LESSON 26: GENERAL STRUCTURE OF SHIPPING INDUSTRY

They have oil pumping, heating and other necessary special 1. Different types of provisions on board. They range from 2000 dwt to 500000 2. Shipping routes dwt. A generally sticks to a single product. 3. Operating ships Oil tankers represent 1/3rd of the world’s merchant fleet in dead 4. Liner operations weight capacity terms (some of the vessels even exceed 500000 dwt). Crude oil is transported from the oil fields to refineries, 5. Tramp operations petroleum, and fuel oil from the refineries to distribution 6. Organisation of a shipping Company centres and bunkering , such that there is a worldwide Dear Friends as we all know that Transportation is one of the network of tanker routes. most visible elements of logistics operations. Vessels exceeding 200000 dwt are called Very large crude carriers O.K. Let’s discuss that how water transport ha been developing (VLCC) and those above 300000 dwt are called Ultra large crude since ages, and what are advantages of same carriers (ULCC). It provides two major functions: product movement and LNG Tankers, this liquefied natural gas carrier fleet is an product storage. Of the various modes of transport, water is important part of the world mercantile fleet. the oldest mode of transportation. Steamboats replaced the 2. Bulk Carriers original sailing vessels in the early 1800s and by diesel power in These carry various mineral ores, grains and many other the 1920s. produce. They can be ore cum oil carriers. They are single deck The main advantage of water transportation is the capacity to vessels and usually there is no handling gear on board. move extremely large shipments. Basically, about 98% of world a. OBO trade in volume terms is conveyed by sea transport, and in the Ore/Bulk Oil ships are multi purpose bulk carriers designed past forty years, there has been a radical change in the techniques for switching between bulk shipments of oil/bulk grain, adopted in the distribution of international trade through fertilizer and ore trades. Many such vessels exceed 200000 . dwt. Containerization, multi-model transport service, advancement of b. RO/RO marine engineering technology, specialized systems, small crew RO/Ro types of vessels are designed to carry private cars complements and computerization have all contributed to the with , coaches, road haulage vehicles and non- development of international trade and for sea transport to remain motorise passengers. Such vessels are also termed multi competitively priced. purpose vehicle and an increasing number of them The basics of the general structure of shipping can be under- operate in the U.K. - Continental trade. The important feature stood in terms of the different types of ships according to is that the vehicles are driven on and / or off the roll- nature of cargo and unitization, world wide shipping develop- on, roll-off by means of a ramp at the / berth - ment, shipping operating systems namely, liners and tramps permitting unimpeded transshipment. and a glimpse into the organization of a shipping company. c. SD 14 Different Types of Ships The SD14 is a modern tramp vessel designed to convey Merchant ships can be of four types: traditional tramp bulk cargoes such as grain, timber, ore, coal 1. Tankers etc. Another similar type of ship is called the Freedom. Both vessels are multi purpose - dry cargo carriers and 2. Bulk Carriers engaged under a document called a charter party on a time or 3. General cargo vessels voyage basis. 4. Container Ships. d. Panamax : 1. Tankers Panamax are bulk carriers with a breadth which can pass Tankers can be of four types through the Panama Canal (106 feet wide). Such bulk carriers 1. Oil tankers carry upto 80,000 tons of cargo. 2. Product tankers e. Train vessels 3. LNG tankers Train ferry vesselscarry railway passengers and freight rolling 4. Acid tankers stock. Access to and from the vessel is over a ramp thereby permitting an unimpeded transshipment offering through 5. Edible oil tankers rail transits.

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3. General Cargo Vessels change of seasons. The development of shipping in a region These are for break bulk cargo and have cargo handling gear depends on its population density, economic advancement and like derricks and jib cranes on board. Majority of these are many other inter-related conditions like port and refueling facilities. ‘tween-deck’ vessels. The chief shipping lanes are : They range from 2000 dwt to 150000 dwt, although the 1. The North Atlantic Route most common range is from 20000 dwt to 40000 dwt. It lies between Western Europe and Eastern Canada and the The ‘tween deck’ vessel is a general cargo vessel engaged United States. It is the busiest and the most important of primarily on deep-see liner cargo services. worlds shipping routes in terms of both passengers and goods. The trade largely consist of the exchange of food, This type of vessel has other decks below the main deck industrial raw materials and certain manufactured goods of called ‘tween deck’ and all run the full length of the vessel. North America for the manufactured articles and certain food  These vessels are suitable for general cargo, because the cargo and raw products of Europe. space is divided into separate tiers and decks, which eliminates 2. The Mediterranean - Rea Sea - Indian Ocean Route the risk of cargo damage by preventing too much weight being put on the cargo at the bottom. It is the second most important shipping route in the world. It connects North Western Europe with the Mediterranean, Currently, this type of vessel is being displaced in many Eastern Europe, Southern and Eastern Asia, Australia and trades by the container ship and combi carrier. New Zealand. The Suez Canal is the main link in this route. Coasters are all purpose cargo carriers operating around our Traffic over this route includes passengers and a variety of Lcoast. commodities including cotton, tea, rubber, wool, dairy LASH - Lighter abroad the ship. This type of vessel enables products and meat, but specifically petroleum from the lighters to be conveyed from one port to another thus Middle East to Europe. combining inland waterway with ocean transportation. 3. The Cape Route Is Another Important Trunk Route Advantages of the service include through rates / bills of Connecting Western Europe, Africa And Australia lading; no intermediate handling during transfer from the The Cape route is another important trunk route connecting ship, low risk of cargo delay as barges are lowered into the Western Europe, Africa and Australia By way of the Cape of water immediately on arrival at each port and the barges are Good Hope. The poor development of the African likewise loaded on the LASH vessel; it reduces time spent in continent, and the competition with the Suez route, port or its environs to a minimum. considerably brings down the traffic moving over this route. 4. Container Ship However, the traffic is mainly comprised of manufactured articles, fruits, wine, wool, wheat, tobacco and meat.  Container ships cater to only containerized cargo and generally have cranes on board. They can store upto 4 tiers 4. The South Atlantic Route of containers below the main deck and upto 3 tiers above It lies between the rich agricultural regions of southeastern deck. Container ships are divided into reefers and non- South America on the one and the highly industrialized reefers. districts of North - Western Europe and the Mediterranian on  A Container vessel is a basically cellular vessel with crew and the other. Coal, machinery and manufactured goods mainly machinery situated aft. Each hold of a cellular ship is fitted constitute the traffic moving towards South America whereas with a series of vertical angle guides adequately cross-braced raw materials and foodstuffs like meat, coffee and fruits are to accept the container. taken in the return journey.  The combi carrier is a unitized cargo carrier combining 5. The Panama Route container and vehicle shipment including RO/RO. It is It plays a significant role in the trade between Eastern North tending to replace ‘tween deck’ tonnage and is particularly America, and Western United States, Western Canada and ideal in Third World country trades where port Chiles. It saves travel of additional few thousand kilometers transshipment facilities are rather inadequate. around the Cape Horn. The trade is based on the exchange of In recent years, the hover craft and hydro foil craft are operative in minerals and industrial raw materials of Western South America UK - Continental trade conveying passengers and accompa- and Western North America for manufactured nied cars. Such crafts are unlikely to capture any significant goods of Anglo America. international trade distribution market. Many such crafts are 6. The North Paciffic Route operating in estuarial services and in the Balitic, and some are It mainly helps trade between Western North America and being used in various parts of the world for land exploration Eastern Asia and that between North America and Australia. work in rivers / swamps. The volume of traffic is however small. Shipping Routes Role of Suez and Panama Canals in Ocean Most world shipping is confined to rather well defined routes. Shipping The shipping routes generally tend to approximate to an arc of Both the Suez and Panama Canals have radically changed the the great circle since it guides the ships to undertake the shortest ocean shipping pattern in terms of route, time, distance and journey. Wherever necessary, adjustments are made with the money. Both the canals cut through narrow necks of land

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joining continental areas. Of the two, Suez is more important hire fluctuates following the basic laws of supply and than the Panama. demand. Constructed over a period of ten years, according to a plan of the Tramp Tankers are specialised vessels. They may be under French engineer Ferdinand De Lesseps, The Suez canal was opened charter or be operated by an industrial company, that is, oil as early as 1869. company, motor manufacturer etc. to suit their own The opening of this canal saved approximately 4500 nautical miles individual / market needs. on the voyage from to Bombay. Great increase in trade Oil Companies are large organisations which need to move was brought about by the opening of the canal. Larger steamships vast quantities of their own products by sea. They therefore with more powerful engines came to be con- own and operate their own ships. Large oil companies like structed. The canal is of particular importance to India, Middle British Petroleum and Shell own and operate their own East Countries and Western Europe. ships (oil tankers) and are amongst the largest shipping Liners aiming at speed and practically all liner traffic between the companies in the world. Yet even so they own only about European ports and those of Asia and Australia prefer the Suez 40% of their shipping requirements and charter - in the route. other 60% from independent tramp tanker owners. Tramp vessels seek economy and hence higher freight rates 2. Liner Vessels make them use the Suez route, otherwise practically all the Liner vessels operate on a fixed route between two ports or tramps moving between the Australia and the European ports two series of ports. They operate on a regular scheduled opt for the Cape route. Due to the Arab-Israeli war, the canal service. They sail on scheduled dates / times whether they was closed for nearly 8 years from 1967 to 1975. The former are full or not. The cost of using the service (freight) can be importance is unlikely to be revived, since; ocean shipping has quoted from a fixed tariff. come to be dominated by the super tankers, which are too big The features very prominently as the for the canals. note used in the liner cargo service. The Panama Canal was opened in 1914. The moving ships have to Container vessels in deep sea trades and RO/RO vessel in the negotiate six locks in their journey through the canal, which short sea trades feature prominently in this field. contrasts with the lockless Suez. The canal cuts down on the long Liner vessels can be operated as independent lines or as distance, which had to be traveled costlier around the cape horn. member of a conference line. American coastal shipping consequent to the opening of the canal had expanded. The number of vessels 3. Conference Line traveling in the canal is very high. The eastbound traffic is more An ocean freight conference line is an association of ocean than twice as great as that flowing westward. carriers who have joined together and have consensus with Operating Ships regard to freight rates and shipping conditions. They establish common rules of operation and hence operators in The type of merchant vessel employed on a trade route is the group charge identical rates. determined basically by the traffic carried. There are different ways in which a ship can be operated. Again, in that, they generally adopt dual rate system, in the sense that, they provide preferential treatment to contract They are as exporters. 1 Tramp vessels Contract exporter is one who agrees to ship all or a large 2 Liner Vessels. portion of the firms cargo on a regular basis on vessels of the  Special types of tramp vessels are the Tramp Tanker Vessels.  conference member lines. So contract exporters are Liner Vessels can be operated as Independent lines or as charged at a lower rate than charged for non contract shipper. In Conference lines. case, when no conference service is available within a reasonable time, then after obtaining permission from the 1. Tramp Vessels conference, the particular shipper (contract exporter) can make use Tramp vessels or general trader, does not operate on a fixed of any other vessel. sailing schedule, but merely trades in all parts of the world in 4. Independent Lines search of cargo, primarily bulk shipments. It is a chartered ship prepared to carry anything anywhere. It’s cargoes include They operate independently and individually and quote coal, grain, timber, sugar, ores, fertilizers, copra and the like which freight rates without the use of a dual rate contract. They are carried in complete shiploads. may sometimes lower their rates when they compare with conference lines to attract the non-contract shippers. Many of the cargoes are seasonal. Tramp vessels are engaged under a document called a charter party on a time or voyage Development of Liner and Tramp Trade basis. Such negotiations usually are conducted by Liner companies, by the very nature of their function, need a shipbrokers on behalf of their principals. larger organization structure than a tramp company. One of the The is determined by the economic forces of oldest liner companies is the P and O started in 1837, followed demand and supply in so far as cargoes seeking shipping by Samuel Cunard in 1840. The opening of the Suez Canal, space and the availability of vessels is concerned. The cost of which facilitated development of trade routes to the east, caused

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tremendous expansion of the liner trade. In the years follow- the conference involved, and whether they will accept, reject ing the First World War, there was another era of expansion or tolerate someone joining the trade. and after the Second World War the traditional liner companies If it is decided to join the conference, many of the questions have consolidated and merged. More growth that is new has been concerning scheduling such as sailing dates, ports and in the developing countries. For example, the P and O group now frequency of service will be determined by the conference. constitutes some hundred-member companies and is one of the Once the run is established, the line manager must maintain largest shipping groups in the world. It owns a very large fleet of schedules and combat the problems of delays, strikes ships. breakdowns and the annual dry-dock. For Tramp ships, the In the mid-sixties, containerisation gained momentum and problem is to charter the vessel out to obtain a maximum huge capital investment was necessary to introduce profit to the Company. containerisation. So many rival groups formed consortia, for 5. Marketing example The Atlantic Container Line (ACL) (formed by Marketing in shipping as in any other business involves Cunard), Holland-America Line, Swedish America Line, Swedish Trans Atlantic and French Line. Individual members, who 1. Product Analysis own ships, charted their ships to large players like ACL to operate. 2. Traffic and Market Development Tramp shipping also has benefited from such co- 3. Promotions and Product Development. ordination. Consortia such as Seabridge have been organized to 1. Product Analysis Means Assessing operate a large fleet chartered to it by its member companies.  Further development has been in diversification strategies. The supply and demand for the particular shipping Even very large shipping companies like P&O operate in every service in question. conceivable type of ship in every possible trade.  The costs of such a service. Organisation of Shipping Company 2. Traffic And Market Development Is Concerned With How To Deploy Ones Resources, E.g. In Cruising For The functions of some of the more important departments in a Instance This Would Be To Consider shipping company are as follows:  How long should the cruises be? 1. Husbandry  Where should be cruise go? It is department which keeps the ships seaworthy. So it has to look into Maintenance Research and Technical Repairs. It also  For which age group, class and nationality is it designed looks into the personnel affairs of the ship. to cater for? 2. Insurance Department 3. Promotions And Product Development Deals With It keeps track of fulfillment of all insurance formalities and  Analysing mistakes (passengers’ complaints) settlement of legal claims.  Shore excursions 3. Finance Department  Food and entertainment It looks into the revenues and expenditures concerned.  Advertising 4. Operating Department 6. The Technical Department It is very crucial department for a shipping company. The This department will be responsible for the maintenance and main concern of this department is to maximize the efficient functioning of the ships as carrying vehicles and the economic employment of the ship. As part of this end, it safety of the ship and crew. This requires not only a has a major function of coordination, not only amongst comprehensive technical knowledge but also an awareness of the other departments of the Company but also with the the precise details regarding national and international ship, the shipbroker and the agents who will have to regulations concerning pollution, port health, safety and the like. attend to the various and many problems that may arise This department must be aware of and be frequently involved at the ship’s ports of call. Where no bunker and the in research so that the company’s ships and future ship amount to take is one of its continuing problems as the buildings do not fall behind in technical efficiency and safety. varying price of bunkers in different ports of the world means that careful planning can make substantial savings in Questions For Self-analyzation this direction. Q1 Describe the various modes of Transport, and with respect Another specific activity of this department is to Water Transport, give the advantages and disadvantages scheduling. Scheduling concerns where to send the ships for same. and when. Q2 What are the different types of Merchant ships. For general cargo liners, this is a twofold problem. Q3 Explain various shipping routes. The decision to open up a new route or line. This is Q4 What are the different ways in which a Ship can be fundamental and will require a special research team. Not operated. only has the supply and demand on the new possible routes Q5 Explain in brief the organization of a Shipping Company to be considered, but also the strength of the competition,

195 UNIT 11 LINER FREIGHTING

Structures Objectives lntroductioll Nature of Liner Shipping Services Shippers' Point of View Shipowners' Point of View The Conference System The Taril'f Application of Rate in Liner Shipping Types of Rates Level of Freight Rates Cost StrucRlre Pricing Principles Surcharges General Kate Increase Regulations Concerning the Shipping Conferences Effect of Containe~.isation Let Us Sum Up Key Words Answers to Check Your Progress Terminal Questioils

11.0 OBJECTIVES After studying this unit you should be able to :

9 explain tl~enature of liner shipping'services describe the conference systeln and the freight rate tariff

9 explain the various types of freight rates and the cost components in liner shipping

9 describe the principles usually followed for pricing of services in liner shipping , . describe the various 'lypes of surcharges levied on the basic freight rates explain the concept of general rate increase and the modus operandi followed for effecting the same.

