargo-canvassing.

  • Win-win strategy and Pareto-optimization are identified and interpreted.

Abstract

In the shipping industry, forwarders can purchase a “one-stop” service from an ocean shipping (OS) company or a dual “ocean + inland” service from an OS company and an individual inland shipping (IS) company. Additionally, the OS company can strategically decide whether or not to enter the downstream market for cargo-canvassing, which will form a co-opetition relationship with incumbent forwarders. We investigate a strategy matrix based on the following two questions: “What kind of shipping service should be purchased by the forwarder?” “Is it beneficial for OS company to enter the market?” We find that when the forwarder’s cargo-canvassing effort level is low, a dual-service purchasing strategy will benefit both the stakeholders, while market-entry is a self-interested behavior and hurts the forwarder. Enhancing the cargo-canvassing effort level may help the forwarder to overcome this dilemma. However, with an increasing level of effort, there is a mutual inhibition of dual-service purchasing and market-entry, which hurts both the stakeholders’ profits simultaneously. Interestingly, we show that a win-win situation exists when the forwarder adopts a dual-service purchasing strategy without market-entry. Furthermore, we verify that this win-win situation is Pareto-optimized.

Introduction

Maritime shipping is currently the main global trade transportation model due to its low-cost and efficient transportation services, and it transports 90 percent of global trade annually. With the progress of international trade and globalization, global logistics services are becoming increasingly important in a world characterized by global partnerships that are not only deepening but also taking place in an increasingly turbulent environment (Yang, 2019). However, the international maritime trade lost momentum in 2018. The slowdown was broad-based and affected nearly all maritime cargo segments. Global port cargo-handling activities were damaged, and the growth in containerized global port throughput decelerated to 4.7 percent in 2018, down from 6.7 percent in 2017.1 A range of incidents that had intensified in 2018 contributed to the slowdown in maritime trade growth2. Specially, the escalation of tariffs between China and the United States dominated the headlines in 2018 and early 2019. Nearly 2 percent of the world maritime trade volume is estimated to be affected by the tariff hikes applied in September 2018 and May and June 2019. The low speed in global maritime trade volumes has restrained the growth of the freight forwarding and ocean shipping industries (Lee and Song, 2015).

Freight forwarders are intermediate entities in commerce and the international carriage of goods and act as the link between the shippers and the carriers (Murphy and Daley, 2001, Saeed, 2013, Lee and Song, 2015, Li and Zhang, 2015). Fig. 1 describes the operations of global freight forwarders (Bernal et al., 2002, Lee and Song, 2015). Freight forwarders provide a great number of professional services for shippers (i.e., exporter and importer), including planning the most suitable and feasible shipping route for the shippers based on transportation time, security and costs; arranging customs clearance and inspection and related charges on behalf of the shippers; and preparing the documents required for transportation. In summary, shipping forwarders are international trade specialists who can provide a variety of functions to facilitate the movement of cross-border shipments (Murphy et al., 1992).

Therefore, freight forwarders realize value by arranging a “package” service for the shippers, who therefore do not need to interact with all the carriers, ground handling agents, customs agents, etc., but only with a single counterparty. Forwarders have contracts with carriers to move goods and guarantee the loading capacity at stable prices. In shipping practice, the multitudinous forwarders act as non-vessel-operation carriers (NVOCs) and purchase marine services from ocean shipping (OS) companies and inland shipping (IS) companies. We have observed that there are two service purchasing strategies for forwarders in the maritime industry. The first strategy is one-stop service purchasing. The forwarders cooperate with some well-known OS companies, who negotiate with IS companies to procure inland services for a one-stop service provided to the forwarders (Wang et al., 2017a, Wang et al., 2017b). Hence, one forwarder canvasses for cargoes in a downstream shipping market and purchases a one-stop service from the OS company, while the OS company seeks an IS company to complete the inland shipping service. This forms a vertical shipping service supply chain. Polskie Koleje Państwowe Cargo (PKP Cargo) signed cooperation agreements with the OS company Maersk Group in 2015. PKP Cargo is responsible for canvassing, while the Maersk Group cooperates with local IS companies for marine transportation. The second strategy is dual-service purchasing. In this practice, some freight forwarders do no transfer all the marine transportation services to an OS company. Instead, the OS company only completes the ocean shipping service and an individual IS company is used for the remaining inland shipping services. In other words, the forwarder purchases OS services and IS services from an OS company and an IS company, respectively, i.e., dual-service purchasing. The forwarder SINOTRANS CONTAINER LINES Co. Ltd. cooperates with the IS company SHANGHAI PUHAI SHIPPING Co. Ltd. and the OS company SHANGHAI PANASIA SHIPPING Co. Ltd. in the China-Japan container transport market. Intuitively, a forwarder that independently contracts inland services can reduce its dependence on the OS companies and avoid costly one-stop service charges. Therefore, the question is, why does the one-stop service purchasing strategy still exist in practice? Thus, it is essential and significant to investigate the motivation for forwarders to adopt the two different service purchasing strategies.