11.1 INTRODUCTION

111 llnit 7 YOU have learnt that shipping services are divided into liners and tramps.You know that liners are ships plyil~gon a fixed route or routes which offer cargo and/or space at a fixed rate. Such ships usually carry general cargo i.e., an accumulation of small loads belonging to various shippers. At times, they have to sail out from ports without a full load. This makes liner shipping very demanding and subject to heavy losses. Hence, proper detel'mination of freight rates is very important for them. In this unit you will learn about the nature of lher services alld their fi.eighting practices including the conference system, tariff, pricing principles and surcharges.

11.2 NATURE OF LINER SHIPPING SERVICES As stated earlier, liners are the ships plying a fixed route or routes, sailing according to a 111tcl-r~atio~lniFrcigllting pre-detemmined~schedulewhich offer cargo and/or passengeispace at fixed rates lo the abide by its regalations to their nluh~albenefit and quote the same rates of freight and other IJractices users of such service. The sailing scliedules in liner shipping are published in advance agreed conditions. giving the name of the ship, arrival and departure dates, port coverage, frequency etc., and the freight rates are made known to shippers for facilitatil~gbusiness deals in tcn~~sof The main purpose of the conference is to eliminate price competition (not service delivery schedules and quotation of price on CIF basis. con~~etition)between member liners. This is achieved by nlaintail~inga commmon tariff and rules. Besides, with a view to reducing and, if possible, eliminating competition from other Liner ships are carriers of break-bulk cargo for general cargo conlprising of manufacturing liner operators who are not members of the conference, the conference enters into loyalty and senmi-manufactured, processed and semi-processed goods and materials rnoviiig as agreenmel~twith the shippers to seek their patronage by offering them some inducement in packed cargo in different types of packings, eg., bales, cases, cartons, drums, rolls, packets, the fomm of loyalty contract aiidior a deferred rebate system. The latter has, however, been crates, bundles etc. Now-a-days, apart from the traditional packings as mentioned above, abundoned by some of the governments. nmovement of break-bulk cargo in unitised form, such as sling load, pallets and container is becoming more common in case of liner operations. The conferences can be divided into two broad categories, namely, 'closed' and 'open' systems. In the closed systenls, the existing members virtually control the entry of new applicaots, but in tlie ope11 system, any line1 who wisbes to join must be accepted provided 11.3 SHIPPERS' POINT OF VIEW it call demonstrate its 'ability' to place suitable tonnage and give necessary berth coverage. Traders of general merchandise require shipping services of a more sophisticated naturc The collferences invariably follow a self-policing system to ensure discipline ainollg the because of a large variety of products being offered by them for tl.ansportation. Such lnembers and for rationalisation of services "pooling arrangements" like cargo sharing, berth products being susceptible to fluch~ationsin demand due to change in I'ashion, design, pools, freight pools etc, are introduced. The net effect of "pooling arrangements" is to season, technology, substitutes etc. are not amenable to carriage and storage in large quantities and at the same time, there is need to keep the transportatiol~cost to the inlnimtum ensure adequate shares either in ternls of cargo or revenue. so as to enable tlie trade to remain competitive. The requirement of shipping scivice for transporlation of such products has to be of the type that call make avoilablc 111e.s~ Check Your Progress A products at destination markets at regular intervals, so as to minimise tlme iiive11lo1.yru~d 1 Why do you consider stable freight rates important in case of liner shipping'? warehousing costs. This calls for speedy shipping services to different markets at stable rates of freight for different products and on a regular basis according to a schedule..

11.4 SHIPOWNERS' POINT OF VIEW

The operators of liner shipping services are committed to regular s~heduleof services at 2 What has been the main pillpose of fonning a shippir~gconference'? stable freight rate on pre-fixed route ii-respective of the availability of cargo at a given point of time. Such operators are also lcnown as 'conunon carriers', and they are not supposed to discriminate ainong tlme big or s~nallaiid regular and casual users of their services. In other words, as coinmon carriers, they are obliged to accept cargo from all types of shippel's. All these inevitably impose a heavy ~~esponsibilitj,on a liner sl~ipownerif he were to operate on ...... an individual basis. He would not have the resources to conunit for tlme frequency of tlme service at a stable rate. It has, therefore, been found practical by liner ship's operators to 3 Why are liner ships called co~mmloncarriers'? shoulder these respoiisibilities on collective basis by forming route specific association of

shipping cotnpanies known as slmipping conferences with a constitution, rules and , regulations for members, and a coimnon tariff or a loose coilferences with freight agreement only...... 11.5 THE CONFERENCE SYSTEM 4 State whether the following statements are True or False ? i) The parting scl~edulesof liner shipping are publisbcd well in advance. Liner shipping and the conference system have developed in hand and glove with each ii) Liner ships are carriers of bulk cargo. other. The origin of the conference system tookplace at the end of 19th century when the first conference was formed in 1875 in UK-CaIcutta trade. Ever since the steamers started iii) As common carriers the liner ships are obliged to accept cargo from all types replacement of the sailing ships in the sphere of ocean transport, rate wars and conlpetition of shippers. had set in because the former increased the carrying capacity of the world fleet quite rapidly iv) The first shipping conference was formed in 1875. and were faster in speed as compared to the latter. Thys the increase in supply was not v) Tlme net effect of pooling arrangement is to ensure stability in freight rates. matched with the demand leading to creation of excessive capacity of shipping services. . The shipping companies, therefore, with a view to avoiding the wasteful and cut throat conlpetition in freight rates, found an answer in the formation of conferences or rate agree- 11.6 THE TARIFF ments. The formation of association of col~ferenceby liner shipowners resulted in bringing out a ... There were, at one time, about 350 conferences or rate agreements $1 existence throughout co~tmmontariff aillollg the otherwise competing shipping companies since everyone ?ad the world. Though no precise figure is available for the total number of conferences, it is rqalised the ill-effects of cut-throat competition through rate wars in the past. Thus, the estimated that around 250-260 conferences or rate agreements arc in operation in tl~c~rlorld majority of the freight carried by conference. These are published in rate books referred to liner trade. as "Tariffs".

A conference is an association of two or more liner shipping companies operating ih a well The tariff specifies all tlie rules and regulations concerning the applicable freight rates for defined trade, p1ying.a fixed route or rotltes within certaingeographical limits, wlmo agree to various coimodities, It often contains a classificatioll of the ports included in the confer- Liner Frelghtlnl: I~~te~~llritio~~alFreighting ence range into 'base ports' to which 'base rates' apply and 'outputs' to which surcharges ,,,K or tramps, 'I'his type of competition is very harmful for all carrXs and hence open rates Practices I't~aclices apply. The base' for quoting freight rates of individual co~nrnoditiesis not standardised. The are rarely quoted. ~atesof individual commodities are expressed in different ways, namely, per weight toil (W), per measurement ton (M), and per weight ton or measurement ton (WM) , whichever gives Ad Valorem Rates : "Ad valorem" means according to value. ~chrates are charged 011 the the higher revenue. Yet another type is ad valorem rates according to which all or part of the declared value ~Tcomi~ioditieswhich are light in weight, cornact in bulk and high in value. freight rate is paid in proportion to the value of goods. If the value of a conullnodity is very high, the carrier may a higller rate by adding the ad valorem rate to the general rate. The unit of measurement of different bases can vary. For example, a weight to11 is usually defined as either a metric toil (100 kg) or a long ton (1,016 kg) and a measurenlent ton in Mininiuni Rates :These rates are too low and no carrie1.~ouldnormally charge such rates. some trades, is defined as 40 cu. feet, while in others 50 cu. feet, or else, as is usually the However, these rates are flexible and the carriers usually charge a rate which is above the case today, as 1 cu. meter i.e., 35.5 cu. feet. According to normal practice, a cornniodity that is being charged on a weight basis will pay according to its weight irrespective of the volunle it occupies and a commodity that is charged according to volume will do so Arbitrary Rates : Sometimes, conllnodities are ~nlcadedat a port where water is shallow or, irrespective of its weight. due to other reasons, nav~gationis impossible, Unler such conditiolls, commodities have to be carried from tbe place where the ship has anchored (say about a mile away from the port) to tlte n~ainport on barges or sinall carriers. Add'tional charges for this extra service are 11.7 APPLICATION OF RATE IN LINER called arbitrary rates whicl~are generally included in the inail1 rate. SNIPPING Refrigerated Cargo Rates : Some conmodities, being perishable in nahlre, require the Rate is the conlpensation for sale of space in a ship or it is the payment for the facility of iiefrigeratioll. Rates 011 such conmodities are usually higher thail the ordinary transportation of comnlodities from the port of uploading to the port of discharge. The rate rates. usually depends upon the trade route involving the mileage to be covered which is counted I from the end of ship's tackle at the loading pier to the end of ship's tackle at the port of 13a~-celRates : These are the rates charged for t,ansporting small packages whlch are not destination. It should be clearly uilderstood that ship's tackle is the position by the side of carried in the holds of the ship but are kept separately and are carried under the special care ship from where the cargo is to be picked up and lifted by the gear or tackle of it. The rate, of the persoi!nel of the ship. however, does not include the labour charges that are involved in taking the conunodities to and from the tackle of ship, both at the port of origin and the port of destination. Besides , , this, at a large number of ports, various tenninal or accessorial charges are to be paid by the 11.9 LEVEL OF FREIGHT RATES owner of cargo. These charges include wharfage, loding and unloading of freight car, heavy lift, lighterage etc. 111 addition, there are miscellaneous charges known as cargo taxes, As stated earlier, freight rates in liner shpping are usually fixed by the conference and are lallding charges, stamp charges, port dues etc. . pi~blisliedin their tariff The general lqvel of rates is held unchanged for a reasonable time SO that there is some resemblance of stability in freight rates. Tlle liner freight sates are 'administered rates' and the market forces do not have much influence over these rates at least in the short period. Howcver. the rates for the cai~iageof individual cornrnodities are . 11.8 TYPES OF RATES ~orked~outon the basis of some yriilciples or norms which are supposed 40 take care of The freight rates are described in various ways.These can be summarised as foilows. interest of carriers as well as the trade. In determining the level of freight rates, the co~lferellcesnorn~ally take care of the competition from tramps and other non-conference as Commodity Rates : A commodity rate is meant for a specific conmodity. It depends upon well as comn~oditycontpetitionoffered by rival sources of supply. the route to be covered, value of cargo, storage, competition etc. These rates are usually quoted for those conmlodities which move regularly, and, in case of a commodity there has 11.10 COST STRUCTURE not been moving regularly the rate may be settled between the shipper and the individuil carrier or the conference line. Before going into the principles that govern the freight rates, it is necessary to examine the cost structure of liner services, Tile costs can be divided in'the following three categories : General Cargo Rates :These are overall rates which cover all those commodities for which specific comnodity rates have not been fixed. These rates are mentioned in the shipping a) Organisarional Ovel.head Costs like depreciation on ships, interest charges on documents as N.O.S. or N.O.E. which ineans 'not otherwise specified' or 'not otherwise borrowed capital and adnlinistsative expenses for maintail-ling and running of offices enumerated'. As the nun~berof such general cargo is very large9andtheir nature differ and agencies, widely, the rates are usually high so as to help the carriers. b) Voyage or Operational Costs such as fuel consumption, crew cost, insurance charges and other dues, and port charges, canal and other dues, Class rates : For class rates, a general classification of goods is adopted according to which c) Voyage Variable Costs for storage and handling of cargo, all commodities are grouped or classified into 6 to 10 classes. For this, the transportation characteristics of co~nmoditiesare taken into consideration more closely than in case of The organisational overhead costs constitute about 35 per cent of the total cost and the general cargo rates. Most valuable commodities are placed in class I which carbear high voyage and oper.ational costs around 50 per cent of the total cost of maintaining liner charges. As against this, all those commodities whose density is heavy and the intrinsic' services. The i,emaining 15 per cent of tlie total costs relate to the voyage variables or the value is low, are placed in the last class and the rate for such commodities is the lowest. out-of-pocket expenses, However, the proportion of cost components may vary according to the size, design, manning and technology of individual ships in operation, It may be Deck Cargo Rates :Dangerous commodities like acids, explosives, timber etc. are invariably noted that the operational costs of a liner ship, being fixed in nature, have great implications carried on the deck of the ship. As such, these are placed in the category of deck cargo and for determination of liner freight rates. are charged special rates. Check Y our Progress B Open Rates :~hese rates do not confoim to the published or settled rates and apply to particular commodities only. Noimally, these are competitive rates. An ocean carrier would 1 What do you mean by Tariff? quote these low rates when it has to compete with ships belonging either to a conference I 11;tcrilntional F~.eigltti~~g Practices their value, namely, (i) high, (ii) medium, and (iii) low. The com~oditieswith a high value can be charged rates that are high enough to leave some surplus, the commodities with

...... medium value may be charged in such a inannei- that they cover the direct and fixed 'osts 2 Enumerate the accessc n'al charges payable by the shippers. associated with their caniage ; and those with low value inay be charged in a lnainler as to cover at least the out-of-pocket or cargo handling expenses. Thus a policy of differential freighting is introduced under which a set of commodities subsidise the fi-eight for others. This helps to maintain a common dependable service for the benefit of all the sl~ippers.

...... While fixing the rates or basic rate on the basis of above principle, consideratioll is also 3 Why do we term lincr freight 1 ates as administered rates'? given to factors like total volunlc of cargo, its stlare in the total traffic, the ilahire of cargo, susceptibility to damage or pilferage, the regularity with which the item is offered for I carriage, special stowage factors, use of heavy lift, extra length, packing, extent of I competition, port conditions, stevedoring charges stc. The conunodities which have not been included in the tariff because their movrment is occasional, are subject to il general ...... 1 cargo rate which is fixed at a fairly high level. The reason for keeping the general cargo rate 1I 4 State whether the following statements arts Tme or False. at a higher level is n~ailllydue to the iilconveniellce caused by the occasional moveinerlt of i) Organisational overhead cost coilktitutes about 60 per cent of total cost. the cargo which exerts unexpected precsuro on space normally provided for regular items of trade andithe possibility of foregoing hlgh freighteditems. ii) The base for quoting fieight rates of individual commodities is not standarclised. i iii) Deck cargo rates are applicakle to all comnlodities. It may be noted tht cross subsidisation is the chaiacteristie feature of the liner freight Cargo handling cost is about 15 per cent to the total cost. 1I iv) I tariff, according to which losses incul~edin the carriage of a group of items are mitigated v) The freight rate has no relatiorship \bvitl~the route to be covered. ' through profits on the traffic as a whole. This means that liner rates are 'administered rates' in which the totality of revenue is of paramount importallce. 11.1 1 PRICING PNNCIPLAYS The liner shipping, by and large, follows the simi\prpattern of pricing policy as is followed I 11.12 SURCHARGES by railroads or road carriers operating as common ~'arrier.The principles followed for pricing Over and above the basic freight rates, the operator of the liner shlp or the confereilce of services in liner shipping are as follows : would levy a few surcharges on a flat basis. These are usually in the foim of a percentage on \ tariff rates of individual commodities, and are of the following types : The Cost of Services Principle :The cost of service p1:inciple sets the lower limit for rates on the basis of an aggregate cost incurred by the carriei:in providing a service plus, if a) Heavy lifts and long leilgths surcharge; possible, a reasonable margin of profit. ! I b) Port congestion surcharge; c) Bunker surcharge; (Bunker Adjustment ) (BAF); and In any case, the from the caniage of cargo should not fall below the level of the Surcharge on account of Currency Adjustment Factor (CAE). total cost of operation in order to ensure the continuity of service. The liner ship operator d) would, therefore, make sure that rhe levels of freight rates cllarged for most of the cornmodi- Heavy lifts and long lengtlis surcharge : Soine articles are heavy as well as lengthy which ties do not fall below the average cost of providing the services and, in any case not below cannot be handled by the gear of the ship. They require the help of floating derricks for the direct costs, This is an important principle from the point sf view of supplier of liner which extra charges are made. Similarly, charges for extra lengths are added to the freight service. rate. The Value of Service Principle :The value of sei-vice principle represents the demand side Port congestion surcharge :This surcharge is levied when the liner carriers suffer abllormal and sets an uppcr liinit to rates on the basis of value added by the carrier through transpor- i delays at certain ports for loading and unloading operations. Usually only those con~modi- tation of a cornnlodity from one count~yto another. In other words, the shipper's ability and ties which have to be discharged at these ports would be subjected to such a surcharge. willingness to pay for the service is the most relevant factor according to this principle. The I The time lost by the carrier at a port on accouilt of congestion would be totally unproduc- rates will depend upon the difference between the price of the goods at the poi? of shipment I tive aiid it has to bear eertain fixed items of cost, known as standing charges. The con- and the price of the goods that can be obtained in the destination market. But, the freight cerned shippers, therefore, have to compensate the carrier at least for the standing charges rate twbe charged on a commodity should not be fixed so high as to exceed the value of incurred during the period of detention, service, represented by this difference, because then there will be no incentive for the 1 exporter to expoit his gaods. Thus, the value of service principles sets the maximum limit or The bunkers surcharges or Bunker Adjustment Factor ;This surcharge has come irl tht. a ceiling to the level of freight rates that could be charged. As against this, the cost of wake ofhike in oil prices by the oil producing and exportiilg coiintries. Oil consiuuption service sets the lowest or the floor Iimit to the level of freight rates. It is evident that both constitutes a major iten1 of operatioilal cost for the liner ships. Initially, due to the the principles cannot be used in isolation because the same would affect the cargo availabil- unexpected ilahlre of the cost increase, most conferences levied a surcharge for ity to the carrier. These principles, therefore, would act ollly as guidelines in setting lower compensating the carriers. But as the oil piices have been increased periodically by the and upper limits to rates within which appropriate rates have to be worked out for actual OPEC, the rate of bunker surcharge bas also been steadily going up. In fact, suixie application. confereilces have even merged this surcharge with the tariff rates of the conlmodil~es. The Principle of "Charge What the Traffic Can Bear" :Under this principle, the rates for Currency surcharge or the Currency Adjustment Factor :This surcharge has arisen on differerit coinmodities are determined on the basis of the capacity of an individual account of the wide fluctuations in international currencies with the institution of floating coinmodity ta bear the burden of freight. In other words, a, commodity should be charged exchange rates instead of the fixed exchange rates prevalent earlier, The conferences have freight rate on the basis of its ability to bear the incidence of the charge made by the lineg, . their own tariff currency, US dollars or Pound Sterling, in which usually the freight revenhe ship operator, With a view to facilitating the application of this principle, liner operators or is collected and accounted for. But thecarriers of the member lines have to disburse their their conference divide all items forming the traffic-mix into three major categories in temhf expenses at various ports of call in the curreilcies of concerned countries. Frequent representatives, organisations before effecting a general rate increase. Intcrtintionnl Frcigl~tlng fluctuations in the currency values would, therefore, entail some loss or gain for the camier Liner Freighting I'ractires engaged in international operations. Practices

Based on the actual experience of the member lines, a conference would arrive at the amount of overall loss or gain and accordingly the currency surcharge is levied on the shippers, SHIPPING CONFERENCES which could be negative or positive. In other words, the loss is recovered from the shippers while the gain would be refunded. When the tariff currency suffers a devaluation, the In USA, the Government plays an important role in rigulating the activities of both the US and the foreign shipping lines in the country's import/export trade through the Federal revenue collection of the carriers would be adversely affected. A special devaluation surcharge would be levied on the shippers for coinpensating the carriers. Maritime Conunission, establislied under the Shipping Act, The Commission guards against unauthorised mol~opolyin the water borne commerce of the United States to Drotect the interests of exporters and importers by maintaining surveillance over conferences and 11.113 GENERAL RATE INCREASE corninon carriers by water with respect to their rates, practices, services, etc. Liner freight rates are usually kept stable. But, on account of the world wide inflation, the The law requires every carrier/conference to maintain and keep open for pl~blicillspection all cost of ships and borrowings by the shipping.companies and also the cost of operation / tariffs it has published or to which it is a party. Rebating Agreements are unlawful.The law have been steadily going up. Consequently, the conference, for compensating the member I also requires the filing, with the approval by the Federal Maritime Commission, of all lines for the increases in various costs, effect general rate increases periodically and, as a t agreements including conferences agreements. The shippers can also approach the result, all commodity rates in the tariff would go up uniformly by a specific percentage. Comrnissio~lunder its informal/formal conlplaints procedures for redressal of their Generally an advance notice, varying between 3 to 6 months, is given to llie shippers about grievances in regard to freight rates of any conference/carrier practices considered such freight increases. During the intervening period, most conferences would hold discrin~inatory01- unfair. consultations with the shippers' representative organisations, such as Shippers Associations or Councils or Chambers of Commerce or Trade Associations in the countries In Austrrlin, the Government seeks to achieve the same purpose, in a less direct manner, affected by the, increase. Representations are also made, individually 01' collectively, by the through legislative measures aimed at strengthening the shipperlshipowner consultations. shippers who are likely to be adversely affected. This helps the concerned conference to The conm~onwealthofAustralia Trade Practices Act, 1996 (No. 39 of 1996) Part XA, judge the impact of the general freight increase on the trade as a whole as well as on the Overseas Cargo Shipping requires the shipping conferences/shipowner in Australia's individual commodities. The governments of the concerned countries also analyse the outward trades to hold co~~sultationswith designated shippers' bodies - the Australian overall'impact on trade and their economy and express their own concern directly or . Shippers' Council or ally other shippers' association hffiliated with the Council. These have indirectly, so much so that in soirie countries prior approval of the governnient is required been vested with statutory authority to negotiate with conferences/cai~iersin niaaers by the conference while effecting the general rate increase in the tariff relating to fixation of freight rates, conditions of carriage, etc. The Act empowers the government to participate in such consultatio~lsand requires the conferences/carriers to give due regard to the points made by its representatives at such consultations. Check Your Progress C 1 Name the categories in which all traffic is divided in accordailce with the 'charge The law requires the shipping conferences to file their agreements with the 'Clerk' of the what the baffic can bear' principle. Shipping Arrangements : It empowers the Government to refer any agreement for investigation by the Trade Practices Tribunal and to disapprove it for failure on the part of the conference in complying with the provisions of the law, or where they have not given due regard to the need for service by way of overseas cargo shipping to be efficient...... The UN Convention of The Code of Conduct For Liner Shipping 2 Explain briefly why do the conferences effect "general rate in increase" in tariff 7 Conferences was adopted on April 7, 1974'and it came into force 6 months after 24 states ...... 1 with 25% of world shipping tonnage of general cargo and container ships as per Llyod 's Register of Shipping 1973 became contracting parties. The sailent features are as follows : 1 ! 1 Positive role of Government to regulate shipping conferences 2 40:40:20 principle in the carriage of overseas trade .I....*....'.'.'.....t.~,.....,.....~~.,,...#~.*..,,..~~..,...,...... ,,,,I'I'.I'I'I'I'.I'I'I'I'I'I',.,,,,...~..,....~...... ~.~...*.~ 3 A major say for the shipping lines of trading partners in conferences decisions 3 What are-the reasons for levying the surcharges? 4 Stability of Freight Rates for 15 months 5 One hundred fifty days' notice by conference for any general rate increase 6 Consulation based on cost data justifying the rate increase 7 Promotioilal freight rates for non-traditional items 1~....11...... 1....1(..1....~...1....1*.~...~...,..,~..,..,,,~,..,,.,..,....,...... ,.,.....,..*,,,,,.,...,,,...... ~.... 8 Re-orientation of Loyalty Agreements . 4 Fill in the blanks. 9 Mandatory conciliation to resolve disputes 3 The cost of service principle sets the ...... for rates on the basis of an aggregate cost of providing the service. ' 10 Review 'Conference' after every 5 years India has ratified the Convention in January, 1978, ii) The value of service principles sets an upper limit for rates on the basis of ...... by the c-arriers through transportation. iii) The bunkers surcharge is levied for compensating the carriers for 1 1.15 EFFECT OF CONTAINERISATION . , 1 ...... The introduction of containerisation from mid-1960s has brought in a revolution in liner . iv) Port congestion surcharge is levied when the liner carrier suffers ...... ,.at shipping. Presently, over 90 per cent of the world's recognised liner trading routes have certain ports. been containerised. This has ilso influenced the liner tariff rates, as the container tariff rates are separately applicable for cargoes loaded in containers and are dividedhto commodity v) Most conferences would hold consultations with ...... Liner F,rc.ight,lng box rates (CBR), FAK (Freight All Kinds), FCL (Full Container Load) and LCL (Less Than Dunnage :A charge for packing Inaterial used to secure and stablise goods in trans,?ort. ' Pt.acticcs Container Load) rates and contain per box rate, , detention, stuffing and de- FCL (Full Container Load) : A container service where the responsib ility of stuffingalld stuffing charges. sbippillg rests with the merchant. FCLILCL : A container service where the merchant is responsible for ~tuffinpand the 11.16 LET US SUM UP MTOIcarrier is responsible for stripping. Liner ships are the carriers of break-bulk cargo and sail according to a pre-fixed route or Free All Kind (FAK) :A unifolm rate for all commodities moving on the saille voyage routes. The freight rates are also pre-fixed and published in the rate book called 'Tariff. irrespective of their values. The shippers of general cargo need a regular and efficient shipping service at an economical LCL (Less than Container Load) :A container service where the MTlOlcarrier is responsible rate. The operators of such service. on the other hand, are required to provide a regular for both stuffing and stripping. service without any discrimination among the big or small exporters. So, to avo~dany LCLIFCL : A container service where the MTOIcarrier is responsible for stuffing alld the unhealthy competition amongst themselves, the liner shipping companies form route merchant is responsible for stripping. specific conferences or rare agreelnenls and follow a common set of rules and regulations and a common tariff. Liner Rates : Agreed freight rates inclusive of stevedoring charges. Outports : The ports to which surcharges apply. The liner ship operators or their conference follow certain pricing principles for determining Stevedoring Charges : Charges like loading, trimming, spouting, and dischargmg expenses. the freight rates for various commodities. While the 'Cost of Services Principle' sets lower i limit for freightrates the 'Value of Service Principle' sets the upper limit or ceiling to rates. Stowage Factor : It is the volume which a certain amount of weight of cargo occupies. It is Then, there is also a third principle of 'Charge What the Traffic can Bear' according to which normally measured in cubic meters or metric tons. the conference divides the total traffic mix into thee broad categories, namely, high, medium Wharfage : A charge for convelying cargo over the piers as assessed by the carriers. and low in terms of their value to bear different levels of rates and, in the process, high value cargo subsidises the carriage of low value cargo. 11.18 ANSWERS TO CHECK YOUR PROGRESS The tariff publishes the basic o; base freight rates. In addition, the liner ship operators or A 4 (i) True (ii) False (5) True (iv) Tme (v) False their conference niay levy a few surcharges which may be in the fom~of (a) heavy lifts and 1 B 4 (i) T~ue (ii) True (iii) False (iv) True (v) False loiig lengths surcharge, (b) port congestion surcharge, (c) bunker surcharge and (d) cur- C4 (i) lower limit (ii) Value added (iii) Increase in oil prices rency surcharge. (iv) abnolmal delays (v) shippers'. Liner freight rates are kept usually stable. But, on account of inflation and increase in cost of operation, the confere~lcesdo effect general rate increases periodically. This is usually done 11.19 TERMINAL QUESTIONS after due consultation with shippers representative organisations and the concerned governments, if necessary. 1 Discuss the major concerns ofthe shippers and the shipowners in case of liner shipping, Recent developments by way of introduction of container technology have also influenced 2 What do you understand by the conference system in lil~ershipping operations. the freighting practices and the commodity rates have been replaced by commodity box Explain its utility and the concept of pooling arrangements, rates (CBR) or in some cases by FAK (freight all kinds) or FCL (full container load) and LCL Discuss the basis principles and factors that govern the liner freight rates, Also specify (less than container load), 3 the different elements added to basic freight rates to work out the final charges to be paid in case of break-bulk cargo. 11.17 KEY WORDS 4 Distinguish between a) General Cargo Rates and Specific Cargo Rates Accessorial Charges :Terfninal charges such as wharfage, loading and unloading of freight b) Open Rates and Advalorem Rates car, lighterage etc. c) Weight Ton and Measurement Ton 5 Discuss the various types of surcharges that are usually levied on the basic freight Arbitrary Charge :Assessed by carriers in addition to the freight rate to off-set rates. extraordinary cost for serving off-line ports. Base Ports : The ports to which base rates fixed by the conference apply. Bunker Adjustment Pactorl(BAF) :Assessed by a carrier, usually as a percentage of ocean freight, to compensate for unanticipated fluctuations in fuel prices. Commodity Box Rate :It is a lumpsum amount payable for the camage of a container stuffed with a particular commodity. Conference :Association of liner shipping companies operating in a specific crade route, formed with the main purpose of eliminating price competition betweenmember lines. - -.. Cross Subsidisation :A situation in which one component is subsidising the other component, e.g., in liner shipping the freight charge on.high value cargoes subsidise the carriage of low value cargoes. \ Currency Adjqstment Factor (CAF) :Assessed by or carrier, usually as a percentage of ocean freight to compensate for exchange rate differntial between US dollars and foreign currencies. A Demurrage :A charge assesged fot cargo held in carriers possession after expiration of lay time,

LESSON 9: INTERNATIONAL AIR TRANSPORT

freight is handled on a emergency rather than a routine basis.  Air Transport Firms typically utilize scheduled or non scheduled air cargo  Advantages, movements when the situation justifies the high cost. Products  Constraints with the greatest potential for regular air movement are those having high value or extreme perishability. When the marketing  Air Cargo Tariff structure period for a product is extremely limited - such for Christmas items,  I A T A high-fashion clothing, or fresh fish - air transport may be the only practical method for logistical operations. Routine Air Transport logistics products such as parts or consumer catalog items are also The appropriate mode of transaction generally depends on candidates for air freight. market location, speed and cost. The fixed cost of air transport is low compared to rail, water, and Any cost-benefit study of air cargo evaluates itself in compari- pipeline. In fact, air transport ranks second only to highway with son to alternative methods of distribution. The prime factor respect to low fixed cost. The fixed costs of air freight are associated considered in any such analysis is the true value of the time with aircraft purchase and the requirement for saved by the delivery of goods by air. specialized handling system and cargo containers. On the other hand, air freight variable cost is extremely high as a result of fuel, Among many factors of comparison while deciding upon the maintenance, and the labour intensity of both inflight and ground mode of transport, the following are some of the important crews. Since they require wide-open space, airports are generally not points to be considered integrated with other modes of transporation, with the exception 1. Period of credit availed of of highways. 2. FOB value There is no one ideal transportation mode. Each mode has its 3. Value of goods in transit (generally the final price) 4. own inherent or special hazards involved. Under the sea Insurance cost percentage transport, hazards include the wave impact, exposure to sea, water damage, damage due to vessel movement (like rolling, 5. Warehouse cost percentage pitching, surging and swaying). Hazards in air transit include 6. Duty payable ground handling, changes in atmospheric pressures and 7. Economic order quantity temperature. 8. Reorder point Advantages OD Air as Transport System 9. Stock out cost Air cargo offers the following advantages in market 10. Packing cost exploitation  11. Transport cost It creates new markets or brings new markets within reach and extends markets. For example, perishables market is 12. Average transit time expanded on the availability of improved refrigerated air 13. Maximum transit time cargo service. 14. Minimum transit time.  Air transport extends the use of mobile production To move goods between continents, sea or air transport are facility. There are instances when it is more economical to resorted to in most cases. And when speed is essential air move a production centre from one distribution area to transport is preferred. A coast-to--coast shipment via air requires another than it is to move bulky goods from a central only a few hours constrasted to days with other modes of production centre. transportation when the need is urgent or when delivery must  Air transport spreads seasonal demand. With the be quickly completed, air transport serves the purpose. But introduction of air cargo, the whole world can be regarded as quick delivery costs more. So generally a trade-off between the the home market and the peak demand spread over a larger two, speed and cost is taken up, which allows other elements of period. logistical design, such as warehousing or inventory, to be  Packing cost for air transit are relatively lesser than ocean reduced or altered accordingly. Air Transport remains more of a transport, since the goods are in transit for a lesser time, and potential opportunity than a reality. Air transport capability is also the hazards are relatively lower. limited by lift capacity (ie., load size constraints) and air craft  availability. Apart from providing a high level of customer service, air transport, particularly helps in savings in distribution costs. No particular commodity dominates the traffic carried by air The minimization of distribution costs is linked with freight operations. Perhaps the best distinction is that most air