Further, regarding cargo-canvassing in the consumer market, intuitively, one may believe that the forwarder is the party responsible for canvassing the cargo. However, in maritime practice, it is also common for the OS company to canvass for cargo in the downstream shipping market. For example, the Maersk Group owns a subsidiary, DAMCO Logistic, that takes charge of its cargo canvassing business. Similarly, AMERICAN PRESIDENT LINES (APL) owns APL Logistic and CHINA COSCO SHIPPING CORPORATION LIMITED (COSCO) owns COSCO International Freight Co. Ltd. Both APL Logistic and COSCO International Freight Co. Ltd. canvass for cargo. According to Murphy and Daley (2001), an empirical study showed that more than 54.4 percent of respondents agree or strongly agree that the barriers between the international freight forwarders, the carriers, and the logistics providers are disappearing. It is evident that canvassing for cargo can strengthen a company’s relationship with shippers, improve the service quality, and expand the total market demand size. However, when both the forwarder and the OS company simultaneously canvass for cargo in the downstream market, the former has a greater market advantage than the latter. The market advantage is achieved through their own effort of cargo-canvassing, which can be reflected in the following three aspects:

  • Regional Advantage. Mass international freight forwarders often locate their headquarters in prosperous trading port cities with many offices set up in trading areas, giving full play to their geographical advantage and meeting the business needs of customers to the greatest extent, which helps the trade parties successfully complete the transportation of goods.

  • Service Advantage. The forwarders work closely with shippers and provide more value-added logistics activities to respond effectively to the customers’ ever-changing logistics requirements. This level of involvement introduces a higher level of expertise, which the OS company may not be able to provide.

  • Transport Advantage. The forwarders can act on the customers’ behalf to procure the most suitable combination of transport modes. Regardless of which mode the shippers choose, i.e., sea-road, sea-rail, or sea-air, the international freight forwarding companies are able to satisfy the customers’ demand with services that cover almost all the thriving areas of trade.

Clearly, once an OS company enters the downstream market to canvass for cargoes, there is a co-opetition relationship between the OS company and forwarder. Although the entry of the OS company brings the company a new stream of revenue, it is certain to affect the revenue from the cooperation with the forwarder. Hence, it is necessary and important to observe the motivation for OS companies to enter the downstream market.

Section snippets

Research questions and major findings

Motivated by the importance of service purchasing and market-entry problems for forwarders and OS companies, we build analytical models to answer the following pertinent research questions:

  • Q1: Which is the better service purchasing strategy for the forwarder, i.e., one-stop service or dual-service purchasing?

  • Q2: Is it beneficial for an OS company to enter the downstream market without a market advantage?

It is natural to ask about the relationships between the two questions we raised. If the OS

Literature

The literature on co-opetition relationships in the transportation field is closely related to our research. The typical works focus on aviation management (Hu et al., 2013, Niu et al., 2019), maritime management (Ishii et al., 2013, Lee and Song, 2015, Asadabadi and Miller-Hooks, 2018, Yang and Chang, 2019, Hintjens, 2018), and railway management (Xiao et al., 2007, Jiang and Zhang, 2014). Hu et al. (2013) proposed a two-stage game-theoretic approach to study the operations of an airline

Model

We consider that the forwarder may make the strategic decision regarding the one-stop service or dual-service purchasing strategy, and the OS company may also make the strategic decision on whether to enter the downstream market. Under the one-stop service strategy, the OS company offers both the ocean shipping and inland shipping services. Under the dual-service purchasing strategy, the OS company only offers the ocean shipping service and the forwarder looks for another IS company who can

The value of dual-service purchasing and market-entry

We present the equilibrium outcomes in Table A1 (see Appendix A). To investigate the values of forwarder’s dual-service purchasing and OS company’s market entry, we compare the optimal decision variables of the four scenarios. The comparison results are summarized in the propositions.

Optimal strategies

Based on Propositions 2 and 4, we could derive the optimal strategies for both forwarder and OS company regarding their decisions on service purchasing and market entry.

Proposition 5.

The optimal strategies are as follows:

(i) For the forwarder:

  (ia) When k(0,min(K11,56), the optimal strategy for the forwarder is as follows: The forwarder adopts the dual-service purchasing strategy when there is no market-entry (Strategy B).

  (ib) When k(K11,56), the optimal strategy for the forwarder is as follows: The

Conclusion

In the shipping industry, it is possible for either forwarders or OS companies to canvass for cargo. In recent years, we have observed that the forwarder takes advantage of the complementarity between inland shipping and ocean shipping to carry out a dual-service purchasing strategy. This reduces the dependence of forwarders on OS company, who could provide a “one-stop” service strategy. Moreover, OS companies are increasingly involved in canvassing for cargo. On the one hand, market-entry can

Acknowledgements

We sincerely thank the editor and four anonymous reviewers for their kind and helpful comments on this paper. And this work was supported by the Natural Science Foundation of China (71774019), Talent Project of Revitalizing Liaoning (XLYC1807097), and Ministry of Education Project of Humanities and Social Sciences (19JHQ096).

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