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quicker delivery, which results in economies in the cost of The total exports and imports of India in 1995 and 96 by air was financing and stock holding. 286000 and 129000 tonne respectively, which clearly highlights the Significant packaging cost savings can be realised to offset the substantial imbalance in the movement of goods by air. higher air freight rate compared with surface transport. Being For air exports, Delhi continues to be the main gateway, but as ideal for palletized , a substanital volume of far as imports are concerned Mumbai emerged as the hub. merchandise is now moving by air on pallets which aids In keeping with the growth of the airfreight movement, airlines handling, reduces packing needs, facilitates stowage and have dedicated substantial capacity in their fleet for the move- lessens risk of damage/pilferage. ment of freight. The country’s national carrier - Air India - with Because of the lesser time in transit, the locking of funds in its modem fleet of Boeing and Airbus aircrafts, carries around the inventory in transit is minimized and inventory turnover 1,000 tonnes of freight ex-India per week to various destina- is also fast. Quick transport reduces amount of capital tied tions worldwide. up in transit and in stock provision. This facilitates prompt Apart from their passenger flights, many international airlines financial settlement eliminates need for extensive warehouse such as Cathay Pacific, Ethiopian Airlines, Singapore Airlines, reduces risk of stock piling, and thereby obsolescence and British Airways, Swissair, Saudia Cargo, KLM Royal Dutch deterioration. Airlines and exclusive cargo carriers like FedEx and UPS are Air transport comes handy in delivering perishables in operating dedicated scheduled freighter services from and to prime condition. Sending of samples for quick decision important hub airports in India. making, high fashion clothing, parts, consumer catalog Cargo handling infrastructure at the major airports in India is items, perishable like fresh fish, quick replacement of broken severely affected by lack of modernisation, particularly inad- machinery and other such urgent demands can be fruitfully met equate space, lack of proper proper cold storaging facilities, out by using air transit. In cases of opportunity costs like outdated equipment, pilferage and theft. For instance, in lost sales and customer dissatisfaction, which adversely affect Mumbai and Delhi, which are the major hubs for airfreight, the profit, these costs can be minimized with air transport. space provided for customs examination is extremely limited, Simplified documentation system is followed with thereby hampering the process of speedy clearance and move- importance given for one document namely, air . The ment of goods. The prospective growth areas for the lATA air waybill is, acceptable on any lATA airline thereby movement of airfreight are the inland airports like Bangalore, permitting flexibility. There is common code of liability Ahmedabad, Hyderabad, among others. conditions to all lATA accredited airlines. Air Cargo Tariff Structure Major airports world wide tcnd to be situated in the centre As We all Know of commercial/industrial areas compared with the major Freight is the reward payable to the carrier for the carriage and seaport. In consequence the airport can in many situations be arrival of goods in a mercantile or recognized condition, ready to closer situated to the industrial/commercial market which be delivered to the merchant. has a competitive advantage in terms of lower collection/ The freight charge depend on the forces of supply and demand. distribution cost. The demand for a particular international transport service Constraints mode is basically derived from the demand for the commodi- Constraints in Air Transit: ties carried, and is, therefore affected by the elasticity of demand for these commodities.  Limited capacity of air freighter and overall dimensions of acceptable cargo together with weight restrictions are Airfreight operative on regular scheduled international services are constraints on air cargo. decided collectively by the airlines attending their usual twice- yearly traffic conferences. These are held under the aegis of the  Very high operating expenses and initial cost of aircraft International Air Transport Association (lATA) which adopts a when related to overall capacity. policy of parity on level ofrates on individual services/ routes. The  Service is vulnerable to disruption when fog prevails, rates reflect market conditions and service cost. particularly in airports with less modem traffic control A major share of the air freight market is now conveyed under equipment. agent sponsorship involving consolidation arrangements.  Air freight relies on road primarily as feed distributor services. A properly compiled tariff should encourage the movement of Moreover, airports are sparsely located and not all have all classes of cargo to ensure the best balance between revenue Customs clearance facilities as they only serve domestic flights. production and the full utilization of the transport unit. Traditionally, airlines have considered the cargo as a byproduct of passenger transportation. The advent of freighter and combi IATA controls airfreight rate formulation insofar as major aircraft saw this industry assuming a new status. Today, there are world airlines are affiliated to it, which represents about 98 per several airlines which are dedicated exclusively for the movement cent of international airfreight services. lATA has no influence of domestic and international freight by air. Airfreight, there- on internal domestic flight airfreight tariffs or charter flights. fore, has assumed great significance in the physical distribution The significant aspect of lATA affiliated airlines is that no and logistics process. competition is permitted on air freight rates, that i.e., parity

64

prevails, and competition. is permitted only on service quality, level, a valuation charge will apply in addition to freight charges. frequency etc. For example, if declared value is more than certain 11.80 / kg, Air Freight Rate Classification charges for carriage will be on a weight or volume basis plus a valuation charge based on the amount by which the value for Air Freight Rate Classification: Basically, there are six types of carriage exceeds the value limit in £ / kg., that is, per £ 100 pro rata airfreight rates in existence. of declared amount. Air cargo is charged by weight except where the volume is more than 366 in3/Kg. In such cases, volumetric charges apply and each 4. General Cargo Rates unit of 366 in3 is charged as 1 Kg. These are the basic rates and fall into three categories as below: 1. Same individual rates do not necessarily apply in both direc- Minimum charges tions, thereby reflecting the differing market situations. 2. Normal rate - the “upto 100 kg.” rate Changes in rate level are normally negotiated through the lATA 3. Quantity rate - applicable on the various minimum machinery. The exceptions are the Government Mandatory quantities called break -points. Rates which are introduced through bilateral/multilateral negotiations by the Governments, on the basis of national 5. Cabotage considerations and regulations and if export of certain com- Term used for goods carried when points of origin and modities is to be encouraged. destination are both within the sovereignty of UK, where special non-international rates may apply. 1. Specific Commodity Rates The carriage of U.K. cabotage traffic cannot be carried by foreign They are heavily discounted rates applicable on specific com- airlines without special permission. modity, between two points, say Bombay and Paris. It is not possible to send goods at these preferential rates to alternative The listed territories under U.K.cabotage are, Anguilla, Ascen- destination even where the alternative airport is on the same route sion Islands, Bentluda, British Virgin Islands, Brunei, Caicas and nearer to the airport of origin. Islands, Cayman Islands, Dominica, Falklands Islands, Gibraltar, Montserrat, Nevis, St.Christopher, St.Helena, Against this, freight all kinds rates carry a combination of St.Vincent, Turks Islands. different commodities. These rates favour consolidation. SCR also called as “Co-Rates” account for seventy five per cent 6. Unit Load Device (ULD) Rates: of the cargo carried out of India. This type of rate has done This applies to any type of container, container with an integral pallet, much to stimulate air freight development and by encouraging or aircraft pallet whether or not owned by an lATA quantity shipments has produced cost savings in documenta- member, and whether or not considered to be aircraft equipment. 1. tion/handling packaging. The rates are market oriented and take Aircraft ULDs - Such units are integral part of the aircraft. into account actual demand requirements. They recognise the Aircraft ULDs can be loaned to shippers and agents for varying ability of the user to pay for air transportation according loading purposes provided the shipper or agent can prove to his requirements. This approach results in discrimination and that he is equipped to handle them. is not always related to the cost of transportation. 2. Non Aircraft ULDs - They must be registered with lATA The minimum quantity allowed at each rate is 100, 300, 500 and and conform to lATA standard specifications. Non aircraft 1000 Kg. Hence a consignment of 85 Kg will be charged at 100 ULDs in order to be eligible for rating incentives must be kg rate. owned by a shipper or agent. 2. Classification Rates (Surcharges and Rating of ULDs - Two methods exist - Rebates) Method A and Method B 1. Newspapers, periodicals and books are carried at Method A reduced rates. Special rates are available on application to the In order to qualify for bulk unitization rates, the cargo must be airline. carried from origin to destination in the same ULD. The charge for 2. For Human remains, regulations vary from route to route. the consignment shall consist of a flat minimum (pivot) charge Prior application is necessary to the airline. for a specified pivot weight above which an additional charge (over- 3. Valuable Cargo - gold, platinum, diamond, legal bank notes, pivot rate) ner kilo will apply. Charges for airlines owned aircraft securities,share coupons, travellers cheques, are charged at ULDs shall be based on the actual gross weight less the actual tare ‘under 100 kg’, air cargo rate plus a 100 per cent weight of the ULD. surcharge. Charges for non-aircraft ULDs shall be based on the actual gross 4. For live animals, prior arrangements must be made. weight less the actual tare weight, but not more than the lATA tare Stringent regulations apply regarding documentation / travel weight allowance for the particular ULD. facilities and conditions. A shipper’s certificate for live Method B animals is required. Charges are based on actual weight of the shipment, but not 3. Valualation Charge less than the minimum chargeable weight for the particular A declaration of value must be made. Where goods have container used. Tare weight allowance is applicable. declared value for carriage per kilogram higher than a certain

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A discount is also granted under this programme, which refers out the flight and issues house airway bills to individual to each type of non-aircraft ULD. The amount of discount can be shippers. The agent is able to charge an inclusive rate, which is deducted from the weight charge, but shall not exceed 10% of the much lower than consignment sent as an individual parcel. charges applicable to the consignment carried in the ULD. Details of the Scheme are Discounts and tare weight allowances only apply when ship- 1. It is ‘particularly attractive to exporter who despatches small ments are delivered to the airline packaged in registered shipper consignments. owned, standard size non-aircraft units. 2. The agent usually takes care of documentation. In no case shall the charges established under Method A be applied cumulatively with the discount authorized under rating 3. Airline is able to concentrate on providing a quality airfreight Method B. flight service and becomes less involved in marketing the service involving contact with individual shippers. Dangerous goods, live animals, or human remains will not be accepted in a ULD rated either under Method A or B. 4. The agent promotes the service- a feature of it is the competitive inclusive rate structure compared with an Charges individual package despatched under lATA fare structure 1. Payment of Charges: Paid at the time of despatch, by cash, arrangements cheque or credit card. Regular shippers make use of credit 5. It enables airline to obtain the maximum income from the facilities, which are usually available from most major airlines. allocated accommodation earmarked for the agents. 6. It This enables freight charges to be billed for settlement on monthly basis. enables the airline to plan ahead since consignment collection is duty of the freight agents. 2. Charges Forward: Goods dispatched to most countries 7. The airline usually permits the cancel/change of pre-booked may be sent,”Charges Forward”,i.e. cartage, export fees,and freight payable by the . cargo space upto 36 hours before departure time. 8. It Goods cannot be sent,charges partly preaid and partly permits the shipper to avoid the minimum freight rate forward. Charges forward are not available on regulations found in the airline (lATA) approved rate domesticroutes, where all charges must be prepared. 3. structure. 9. Packing cost is substantially reduced. Disbursements - Most airlines will charge 10% with a basic minimum fee for collection from a consignee of any 10. Consolidated consignments tend to result in quicker disbursement shown on the airway bill. customer clearance. Disbursements will not usually exceed the freight charges 11. Encourages to maximize profitability shown on the air waybill. When the issuing carrier cannot through an equal spread/mix of high and low-density collect the amount from the consignee, it will be charged to cargoes. the shipper or agent. 12. Encourages use of ULDs. 4. Perishable Cargo - Prepaid freight is charged for perishable 13. Its general competitiveness and favourable quality of service cargo. Cargo subject to regulations relating to carriage of facilitates the development of international trade. dangerous goods must be offered separately and clearly IATA indicated in the shippers declaration. The International Air Transport All these air freight rates exclude customs clearance charges, Association road/rail collection, distribution, warehousing, demurrage etc. IATA was founded in 1946 by the airlines of many countries to For special/large consignments an aircraft can be chartered. Rat e meet the problems created by the rapid expansion of civil air s vary according to market conditions and other factors. The services at the close of the second World War in 1946. shipper conducts his negotiations through an air charter broker It is the successor in function of the previous International Air found on the or direct with an airline or Traffic Organization arranged at “The Hague” at the very dawn of airfreight forwarder. regular air transport in 1919. Air Freight Consoidation As a non-governmental organization it draws its legal existence Air Freight Consolidation: There has been a substantial from an Act of the Canadian Parliament given Royal Assent in development of airfreight consolidation over the years. December 1945. Freight forwarder (usually referred to as the agent) has a contract In both its organization and activity, lATA has been closely with an airline on specified flight to provide consolidated cargo associated with the International Civil Aviation Organization for allocated cargo hold space which he undertakes to fill. The (lCAO) also established in 1945, the international agency of consolidated consignment may involve upto thirty consign- governments which creates world standards for the technical ments including differing and . regulation of civil aviation. Each consignment is destined to be for same area / region. IA T A is a voluntary, non-exclusive, non-political and demo- Cargoes are mixed subject to their compatibility. Limitations are cratic organization. imposed on weight and general dimensions of the cargo. Agent prepares a cargo manifest to accompany the air waybill through-

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Membership is automatically open to any operating company, Composite Conference covering the whole usually held every which has been licensed to provide scheduled air services by a two years. Individual airlines make recommendations of tariff government eligible for membership of ICAO. changes at these conferences. Traffic working groups and cost Airlines directly engaged in international operations are active committees make careful studies of prospective traffic and cost of members, while domestic airlines are associate members. operation. The agreement reached by past conferences The voting procedure of lATA are unusual when compared with consists of over 1000 resolutions covering rates between 60,000 those of other international organisations. Each airline has a single pairs of points in the world network. vote regardless of its size. All decisions must be Among the criteria of rate-making considered by the Confer- unanimous. No decisions are effective without the approval of the ences are the following: interested governments. Thus any single airline or any single a. Operation costs government has the power to veto any decision. b. Traffic potential IATA is concerned with much more than traffic matters. It has c. Local economic conditions committees dealing continuously with technical, legal and d. Type Qf traffic to be moved financial issues. IATA, through these committes, promotes standards of safety, comfort and efficiency. Rules and proce- e. Seasonal nature of the traffic dures govern airlines in all parts of the world. An effort is made to f. Competition from non-IATA carriers such as the Steamship simplify and standardize the documents which must flow Companies. from one airline to another. The Association publishes manuals of The work of the Traffic Services is grouped under 3 main Revenue Accounting Practices which aim at the standardiza- functions as detailed below: tion of the reporting of costs, profits and losses. The IATA 1. Passenger Services Conference Clearing House in London settles monthly accounts for interline revenue transactions, making it possible for each airline to This conference of all IATA Trade Association members pay and collect debts in a single settlement. meets annuaIly for the purpose of approving industry developed new standards and changes to existing standards The airlines have achieved a great dealof standardization in all passenger service fields, and directing the policies and through IATA.IATA member airlines adopted the first activities of the committees, boards and working groups standard procedures for handling interline traffic at an lATA which report to it. Traffic Conference in 1947, and these have been developed further over the years through the extensive lATA Traffic 2. Cargo Services Conference Services machinery. This conference of all IATA Trade Association Members The agreements are now the responsibility of the Passenger and meets annually for the purpose of approving industry- Cargo Service Conferences respectively. developed new standards and changes to existing standard in all cargo service fields, and directing the policies and IATA Traffic Conferences activities of the committees, boards and working groups which The lATA Traffic Conferences: The steps in establishing traffic report to it. on international routes are different from those of domestic 3. Airport Handling Committee routes. Before the tariffs are filed with the respective governments for approval, the airlines meet together to agree on a pattern of This committee holds annual meeting, which all lATA Trade rates. These rates apply to all the carriers concerned. Unless all Association members may attend for the purpose of agree, no decision is binding. And the government have the final approving industry developed new procedure and changes to say qn whether the agreements can be maintained. The normal existing procedures in all airport handling matters, and practice is for the airlines to reach an agreement after considerable directing the policies and activities of its sub committees. give-and-take in the Traffic Conferences and for the governments A major post war accomplishment was the integration of the to approve those agreements. OccasionaIly the conferences fail to routes of individual airlines into a coordinated world air reach an agreement or one or more governments fail to sanction network over which passengers, baggage and cargo, with very the agreements, but such failures of agreement are the exception complicated itineraries, can be carried with a minimum of rather than the rule. Furthermore, soon after a conference has documentation. failed to achieve an agreement, the airlines and governments The smooth functioning of this network depends on standard- become quite uncomfortable with the possible anarchy in rates ization and inter-line arrangements among the world’s airlines. which might ensue; thus they soon reconvene to avoid this Today 25 to 30 per cent of passengers and cargo moving possibility. It is also the practice of each airline to refrain from internationally are carried interline at the applicable through fares or vetoing an agreement affecting territories outside its main routes. rates from origin to final destination. This is made possible The world is divided into three areas for the purpose of the through the detailed provisions of the IATA Multilateral Conferences Area No.1 covers the Americas, Area No.2 Interline Traffic Agreements - Passenger and Cargo. covers Europe, the Middle East and Africa and Area No.3 These Agreements provide for the mutual acceptance of covers the rest of the world. Meetings deal separately with the documents, the most important of which are the standard relations between Area No.1 and Area No.2, No.2 and No.3 and IATA ticket and airway bill. No.3 and No.1. But the most important work takes place in the

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As a result, all points on many individual airline routes are integrated into one vast worldwide air transport system. Airfreight has become increasingly important, not only in the overall operations of IATA Member airlines, but also as a factor in international commerce. Apart from the inherent advantage of speed, its unique characteristic is simplicity. Not only do the goods move in a matter of hours between any two points in the world, they also move on a single airway bill by any combination of services, at a known price, in one currency and subject to standard conditions. The legal and regulatory-framework of air cargo transpor- tation is also under constant development, particularly with regard to greater consumer protection and establishment of multimodal possibilities. IATA administration is headed by a Director General. The Association has two main offices, one in Montreal and another in Geneva. Regional Technical Directors are based in - Bangkok, Geneva, London,Nairobi and Rio-de-Janeiro Regional Directors (Special Arrangements) - in Singapore, Buenos Aires. IA T A Traffic Services Office- New York and Singapore IATA Membership airline services system has the unique feature of complete interchange ability of traffic worldwide among some 230 airlines carrying over 95 per cent of world’s passenger and cargo air traffic. If not for it, passengers and shippers would be less well saved than they are today. Questions For Self Analyzation Q1 Explain in brief about the various advantages and disadvantages of Air as medium of transport . Q2 Classify Air Freight rates. Q3 Write a note on IATA.

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LESSON 27: WORLD SEABORNE TRADE AND WORLD SHIPPING

Volume and Value of world Trade The Volume of Fuel Trade World Tonnage The most important change that has taken place in the world of Flag of Convenience shipping since the change from sail to steam is the change from solid Conference System to liquid fuel as a means of power. It has involved a revolution in the types of cargo and directions of trade. In 1910, a considerable part of the world’s shipping tonnage was engaged Ocean highways are main lines of international commerce, and in the carriage of coal and for the coasting trades the mechanized ships of today must compete with other around the United Kingdom this was by far the biggest cargo. mechanized means of transport - with aeroplanes in interna- tional trade and with road and rail in the coastal trades, and in Since 1937 oil, crude and refined, has increased from 22 to 53 per some places with pipelines. On the main passenger routes of cent of world trade in volume, and tankers in 1965 ac- the world, airlines have won business from ships and on the counted for 37 per cent of the world’s shipping tonnage (in gross North Atlantic route now airlines. carry about 85 per count of registered tons). The total amount of oil cargoes has, in the passengers. Coastal business has also been lost by shipping to fifteen years between 1950 and 1964, trebled from 225 land transport. million metric tons to 725 metric tons. This is a tremendous increase, far higher than increase in demand for goods on However, in the international carriage of goods, shipping is still average, and there no sign of it abating. It has been estimated supreme. In terms of weight some 78 per cent of world’s that the demand for fuel will increase at a rate approaching10 per international trade moves by sea, and in terms of value some 68 cent per annum. per cent. Only about 0.5 per cent in value terms is carried by air. Tanker business has a definite pattern of trade movement The remainder is international trade between countries with between producing zones in the Middle East, Carribbean and land boundaries, mainly in Europe, which moves over land. East Europe to the consuming countries of the world. Thus the most important determinant in the demand for Although a sizeable producer of crude oil, the United States also shipping tonnage is the level of international trade. The size imports crude for her own refineries. In the early days of oil, and structure of the world’s fleets are determined by the growth refineries were few and scattered around in the largest producing and structure of trade. and consuming countries only. Volume and Value of World Trade Now practically every country of any importance and a great Statistical measurements of international trade take two forms: many of minor importance have oil refineries and the reason measures of value and measures of volume. When trade is for this may be political and to some extent strategic; but there expressed in value terms it is usually the value of the goods are sound economic reasons to place refineries near markets and “free on board” in the country of export. The volume measure to maximise the crude hauls and minimise the product hauls so is usually in a unit of weight or quantity and in the international that full use may be made of the very large tankers for which the shipping statistics of the United Nations the volume measure- economies of size are highly important, and which cannot for ment used is generally the metric ton and all other units in technical and commercial reasons be readily used for refined which trade is entered are converted to the common measure of products. the metric ton. The reasons for this may be many and varied as in the case of a In shipping practice the word “volume” is sometimes used to developing nation wishing to build up her own fleet. At the other denote cubic size instead of eight, and in general usage is often end of the scale is the U.S.A., where the high operating costs of associated with a measure of space, but in all static’s of American ships make it difficult for her ships to production or international trade “volume” refers to a physical flow compete in an open market with other maritime nations. Flags of of goods and is used to denote non-monetary, or physical countries that give various forms of protection to their ships are measures of trade referred to as Flags of Discrimination. Movements of trade in terms of weight are of course more relevant to the demand for shipping space than are movements Types of Discrimination or Protection in terms of the value of trade. But more details of the origin Unilateral action taken by a nation to protect its shipping. a and destination of trade are available in terms of value. Cabotage, or the reservation of the coastal trade either to It is interesting to note that the disequilibrium in international ship flying that nation’s flag (e.g., France) or to include also trade when it is measured by value is much less than when it is ships owned by nationals but perhaps operating under a measured by volume. This is because, on a average, a metric ton Flag of Convenience (e.g. U.S.A.) of the exports of the manufacturing countries is more valuable b Reduced customs dues on goods imported on her own flag than a metric ton of the exports of primary producing countries ships. c) Restriction of

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credit if goods are not carried in national ships. d) Various system serves the general cargo trade of the world and spreads forms of import/export licence control. its’ oligopolistic or oligopholistic tentacles. e. Priority in loading and discharging for her own ships and the In recognition of the fact that’s India had the longest experience reduction in harbour dues, light dues and other such dues. among ,developing countries of the problems that confront the f. Preference on inland transport charges. shippers in Conference trades, the first study, commissioned by UNCTAD on liner shipping dealt with liner shipping in India’s g. Reservation of types of cargo i.e., government sponsored, foreign trade. The above mentioned study, formed the basic or a percentage of the amount of cargo to national ships. document for the shipping committee of UNCTAD-II held in h. Encouraging or insisting exporters sell C.I.F.(Cost, Insurance New Delhi in 1968, and proved to be an excellent guide for the and Freight) and that importers buy F.O.B.(Free on Board). developing countries during the UNCT AD discussions on The result of this is the control of transport of goods shipping. entering or leaving the country. Open and Close Conference Although these measures will undoubtedly protect a nation’s Conferences can be open or closed. A closed conference is one shipping, the overall effect on the country’s economy may not be so with restricted membership and like any other club the mem- advantageous. Shipments may have to wait for a suitable ship. As the bers reserve the right to vote on their eligibility. The purpose of best possible use cannot be made of shipping space the shipping this is basically to avoid too many ships being employed on the services to and from that country cannot operate at maximum run with the consequent loss of profitability. This will of efficiency. Therefore shipments will take longer and become more course seem very unfair to those shipowners who wish to join expensive. and find their entrance so blocked. One measure that can be adopted to partially overcome these Some countries like the U.S.A. do not allow closed conferences as it hurdles is to tranship cargo to a nearby foreign port. This again not . violates their laws on monopolies. Conferences trading to these only increases the cost and time but also increases the countries are open and any shipowner is, free to join. danger of cargo getting lost, broken and pilfered. Feature of Liner Conference The International Chamber of Commerce had made the  observation that developing countries would do better to invest The liner conference is an organisation whereby a number of their money in trying to establish good modern ports and shipowners offer their services in a given sea route on conditions agreed by the members. inland transport systems rather than in shipping. Conferences are semi-monopolistic association of shipping Conference System lines. They are formed for the purpose of restricting Liner ship owners engaged on the same trade usually operate competition between their members and protecting them with some measure of agreement amongst themselves. This from outside competition. The object of such an agreement may be informal or formal and usually covers such arrangement is to guarantee to members a certain share of the items as freight rates, the number of sailings in a given time, trade by limiting competition. Conference agreements working conditions etc. In fact, in many cases the only factor left may also regulate sailing and ports of call. It leads to the open to competition is the efficiency and quality of service regulation of sailings and may, in some circumstanes, enable offered. These associations of liner ship owners are known the trade to be rationalised. as conferences. Conference achieve their object by controlling prices and by Origin of Conference System limiting entry to the trade. In 1875, in the trade between India and the U.K. the first The chief policy is to establish a common tariff of freight shipping conference, the U.K. - Calcutta Conference was rates, members being left free to compete for traffic by the formed. quality and efficiency of their service There are now some 360 conferences with membership of from The organisation of a conference varies from one trade to two upwards. One of the largest conferences at the moment is the another Far Eastern Freight Conference which has twenty-two members and controls some forty sailings a month between It may consist of informal regular meetings of shipowners Europe and the far East. at which rates and other matters of policy are discussed, or it may involve a formal organisation with a permanent secretariat The conferences have served the trade needs of the world for and prescribed rules for membership, together with stipulated nearly 125 years. penalties for violations of agreement. The conference system was originally evolved in the colonial Members are often required to deposit a cash bond to cover days and so was framed, essentially for maintaining the supply fines in respect of non compliance with their obligations of line to the paramount powers. But after India got independence such conferences which are international in character. For in 1947, it was one of the pioneeer in demanding for develop- example, the Far East Freight Conference, which operates in the ing countries entrance into conferences, and now Indian Far East Europe trade, comprises British, French, Dutch, Italian, shipping lines are members in all the 100 and more liner Swedish, Danish and Japanese lines. conferences serving the country’s foreign trade. Conference Shipping lines often belong to several conferences and there are several inter-conference agreements.

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 In most cases, conference policy is decided by the votes In June 1979 at the UNCTAD- V Conference held in Manila, of the members. Conference rights have a market value the UN Code of Conduct of 40/40120 for liner conferences was when shipping lines are sold. discussed. The code was originally proposed in 1973, and  In some conferences, there exists a pooling agreement adopted in 1983. U.S.A. do not favour the code. whereby traffic or gross or net earnings in the trade are Some commonwealth countries including Australia and Canada are pooled, members receiving agreed percentage of the pool. resisting the code. The legislation reflecting the liner code is found in Organisation of Conferences the Merchant shipping (Liner conferences) Act 1982, which came Conference agreement should cover all or some of the following: a. into effect in 1985. Range of ports to be serviced Deferred rebate and contract system: Associated with Liner b. Types of membership. Some conferences in addition to the Conferences are the deferred rebate and contract systems. The ordinary members have associate members with restricted deferred rebate is a device to ensure that shippers will continue to sailing rights and no right to vote. This may include way port support a conference. members, that is, other liner companies whose route takes A shipper who ships exclusively by conference vessels can, at the them past the conference trading ports and who may wish to end of a certain period (usually six months) claim a rebate, include these ports in their sailings. usually 10% of the freight money paid by him during the c. Rules for admission, withdrawal, suspension and expulsion. d. period. Rules for meetings and voting procedures. This system induces loyalty to conference lines, but it has e. Conference secretariat, officers and duties. tended to become less popular in some trades, in recent years, due to the high cost of clerical administration f. Obligations of member lines. Therefore, it has been substituted by the immediate rebate g. Policing provisions and admission fee. system wherein 1.5 % of rebate is granted at the time freight h. Appointment of Committees. payment is made and not some six months later. i. Arbitration of disputes. A further way of retaining shippers patronage of a conference is Advantages of Coference by the contract or special contract agreement system. Under this system, the shipper would be granted a cheaper freight rate than The main advantages of conference system are: a non-contract shipper. 1. Avoidance of wasteful competition. In addition, there are the special commodity agreements which 2. The reasonable assurance that members have a good chance are specially negotiated between the trade and conference to of realizing a profit, and there are no rate wars. cover goods shipped in large quantities and often for short 3. Stability of rates which enables manufacturers and merchants duration. The shipper may be forwarding a “commodity such as to make forward contracts for goods and so diminishes copper, tea, rubber, foodstuffs or cotton in considerable ; undesirable risk and uncertainty in international trade. quantities. 4. Regular and frequent sailings enable the shipper/exporter to The shippers criticism of the deferred rebate system is that it plan his supplies to overseas markets and avoids the need to enables conferences to build up monopolies tending to keep carry large stocks and the operator to maximise the use of his rates at a high level. vessels. Another point is that a record must be kept (meeting clerical 5. Equality of treatment, that is, rate quoted applies to all expenses) to enable to claim rebates. shippers whether they are large or small. By 1985 - non-conference vessels carried 30-40% oPiner cargo 6. Economies of service which enable operators to concentrate compared to 5-10% some ten years ago. This is due to many on providing faster and better ships reasons: Disadvantages of Conference System a. Increasing use of short-cut rates involving the land-bridge The disadvantage from the shippers point of view arises from the concept such as the Trans - Siberian Railway. fact that if he is tied to a particular conference, he cannot take b. The tendency of most conference lines to charge rates about advantage of tramp tonnage when rates are low. 10-15% more than non-conference line tonnage operators. Moreover if he is a large shipper he often cannot use his c. The growing development of non-conference line services superior bargaining power to obtain lower rates. such as the Evergreen round the world container service. Conferences are a constraint on free competition between ship Question For Self Analyzation owners. Carriers who are not members of a conference object to Q1 Explain the terms Flag of convenience and Flag of the system because it prevents their competing successfully with Discrimination. conference vessels. Q2 What do you understand by Conference system What are Conferences suffer from the usual monopolistic failings like (a) different types of conferences. excessively high freight rates (b) complacency and reluctance to accept change (c) high-handed bureaucratic attitudes. Q3 Explain the organization and advantages of conference system.

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Article Source: Express Exim Review, Oct. 5, 1998. Industry reports coming from Canada state that member-lines in the Canada Transpacific Stabilisation Agreement (CTSA) have agreed on for a further general rate increase to cover costs associated with special routing and handling of extraordinary cargo volumes eastbound from Asia, coupled with the effect of a dramatically weakened cargo market westbound from Canada. Effective from October 1, 1998; freight rates chaged by memberlines of CTSA from all Asian origin points, but excluding the Indian subcontinent, will be increased by $ 300 per 400 foot container, with proportionate increases for other sizes of equipment and cargo otherwise rated. The reports further said that shipments moving via Keelung, Taiwan (including Hsinchu, Taoyuan, Taipei country and Keelung) to Canada will be assessed an additiional $ 300 per container above the normal general rate increase, also effective from October 1, 1998. The additional increase reflects significantly higher costs of receiving cargo at offdock cargo facilities in Keelung for relay by truck to kaohsiung, where most carriers have their main ocean terminals. On October 1, 1998, CTSA carriers will further implement a separate general rate increase for cargo originating at Indian subcontinent locations. The Indian subcontinent increase will be $ 600 per 40 foot container or the equivalent, relfecting special operational difficulties in delivering equipment, and in loading and consolidating cargo in that region. CTSA is a discussion ani policy setting group of 12 ocean and intermodal carriers serving the trade from port and inland points to Asia and the Indian Subcontinent to destinations throughout Canada. The members of CTSA include, American President Lines (APL), Evergreen Marine Corporation (Taiwan) Ltd., Hapag-Lloyd Container Line, Hyundai Merchant Marine Co.Ltd., Kawasaki Kisen Kaisha ltd., (K-line), Mitsui O.s.K. Lines (MOL), A.P.Moller-Maersk Line, NYK Line (OOCL), P & 0 Nedlloyd and Sea-Land Services Inc.

199 Intermodal Transportation and Containerization

Source: Rodrigue and Slack (2013)

The Nature of Intermodalism History as well as competition between modes has tended to produce a transport system that was segmented and un-integrated. Each mode, particularly the carriers that operated them, has sought to exploit its own advantages in terms of cost, service, reliability and safety. Carriers try to retain business and increase revenue by maximizing the line-haul under their control. All the modes saw the other modes as competitors, and were viewed with a level of suspicion and mistrust. The lack of integration between the modes was also accentuated by public policy that has frequently barred companies from owning firms in other modes (as in the United States before deregulation), or has placed a mode under direct state monopoly control (as in Europe). Modalism was also favored because of the difficulties of transferring goods from one mode to another, thereby incurring additional terminal costs and delays, mainly because the load unit needs to be changed, which is common for bulk transportation. Since the 1960s major efforts have been made to integrate separate transport systems through intermodalism, which took place in several stages, first with the setting of maritime networks which then better connected with inland networks. From a functional and operational perspective, two components are involved in intermodalism:

Intermodal transportation. The movements of passengers or freight from one mode of transport to another, commonly taking place at a terminal specifically designed for such a purpose. In North America, the term intermodal is also used to refer to containerized rail transportation. Therefore, intermodal transportation in the literal sense refers to an exchange of passengers or freight between two transportation modes, but the term has become more commonly used to strictly related to container transportation.

Transmodal transportation. The movements of passengers or freight within the same mode of transport. Although "pure" transmodal transportation rarely exists and an intermodal operation is often required (e.g. ship to dockside to ship), the purpose is to insure continuity within the same modal network.

What initially began as improving the productivity of shipping evolved into an integrated supply chain management system across modes and the development of intermodal transportation networks.

Intermodal transportation network. A logistically linked system using two or more transport modes with a single rate. Modes are having common handling characteristics, permitting freight

1 | P a g e

(or people) to be transferred between modes during a movement between an origin and a destination. For freight, it also implies that the cargo does not need to be handled, just the load unit such as a pallet or a container.

This involves the use of at least two different modes in a trip from an origin to a destination through an intermodal transport chain, which permit the integration of several transportation networks. Intermodality enhances the economic performance of a transport chain by using modes in the most productive manner. Thus, the line-haul economies of rail may be exploited for long distances, with the efficiencies of trucks providing flexible local pick up and deliveries. The key is that the entire trip is seen as a whole, rather than as a series of legs, each marked by an individual operation with separate sets of documentation and rates. This is organized around the followings concepts:

1. The nature and quantity of the transported cargo. Intermodal transportation is usually suitable for intermediate and finished goods in load units of less than 25 tons.

2. The modes of transportation being used. Intermodal transportation is organized as a sequence of modes, often known as an intermodal transport chain. The dominant modes supporting intermodalism are trucking, rail, barges and maritime. Air transportation usually only require intermodalism (trucking) for its "first and last miles" and not used in combination with other modes. Additionally, load units used by air transportation are not readily convertible with other modes.

3. The origins and destinations. Distances play an important role as the longer the distance, the more likely an intermodal transport chain will be used. Distances above 500 km (longer than one day of trucking) usually require intermodal transportation.

4. Transportation time and costs. Intermodalism tries to use each mode according to their respective time and cost advantages so that total transport costs are minimized.

5. The value of the cargo. Suitable for intermediate cargo values. Low and high value shipments are usually less suitable for intermodal transportation. High value shipments will tend to use the most direct options (such as air cargo) while low value shipments are usually point to point and relying on one mode such as rail or maritime.

6. The frequency of shipments. Intermodalism functions well when cargo flows need to be continuous and in similar quantities.

2. Forms of Intermodalism The emergence of intermodalism has been brought about in part by technology and requires management units for freight such as containers, swap bodies, pallets

2 | P a g e or semi-trailers. In the past, pallets were a common management unit, but their relatively small size and lack of protective frame made their intermodal handling labor intensive and prone to damage or theft. Better techniques and management units for transferring freight from one mode to another have facilitated intermodal transfers. Early examples include piggyback (TOFC: Trailers On Flat Cars), where truck trailers are placed on rail cars, and LASH (lighter aboard ship), where river barges are placed directly on board sea-going ships. A unique form of intermodal unit has been developed in the rail industry, particularly in the US where there is sufficient volume. Roadrailer is essentially a road trailer that can also roll on rail tracks. It is unlike the TOFC (piggyback) system that requires the trailer be lifted on to rail flat car. Here the rail bogies may be part of the trailer unit, or be attached in the railway yard. The road unit becomes a rail car, and vice-versa. While handling technology has influenced the development of intermodalism, another important factor has been changes in public policy. Deregulation in the United States in the early 1980s liberated firms from government control. Companies were no longer prohibited from owning across modes, which developed a strong impetus towards intermodal cooperation. Shipping lines in particular began to offer integrated rail and road services to customers. The advantages of each mode could be exploited in a seamless system, which created multiplying effects. Customers could purchase the service to ship their products from door to door, without having to concern themselves of modal barriers. With one bill of lading clients can obtain one through rate, despite the transfer of goods from one mode to another. The most important feature of intermodalism is the provision of a service with one ticket (for passengers) or one bill of lading (for freight). This has necessitated a revolution in organization and information control. At the heart of modern intermodalism are data handling, processing and distribution systems that are essential to ensure the safe, reliable and cost effective control of freight and passenger movements being transported by several modes. Electronic Data Interchange (EDI) is an evolving technology that is helping companies and government agencies (customs documentation) cope with an increasingly complex global transport system. Intermodal transport is transforming a growing share of the medium and long-haul freight flows across the globe where large integrated transport carriers provide door to door services, such as the high degree of integration between maritime and rail transport in North America. In Europe rail intermodal services are becoming well-established between the major ports, such as Rotterdam, and southern Germany, and between Hamburg and Eastern Europe. Rail shuttles are also making their appearance in China, although their market share remains modest. While rail intermodal transport has been relatively slow to develop in Europe, there are extensive interconnections between barge services and ocean shipping, particularly on the Rhine. Barge shipping offers a low cost solution to inland distribution where navigable waterways penetrate to interior markets. This solution is being

3 | P a g e tested in North America, although with limited success so far. The limits of intermodality are imposed by factors of space, time, form, pattern of the network, the number of nodes and linkages, and the type and characteristic of the vehicles and terminals. 3. Containerization

The container is what makes the world go round.

The driver of intermodal transportation has undoubtedly been the container, which permits easy handling between modal systems. While intermodalism could take lace without the container, it would be very inefficient and costly. At start, a distinction is necessary between containerization and the container.

Container. A large standard size metal box into which cargo is packed for shipment aboard specially configured transport modes. It is designed to be moved with common handling equipment enabling high-speed intermodal transfers in economically large units between ships, railcars, truck chassis, and barges using a minimum of labor. The container, therefore, serves as the load unit rather than the cargo contained therein. The reference size is the 20 foot box of 20 feet long, 8'6" feet high and 8 feet wide, or 1 Twenty-foot Equivalent Unit (TEU). Since the great majority of containers are now forty foot long, the term Forty-foot Equivalent Unit (FEU) is also used, but less commonly. "Hi cube" containers are also common and they are one feet higher (9'6") than the standard.

Containerization. Refers to the increasing and generalized use of the container as a support for freight transportation. It involves processes where the intermodal container is increasingly used because it either substitutes cargo from other conveyances, is adopted as a mode supporting freight distribution or is able to diffuse spatially as a growing number of transport systems are able to handle containers.

The development of intermodal transportation and containerization are mutually inclusive, self strengthening and rely of a set of driving forces linked with technology, infrastructures and management. One of the initial issue concerned the different sizes and dimensions of containers used by shipping lines, which were a source of much confusion in compiling container shipping statistics. A lift could involve different volumes since different box sizes were involved. As a result, the term TEU (Twenty foot Equivalent Unit) was first used by Richard F. Gibney in 1969, who worked for the & Shipping Record, as a comparative measure. Since then, the TEU remains the standard measure for containerized traffic. The usage of containers shows the complementarity between freight transportation modes by offering a higher fluidity to movements and a standardization of loads. The container has substantially contributed to the adoption and diffusion of intermodal transportation which has led to profound mutations in the

4 | P a g e transport sector. Through reduction of handling time, labor costs, and packing costs, container transportation allows considerable improvement in the efficiency of transportation. Thus, the relevance of containers is not what they are - simple boxes - but what they enables; intermodalism. Globalization could not have taken its current form without containerization. Intermodalism originated in maritime transportation, with the development of the container in the late 1960's and has since spread to integrate other modes. It is not surprising that the maritime sector should have been the first mode to pursue containerization. It was the mode most constrained by the time taken to load and unload the vessels. A conventional break bulk could spend as much time in a port as it did at sea. Containerization permits the mechanized handling of cargoes of diverse types and dimensions that are placed into boxes of standard sizes. In this way goods that might have taken days to be loaded or unloaded from a ship can now be handled in a matter of minutes. Containers are either made of steel (the most common for maritime containers) or aluminum (particularly for domestic) and their structure confers flexibility and hardiness. Another factor behind the diffusion of the container is that an agreement about its base dimensions and latching system was reached through the International Standards Organization (ISO) within 10 years of its introduction. From this standard, a wide variety of container sizes and specifications have been put in use. The most prevalent container size is however the 40 foot box, which in its 2,400 cubic feet which carry on average 22 tons of cargo. However, transporting cargo in a 20 foot container is usually 80% of the cost of transporting cargo in a 40 foot container because irrespective of the size a 20 foot container requires the same amount of intermodal movements even if it takes about half the space during transport and at terminals. There are five main types of containers:

 Standard container. Container designed to carry a wide variety general cargo. They are often labeled as dry containers because they carry dry goods either in break bulk (most common) or bulk (less common) form. Cargo is loaded and unloaded through a double door which marks the "back side" of the container.

 Tank container. Container designed to carry liquids (chemicals or foodstuff). It is composed of a tank surrounded by a structure making it the same size than a standard 20 foot containers, including its four latching points.

 Open top container. A container with an open roof and designed to carry cargo that is too large to be loaded through standard container doors, such as machinery. The container is loaded from the top with a tarpaulin used to cover its contents.

 Flat container. Container having an open roof and sides designed to carry heavy and oversized cargo. The cargo transported is left exposed to outdoor conditions.

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 Refrigerated container. Also known as a reefer. Container designed to carry temperature controlled cargo, often around or below freezing point. It is insulated and equipped with refrigeration plant maintaining the temperature constant.

A significant share of international containers are either owned by shipping lines that tend to use them has a tool to help fill up their ships or by leasing companies using containerized assets for revenue generation. In the United States, a large amount of domestic containers of 53 foot are also used. Doublestacking of containers on railways (COFC: Containers On Flat Cars) has doubled the capacity of trains to haul freight with minimal cost increases, thereby improving the competitive position of the railways with regards to trucking for long-haul shipments. While it is true that the maritime container has become the work horse of international trade, other types of containers are found in certain modes, most notably in the airline industry. High labor costs and the slowness of loading planes, that require a very rapid turnaround, made the industry very receptive to the concept of a loading unit of standard dimensions designed to fit the specific shape of the bellyhold. The maritime container was too heavy and did not fit the rounded configuration of a plane’s fuselage, and thus a box specific to the needs of the airlines was required. The major breakthrough came with the introduction of wide-bodied aircraft in the late 1970s. Lightweight aluminum boxes, called unit load devices, could be filled with passenger’s baggage or parcels and freight, and loaded into the holds of the planes using tracking that requires little human assistance. Containerization represents a revolution in the industry, facilitating both economies of scale and improvements in handling speed and throughput, with containerized traffic has surged since the 1990s. This underlines the adoption of the container as a privileged mean to ship products on international and national markets, particularly for non-bulk commodities where the container accounts for about 90% of all movements. Containerization leans on growth factors mainly related to globalization, substitution from break bulk and more recently the setting of intermediate transhipment hubs. Although containerization initially superimposed itself over existing transportation systems, as it became a dominant mean of freight transportation it created its own unique system of exclusive modes and terminals. Globalization and containerization as closely interrelated. According to UNCTAD, between 1970 and 1990 trade facilitation measures accounted for 45% of the growth in global trade while membership to global trade organization such as GATT/WTO accounted for another 285%. The container accounted for an additional 790%, exceeding all the other trade growth factors put together. The diffusion and adaptation of transport modes to containerization is an on-going process which will eventually reach a level of saturation. Containers have thus become the most important component for rail and maritime intermodal transportation. The challenge remains about the choice of modes in an

6 | P a g e intermodal transport chain as well as minimizing the costs and delays related to moving containers between modes. 4. Advantages and Challenges of Containerization Among the numerous advantages related to the success of containers in international and hinterland transport, it is possible to note the following:

 Standard transport product. A container can be manipulated anywhere in the world as its dimensions are an ISO standard. Indeed, transfer infrastructures allow all elements (vehicles) of a transport chain to handle it with relative ease. Standardization is a prevalent benefit of containerization as it conveys a ubiquity to access the distribution system and reduces the risks of capital investment in modes and terminals. The rapid diffusion of containerization was facilitated by the fact that its initiator, Malcolm McLean, purposely did not patent his invention. Consequently all segments of the industry, competitors alike, had access to the standard. It necessitated the construction of specialized ships and of lifting equipment, but in several instances existing transport modes can be converted to container transportation.

 Flexibility of usage. It can transport a wide variety of goods ranging from raw materials (coal, wheat), manufactured goods, and cars to frozen products. There are specialized containers for transporting liquids (oil and chemical products) and perishable food items in refrigerated containers (called "reefers" which now account for 50% of all refrigerated cargo being transported). About 1.6 million TEUs of reefers were being used by 2009. In many developing countries, discarded containers are often used as storage, housing, office and retail structures.

 Management. The container, as an indivisible unit, carries a unique identification number and a size type code enabling transport management not in terms of loads, but in terms of unit. This identification number is also used to insure that it is carried by an authorized agent of the cargo owner and is verified at terminal gates. Computerized management enables to reduce waiting times considerably and to know the location of containers (or batches of containers) at any time. It enables to assign containers according to the priority, the destination and the available transport capacities. Transport companies book slots in maritime or railway convoys that they use to distribute containers under their responsibility. As such, the container has become a production, transport and distribution unit.

 Economies of scale. Relatively to bulk, container transportation reduces transport costs considerably, about 20 times less. While before containerization maritime transport costs could account between 5 and 10% of the retail price, this share has been

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reduced to about 1.5%, depending on the goods being transported. The main factors behind costs reductions reside in the speed and flexibility incurred by containerization. Similar to other transportation modes, container shipping is benefiting from economies of scale with the usage of larger containerships (The 6,000 TEUs landmark was surpassed in 1996 with the Regina Maersk and in 2006 the Emma Maersk surpassed the 14,000 TEU landmark). A 5,000 TEU containership has operating costs per container 50% lower than a 2,500 TEU vessel. Moving from 4,000 TEU to 12,000 TEU reduces operating costs per container by a factor of 20%, which is very significant considering the additional volume involved. System-wide the outcome has been costs reductions of about 35% by the use of containerization.

 Speed. Transshipment operations are minimal and rapid, which increase the utilization level of the modal assets and port productivity. A modern container ship has a monthly capacity of 3 to 6 times more than a conventional cargo ship. This is notably attributable to gains in transhipment time as a crane can handle roughly 30 movements (loading or unloading) per hour. Port turnaround times have thus been reduced from an average of 3 weeks in the 1960s to less than 24 hours, since it is uncommon for a ship to be fully loaded or unloaded along regular container shipping routes. It takes on average between 10 and 20 hours to unload 1,000 TEUs compared to between 70 and 100 hours for a similar quantity of bulk freight. With larger containerships, more cranes can be allocated to transhipment; 3 to 4 cranes can service a 5,000 TEU containership, while ships of 10,000 TEUs can be serviced by 5 to 6 cranes. This implies that larger ship sizes do not have much differences in loading or unloading time. A regular freighter can spend between half and two-third of its useful life in ports. With less time in ports, containerships can spend more time at sea. Since a ship generates revenue while at sea, containerships are more profitable. Further, containerships are on average 35% faster than regular freighter ships (19 knots versus 14 knots). Put all together, it is estimated that containerization has reduced travel time for freight by a factor of 80%.

 Warehousing. The container limits damage risks for the goods it carries because it is resistant to shocks and weather conditions. The packaging of goods it contains is therefore simpler, less expensive and can occupy less volume. This reduces insurance costs since cargo is less prone to be damaged during transport. Besides, containers fit together permitting stacking on ships, trains (doublestacking) and on the ground. It is possible to superimpose three loaded and six empty containers on the ground. The container is consequently its own warehouse.

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 Security. The contents of the container are anonymous to outsiders as it can only be opened at the origin, at customs and at the destination. Thefts, especially those of valuable commodities, are therefore considerably reduced, which results in lower insurance premiums. Theft was a serious issue at ports before containerization as longshoremen had ready access to cargo.

In spite of numerous advantages in the usage of containers, some challenges are also evident:

 Site constraints. Containerization implies a large consumption of terminal space. A containership of 5,000 TEU requires a minimum of 12 hectares of unloading space, while unloading entirely its containers would require the equivalent of about 7 double- stack trains of 400 containers each. Conventional port areas are often not adequate for the location of container transshipment infrastructures, particularly because of draft issues as well as required space for terminal operations. Many container vessels require a draft of at least 14 meters (45 feet). A similar challenge applies to container rail terminals, many being relocated at the periphery of metropolitan areas. Consequently, major container handling facilities have modified the local geography of container by forcing relocation to new sites at the periphery.

 Infrastructure costs. Container handling infrastructures, such as gantry cranes, yard equipment, road and rail access, represent important investments for port authorities and load centers. For instance, the costs of a modern container crane (portainer) are in the range of 4 to 10 million $US depending on the size. Several developing countries cannot afford these infrastructures with local capital and so have difficulties to participate effectively in international trade as efficient load centers unless concession agreements are reached with terminal operators.

 Stacking. The arrangement of containers, both at terminals and on modes (containerships and double-stack trains) is a complex problem. At the time of loading, it becomes imperative to make sure that containers that must be taken out first are not below the pile. Further, containerships must be loaded in a way to avoid any restacking along its numerous port calls where containers are loaded and unloaded.

 Thefts and losses. While many theft issues have been addressed because of the freight anonymity a container confers, it remains an issue for movements outside terminals where the contents of the container can be assessed based upon its final destination. It is estimated that about 10,000 containers per year (27 per day) are lost at sea when they fall overboard containerships. Rough weather is the major cause, but improper

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container stacking also plays a role (distribution of heavy containers). Yet, the loss rate remains very low since 5 to 6 million containers are being transported at any given time.

 Empty travel. Maritime shippers need containers to maintain their operations along the port networks they service. The same number of containers brought into a market must thus eventually be relocated, regardless if they are full or empty. On average containers will spend about 56% of their 10 to 15 years lifespan idle or being repositioned empty, which is not generating any income but convey a cost that must be assumed in one way or the other. Either full or empty, a container takes the same amount of space on the ship or in a storage yard and takes the same amount of time to be transshipped. Due to a divergence between production and consumption, it is uncommon to see an equilibrium in the distribution of containers. About 2.5 million TEUs of empty containers are stored in yards and depots around the world, underlining the issue of the movement and accumulation of empty containers. They represent about 20% of the global container port throughput and of the volume carried by maritime shipping lines. Most container trade is imbalanced, and thus containers "accumulate" in some places and must be shipped back to locations where there have deficits (mostly locations having a strong export function). This is particularly the case for American container shipping. As a result, shipping lines waste substantial amounts of time and money in repositioning empty containers.

 Illicit trade. By its confidential character, the container is a common instrument used in the illicit trade of drug and weapons, as well as for illegal immigrants. Concerns have also been raised about containers being used for terrorism. These fears have given rise to an increasing number of regulations aimed at counteracting illegal use of containers. In 2003, following US inspection requirements the International Maritime Organization (IMO) introduced regulations regarding the security of port sites and the vetting of workers in the shipping industry. The US, itself established a 24 hour rule, requiring all shipments destined for the US to receive clearance from US authorities 24 hours prior to the departure of the vessel. In 2008, the US Congress has passed a regulation requiring all US-bound containers to be electronically scanned at the foreign port of loading, prior to departure. Needless to say, these measures incur additional costs and delays that many in the industry oppose.

Yet, the advantages of containerization have far outweighed its drawbacks, transforming the global freight transport system and along with it the global economy. 5. Intermodal Transport Costs There is a relationship between transport costs, distance and modal choice that has for

10 | P a g e long been observed. It enables to understand why road transport is usually used for short distances (from 500 to 750 km), railway transport for average distances and maritime transport for long distances (about 750 km). Variations of modal choice according to the geographical setting are observed but these figures tend to show a growth of the range of trucking. However, intermodalism offers the opportunity to combine modes and find a less costly alternative than an unimodal solution. It is also linked with a higher average value of the cargo being carried since intermodal transportation is linked with more complex and sophisticated commodity chains. As a result, the efficiency of contemporary transport systems rests as much on their capacity to route freight than on their capacity to transship it, but each of these functions have a cost that must be reduced. The intermodal transportation cost implies the consideration of several types of transportation costs for the routing of freight from its origin to its destination, which involves a variety of shipment, transshipment and warehousing activities. It considers a logistic according to which are organized transport chains where production and consumption systems are linked to transport systems. Numerous technical improvements, such as river / sea shipping and better rail/road integration, have been established to reduce interchange costs, but containerization remains the most significant achievement so far. The concept of economies of scale applies particularly well to container shipping. However, container shipping is also affected by diseconomies involving maritime and inland transport systems as well as transshipment. While maritime container shipping companies have been pressing for larger ships, transshipment and inland distribution systems have tried to cope with increased quantities of containers. Thus, in spite of a significant reduction in maritime transport costs, land transport costs remain significant. Between half and two-third of total transport costs for a TEU is accounted by land transport. Public policy is also playing a role through concerns over the dominant position of road transport in modal competition and the resultant concerns over congestion, safety and environmental degradation. In Europe, policies have been introduced to induce a shift of freight and passengers from the roads to modes that are environmentally more efficient. Intermodal transport is seen as a solution that could work in certain situations. In Switzerland, for example, laws stipulate that all freight crossing through the country must be placed on the railways in order to try to reduce air pollution in alpine valleys. The European Union is trying to promote intermodal alternatives by subsidizing rail, and shipping infrastructure and increasing road user costs. Since intermodal transportation is mostly the outcome of private initiatives seeking to capture market opportunities it remains to be seen to what extent public strategies can be reconciled with a global intermodal transport system which is flexible and footloose. While economies of scale enabled to reduce the unit costs of maritime, inland intermodal transportation costs account to about 50% of the total costs if terminal costs are included. With the deregulation and privatization trends that began in

11 | P a g e the 1980's, containerization, which was already well established in the maritime sector, could spread inland. The shipping lines were among the first to exploit the intermodal opportunities that deregulation permitted. They could offer door-to-door rates to customers by integrating rail services and local truck pick up and delivery in a seamless network. To achieve this they leased trains, managed rail terminals, and in some cases purchased trucking firms. In this way they could serve customers across the country by offering door-to-door service from suppliers located around the world. The move inland also led to some significant developments, most notably the double-stacking of containers on rail cars. This produced important competitive advantages for intermodal rail transport and favored the development of inland terminals. It also required various forms of transloading between maritime and domestic container units.

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LESSON 25: UNIT 9 CO-ORDINATION - ROLE OF INTERMEDIARIES

c Meet the ship on arrival and report at the customs house 1. Shipping with or for’ the Master and attend to other requirements like 2. Agent arranging for the crew to visit the doctor or dentist if 3. Freight necessary. 4. Brokers d Keep in constant touch with the ship and keep informed the company about the progress and any delays etc. 5. Freight e Notify shippers and consignees of the ships expected arrival. f 6. Forwarder After the vessel leaves the shore, the agents 7.  Must issue delivery order In the field of shipping, many persons in bringing together the  Sign the bill of lading two main parties namely shipper and ship owner play the  Advice principle (ship owner) and port authority  intermediary role. Prepare disbursement accounts The intermediary role-played may be, the role of Shipping  Collect freight and charge and remit surplus freight. Agents, Freight Brokers, Clearing and Forwarding, Customs House Agent and in these days of intermodal transportation Shipping Agents of Tramp Ship the role played by Non-Vessel Operating Common Carriers The agent in this case is required to (NYOCC).  Get a copy of the charter party (C/P) and Many a times it might be seen that a single person / firm  Study the clauses regarding the notice of readiness,  performs one or more of the above mentioned roles (for e.g.) Prepare the statement of facts the shipping agent may also performs the role of freight  Dispatch the demurrage statement brokers. Shipping Agents Remuneration of a tramp agent is usually a lump sum fee mutually agreed or based on a scale of fees fixed and Agency is a legal relationship that is created when two parties recommended by a body like the local agents association or enter into an agreement. The agent represents the principal Chamber of Commerce. subject to the principal right to control the agents conduct concerning the matters entrusted to him. In the case of chartered vessel the agent should study the time C/P to know exactly the function of the legal owners agent In order to streamline his nature of work the agent must make and the disponent owners agent. In a time charter situation clear that in all his dealings he is acting on behalf of a disclosed the legal owner agent will have a protecting or supervisory principal. In all correspondence, contracts, documents, even function. The dealings with cargo, port and customs will be the telexes and faxes, the agent should without ambiguity mention that province of the disponent owner’s agent. he is acting for a disclosed principal. Functions Agents of Liner Vessels The agent has to market the principal liner service and book The owner of the ship, in operating of his vessel will need an cargo from a large number of shippers. agent to assist him arid to act on his behalf to : The agent should have a good hold on the market with an a. Advise him on various port details like efficient sales force and should have adequate and trained staff to  Charges in port deal with the voluminous documentations.  Depth of water When the liner agent is representing the containerized service,  Possibility of any strikes. functions become more tedious. Stuffing, stripping and shore haulage of the boxes have to be supervised at the freight  Any other relevant matter regarding the port of call b) stations and container yards. Make preparation on his behalf, such as In a break bulk service the agents job is largely done when the ship  Reserving a berth sails because an inventory of these boxes has to be maintained.  Liase with stevedores for cargo work Daily report has to be sent to principals about the status of the  Ordering of tugs, pilots etc., to berth the ship.  containers at the agent’s port. Ordering stores. Close liason has to be maintained with shippers and consignees for collecting terminal handling and detention charges on behalf of  All other necessary matters regarding the particular voyage/ principals. shipment.

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Handling a liner agency involves holding a large amount of Basic Precautions In the Issue of Delivery money by way of freight and ancillary charges, this has to be Order properly accounted for, and prompt arrangement made for their Basic Precautions In The Issue Of Delivery Orders remittance to principals. In the issue of the delivery orders, shipping agents must ensure Insurance Coverage on the Liabilities of certain basic precautions like: Shipping Agents  Check the authority of the B/L signatory Since the functions of shipping agents are increasing day by day,  Compare B/L details with the manifest including corrections they are prone to make mistakes. to manifest. The International Transport Intermediaries Club (lTIC)  Check whether freight and charges have to be collected  Check defends agents and covers their professional liabilities apart whether all endorsements are in order including those from providing members free legal advice, protection, and indemnity against claims that arise during the course of of the banks involved. business  If delivery has to be made against indemnity make sure that ITIC cover includes claims for principal agrees and the indemnity countersigned by bank is  Professional negligence properly worded and is unlimited as to value and time.  Loss of documents, and Challenges For Shipping Agents  Breach of warranty of authority Mega carriers like Maersk, Evergreen, Sealand and others have opened their own agencies in major ports to have better control It also helps tramp agents in collecting outstanding disburse- over agencies. But now because of this, multinational agencies (e.g., ments from defaulting ship owners and pay for the defence of a Gulf Agency Company, Barwill and Inchape) have come up. member against whom an unjustified claim has been made. These agencies have opened offices in various countries The insurance does not cover deliberate wrong doing like including India, so as to offer principals a single “entry point” at delivery of cargo without original B/L but against an indemnity one convenient regional centre. which may result in facing a claim from the holder of the Independent agents to stand the challenge posed by mega original B/L and also cases of issue of clean B/L knowing that the carriers opening up their own agencies have formed the cargo has been damaged. Association of International Shipping Agents (AISA). It aims Sub-agency at providing international coverage by local experts. A general agent cannot represent his principal in every port or AISA as a global network compllsing of worlds independent place. A sub-agency is therefore created either with express shipping agencies offers shipping industry a single point of authority of the principal or with necessary implications. entry for agency services. It provides accurate, prompt and up to If the sub-agency is without principal authority, an agent - date information on all the worlds major ports and markets. remains liable for breach of contract and responsible for sub- NVOCC (Non Vessel Owning Common agents acts. If sub-agency is created with the authority of the Carriers) principal, the sub-agents acts will bind the principal, as the sub- The multimodal transportation has widened the scope of agent act will be deemed to be the acts of the agent performed operations of intermediaries. After the promulgation of through the sub-agent. Usually the Principal-agent contract Multimodal Transport Legislation, Indian companies including includes a provision for the appointment of sub-agent. ship agents can operate as MTO’s after obtaining a license from the Credit to Shippers Directorate General of Shipping. In competitive environment shippers expect and usually get These MTOs need not be shipowners or operators i.e., Vessel credit facility in payment of freight. Such a facility is often given Owning Common Carriers (VOCCs) Many ship agents have with principals tacit agreement and it is a rare principal who does obtained the requisite licence and are thus recognized MTOs. not agree to bear the risk of giving credit to shippers. The risk is They thus operate as Non Vessel Owning Carriers (NVOCCs). then usually borne by the agent and this is not covered by Containerized transport has opened up this avenue for them insurance. and they can function as MTOs even from inland locations. Recovery of Disbursements MTOs issue their own multi modal transport document  In the case of recovery of disbursements, a prudent agent (MTD). Shipping agents by becoming MTOs transform will always make sure that adequate funds are received in themselves into principals with all the concommittant liabilities advance. of an NVOCC.  If an agent finds it difficult to recover outstanding These liabilities can be insured, and in fact such insurance coverage disbursements, he can bring an action against the principal is a precondition for getting the D.G’s licence. The ‘The Transport either as per the agency agreement or at the place of Club’ in the U.K is the main insurer of the liabilities. residence of the principal. Freight Brokers  If the agent has made contracts or disbursed money for an Freight broker is an intermediary between the shipper and the undisclosed principal, he becomes personally liable. shipping company. He makes known about the details of the cargo available to the shipping company. To the shipper he

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provides details of shipping space opportunities and assists in 6. Cabling agent - the broker communicating with other booking shipping space. international markets. He prepares a form known as “brokers slip” and passes it on to Thus, a shipbroker is a man of many parts. In reality, he is the the shipping company. The brokers slip contains the following middleman between the two principles concerned in a charter details: party. Baltic Freight broker market is the leading broker market for a. Name of the shipper chartered ships. b. Quantity and description of the cargo Freight Forwareder c. Port of shipment, port of destination Forwarding can be defined as “Help forward”, “send on to further destinations”. The traditional outlook on the position d. Name of the ship in which shipping space has been sought. of a forwarder was to act as a buffer between the Manufacturer The shipping company after perusal of the brokers slips submitted, / exporter and the sea carrier, to assist in the efficient flow of after assessing the feasibility, gives to the broker a “Shipping goods down the international transport chain. The forwarder Order” which contains helped in booking space with the carrier, helping in movement a. Details pertaining to of goods down the dock, ensuring safe loading, arranging b. Name of the ship customs clearance and producing the documentation to and from the sea carrier. c. Name of the shipper The shipping company usually paid the forwarders commission d. Quantity (mostly 5 per cent of sea-freight). He was referred to as “Mr. 5 per e. Decription of cargo cent” in the international transport industry and his primary work f. Port of shipment was in handling documentation. g. Port of destination the freight rate that is applicable to the Depending on the terms of shipment, a forwarder may be shipment. responsible for import work. That would consist of notifying The freight broker then passes on the shipping order to the the receiver of the arrival of goods, arranging customs clearance, shipper. presenting original Bill to certify ownership and obtaining of “out of charge”, note to enable the receiver to pick up his At each port, there is an association of freight brokers working as goods. intermediary in the business of booking shipping space. The service (\f the freight broker is free to the shipper. The With the introduction of containerization, there was dramatic shipping company on the cargo booked through him pays their change in the trading environment, multi modal transport was brokerage. Now brokers provide more extensive services such as made possible and containers were packed at the exporters own shipment matching, rate negotiation, billing and tracing factory and transported all the way to an overseas receivers depot, and transport companies started offering prices directly to Chartered Ship - Freight Brokers the client (shipper) for a total through transport movement, The basic function of the ship broker is to bring together the two effectively acting as their own forwarders. parties concerned, involving the ship and cargo owners. In the The concept of “integrated carrier” who provided the client with his following negotiations between them, a charter party is ultimately equipment, haulage, vessel and forwarding exercise as a concluded. ‘package deal has become established in the international The ship owner on completion and fulfilment of the contract transport scene. A large proportion of the traffic carried by the deep- derives the broker’s income from the commission payable. sea container consortia moves on a door - to - door A further role of the ship broker, other than fixing vessels is integrated basis. Integrated service are primarily concerned with acting as agent for the ship owner. As such, he is responsible for (FCL) full container loads. everything, which may concern the vessel whilst she is in port. This The freight forwarders had to find their place. Therefore, they embraces, customs formalities matters concerning the crew, loading started offering to their clients similar door - to - door quota- I discharge of vessels bunkering and so on. tions and handled the less - than -container load (LCL) traffic. The forwarders bought shipping space with other (non- Duties Can Be Summarized as Follows conference) carriers to the extent the major consortia had left in 1. agent - where by he acts for the cargo merchant covering all traffic in the route. seeking a suitable vessel in which to carry the mechandise. Deep-sea forwarders, who were offering door-to-door rate, if 2. Sale and purchase broker - acting on behalf of the buyer or necessary, either sub contract the movement or particular seller of ships and bringing the two parties together. consignment to the sea carrier or a non-vessel operating 3. Owners broker - acts for the actual ship owner in finding (NVOCC) to effect the overseas movement. cargo for the vessel. The NVOCC system is the bulk buying of slot space on a 4. Tanker broker - dealing with oil tanker tonnage. container vessel and filling it with traffic where he can recover 5. Coasting broker - acts as broker for vessels operating around more from the client. Several forwarders may co-operate to offer the coast and I or in the short sea trade. such a service to increase their bargaining position to obtain lower rates from the sea carrier. Concentration of the forwarders was on LCL traffic because the sea carrier is not geared up to

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cover this market. The forwarders consolidation service is Freight forwarder and Customer House Broker are two referred to as ‘groupage’. intermediaries whose services are quite essential in Thus Under Deep Sea Transport moving cargo for their principals. Freight forwarder generally works for exporters, whereas the customhouse broker works  Traditionally, forwarder’s services were made use of, who for importers. Because the functions are similar, freight received 5 per cent commission from ship owner forwarders some times act as customs brokers and Vice versa.  In the case of FCL traffic systems developed were 1. Use of F.F. is an independent businessperson who handles shipments ‘integrated service’ where in shipping lines they were for compensation. He is an exporter agent who performs offering door-to-door service, doing away with forwarder. usually all aspects of physical distribution necessary to move 2. Use of forwarders operating NVOCC service cargo to overseas destination in the most efficient and economic 3. Use of forwarders who subcontracts to shipping lines for manner. movement of goods The F.F. can represent shippers in both air and ocean freight shipments because the procedures and documents required are  In the case of LCL traffic, systems developed were 1. very similar. Use of LCL service of the shipping line The Freight Forwarder’s Major Contribution to the 2. Use forwarder with groupage service. Exporter is Short sea services: In the area of short sea services, more than  His ability to provide traffic and usage of containers 12 meter tilt trailers were used as the base  Documentation responsibilities for international freight unit of service. The RORO (roll-on, roll-off) ships were movements. convenient for the trailer usage particularly in the sea transport between Great Britain and the Europe. Nearly 75 per cent of  This middleman handles the voluminous paper work unitized cargo, between United Kingdom and Europe, the required in international trade and is highly specialized in carriage was by RO-RO mainly using 12-meter trailers.  Traffic operation (methods of shipping) The forwarder who specialized in trailer movements came to be  Govt export regulations known as “trailer operators”, offering door-to-door service.  Overseas import regulations Majority of trailer movements are “unaccompanied” in that the  Documents connected with foreign trade and custom traction unit is not carried on the sea leg where as in ‘Self-drivers’ clearances. the driver and his unit cover the total door-to-door transit. As the exporters business grows, the exporter tends to perform Thus under short sea services there are containers and trailers more of the forwarding itself. made use of: The freight forwarder can assist an exporter from the very  In the case of movement of FCL, systems which can be  availed of are beginning in getting shipment ready for overseas, by providing Assistance in preparing quotation 1. Use door-to-door service of the shipping line, with no forwarders service or  Advice on freight cost 2. Use forwarder operating NVOCC service.  Advice on port charge  In the case of movement of Full Trailer Load,  Advice on consular fee 1. Use the service of integrated trailer operators (who as well as  Advice on cost of special documentation owning the trailers and vehicles, they own the ships  Advice on Insurance cost providing the sea route connection between the two road  Recommend degree of packing needed systems ego Ferry masters, Norfolk line) or  Arrange to have merchandise packed or containerized. 2. Use forwarder trailer service. The Freight Forwarder Also Prepares  In the case of movement of LCL or L trailer L, the groupage  service of forwarders can be used. Ocean bills of lading,  Thus freight forwarders have to face competition from inte- Any special consular documents, grated carriers and from shipping lines. Hence, forwarders have to  Reviews letters of credit, packing list and so on to ensure provide a service-oriented package meeting the clients that all procedures are in order. requirements on cost, service and reliability. After the shipment is made, the F.F. forwards all documents to the Nearly 75 per cent of liner cargoes are dealth with, with the help of customer’s paying bank with instructions to credit the forwarding agents. exporters account. Their expertise in handling, routing and documentation of He Can Assist the Exporter in Other consignments makes them an useful and much used intermedi- Areas E.g. ary. He is particularly of much help for the small shipper, in  Can reserve space aboard an ocean vessel. whose case part loads from many different shippers are  Consolidate small shipments into full container loads. consolidated into Full Container Load by the forwarding agent.

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If desired, the F.F. can further move goods inland in a foreign Expanding business interests: In more recent years, F.F. has country, through various affiliates. entered specialized, but ancillary fields as packing, warehousing F.F. receives fee from exporters. The service cost is a legitimate and actual carriage of goods (generally involving road transport) export cost and should be figured into the contract price charged to Additionally an increasing number of agents own ISO Contain- buyers. ers for use in international services offering regular consolidated shipments. In addition, he may receive brokerage fee or rebates from shipping company for booked space. F.F. commission is paid by In certain areas, FF’s are tending to merge to raise capital, often for the ship lines. ISO container and international road haulage units investment. Freight forwarders originating cargo for individual liner cargo Because F.F’s control most of the smaller shipments and service receive a commission, which varies according to the because the less than - container (LCL) traffic accounts for 17-18 tonnage forwarded. per cent of the business, carriers woo freight forwarders with extra rebates. F.F. have become increasingly involved in the airfreight business under consolidation arrangements. Expanding business interests: In more recent years, F.F. has entered specialized, but ancillary fields as packing, warehousing This trend is ideal for the small exporter who can despatch his and actual carriage of goods (generally involving road transport) merchandise by airfreight under very competitive terms. Additionally an increasing number of agents own ISO Contain- A number of larger agents tend to have regularly booked ers for use in international services offering regular consolidated capacity on the more important, scheduled, high capacity air shipments. freight flights. As the exporters business grows, the exporter tends to perform Freight forwarder is a “cargo intermediary” who takes up the more of the forwarding itself. transport of goods on behalf of his customer without himself The freight forwarder can assist an exporter from the very assuming the role of a carrier. Different names, ego Customs beginning in getting shipment ready for overseas, by providing  house agent, clearing agent, customs broker, shipping & forwarding agent in different countries know him. Assistance in preparing quotation The customs clearance formalities are generally considered to be  Advice on freight cost cumbersome by the exporters.  Advice on port charge The Forwarding Agent Generally Does The Following  Advice on consular fee Services  Advice on cost of special documentation  Assists in processing of the Shipping Bill covering the  Advice on Insurance cost shipment.  Recommend degree of packing needed  Pays export I import duty on behalf of the shipper.   Arrange to have merchandise packed or containerized. Obtains the Carting order from the shipping company and carts down the goods by trucks or other means from the The Freight Forwarder Also Prepares godown I factory to the docks.  Ocean bills of lading,  Delivers the goods to stevedores, and obtains the Master  Any special consular documents, from  Reviews letters of credit, packing list and so on to ensure  the ships Captain. that all procedures are in order.  Obtains the ‘Bill of Lading’ form from Shipping Company, After the shipment is made, the F.F. forwards all documents to the gets it duly filled in with necessary particulars and submits customer’s paying bank with instructions to credit the exporters the same to the shippmg company. He also submits to the account. He can assist the exporter in other areas also.  Can reserve shipping company the Master Receipt (which is released by space aboard an ocean vessel. the port authorities after the shipper pays the port charges on  Consolidate small shipments into full container loads. If the cargo). desired, the F.F. can further move goods inland in a foreign All these activities have to be done with speed, since if shipment country, through various affiliates. is not effected within seven free days from the date when the F.F. receives fee from exporters. The service cost is a legitimate goods are brought into the port, the goods incur demurrage. export cost and should be figured into the contract price charged to F.F. are for-profit business that consolidate small shipments buyers. from various customers into a bulk load and then utilize a In addition, he may receive brokerage fee or rebates from common carrier (surface or air) for transport. At the destination, shipping company for booked space. F.F. commission is paid by the F.F. splits the bulk load into the original smaller shipments. the ship lines. Local delivery mayor may not be included in the forwarder service. The main advantage is the lower rate because of the Because F.F’s control most of the smaller shipments and bulk load and faster transport of shipments than would be because the less than - container (LCL) traffic accounts for 17-18 per cent of the business, carriers woo freight forwarders with possible for the individual customer while dealing directly with extra rebates.

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the common carrier. FF accepts full responsibility for shipment may also act an F.F. once the shipment is cleared. A CHA must performance. be licensed by the Treasury dept. in order to perform these In a nutshell Freight Forwarders role consists of  services. His services are valuable because the requirement for customs clearance is complicated. Advice of financial and trade nature As per the CHA Regulation, the obligation of CHA is: a.  Advice on packing Obtain authorization from each of the companies, firms or  Planning routes individuals by whom he is employed as CHA and produce  Reserving freight space such authorization whenever required by an Asst.  Advising Insurance Commissioner of Customs.  Preparing Documentation b. Not withhold information relating to clearance of cargo or  Arranging Custom Clearance baggage issued by the Commissioner of Customs from a client who is entitled to such information.  Provide (Transport) consolidation facilities c. Advise his client to comply with the provision of the Act and The Swiss Freight Forwarders’ Association (SFFA) has issued a in case of non-compliance, shall bring the matter to the new edition of its General Condition (1994). The issue of the general conditions is to supplement the provisions of the Swiss notice of the Assistant Commissioner of Customs. Law and their application is not mandatory. The new version d. Exercise due diligence to ascertain the correctness of any distinguishes between the following areas of activity of the information which he imparts to a client with reference to forwarder: the forwarder as an intermediary, as a carrier, and as a any work related to clearance of cargo. provider of other service like customs clearance and the like. The Stevedores responsibilities and liability of the forwarder are spelt out Stevedores are appointed by the shipping company to receive depending on the area of activity in which the freight forwarder cargo and to load or to discharge/unload cargo from the ship. is rendering his services. The term stevedoring means loading and unloading of cargo Customs House Agent onto and from a shipwith the help of cranes and derricks The customs clearance of goods involves quite many procedure installed in the ship as well as on the wharf Containers are formalities. And in many cases the customs station is for away handled by huge gantry cranes. from the official place of the Importer/Exporter. Moreover Dock labour gangs: Ships engage labour gangs by filing a prompt and quick clearance is necessary, only then goods can be requisition with the call-stand department of the Dock Labour cleared out of the customs area. Even work of Central Excise and Board, which are found in all major ports. Usually one gang of Income tax can be carried out in a comparably leisurely labourers consists of: manner, but customs clearance has to be really quick. Hence, to  One Tally clerk help and represent the Importer / Exporter for the clearance  One Tindal work under the Customs Act of 1962, there is provision for  licensing Customs House Agents. Prior to1962, such represen- One Winch Driver tatives were known by different names such as Macadam’s,  One Signal man Dalals, Baggage Agents, and Clearance Agents etc.  One Leading Mazdoor The Central Board of Excise and Customs (CBEC) has issued  Eight Mazdoors. certain Regulations known as CHA Licensing Regulation 194 The Leading Mazdoor supervises the activities of the Mazdoors and laying down the conditions and procedures to be followed. A Tindal assists the Leading Mazdoor in his work. The person, who desires to become a CHA, should file an applica- Winch driver operates the crane after the mazdoors attach the cargo, tion in the prescribed form, when the commissioner of usually on pallet or in container, to the sling of the crane. The Signal customs invites such applications. Initially a temporary licence, man, navigates’ the movement of cargo, by giving signal to the valid for two years, is issued. To be eligible, a person should winch driver during loading and discharging have experience in the line for at least one year should have operations and ensure safe movement of cargo. assets to the extent of Rs.1/-lakh, and also execute a security Tally clerk checks that the number of articles loaded or unloaded bond for Rs.25000/- After passing a qualifying exam, within a onto or from the ship tallies with the available documents. period of two years, the temporary licence can be made a regular Mazdoors are responsible for all activities connected with the licence. The licence is issued for five years, and can be renewed physical loading of the cargo from the port through the crane to the thereafter on payment of a fee of Rs.3000/- for a further period deck. If additional workers are needed other than from the dock of three years. labour, they are drawn from local labour organizations As an individual or firm licensed to enter and clear goods referred to as Private Pools. through customers, a customs house broker is a person / firm Dock. Labour board works in co-ordination with the Post Trust in employed by an importer to take over the responsibility of supplying efficient and trained labourers for the dock and harbor. It clearing the importers shipments through customs on a fee basis. plays an important role in setting disputes among the various The CHA is bonded, and the CHA’s bond provides the categories of dock and harbor workers and between .the workforce required coverage to carryon the responsibilities of the job. He and the government.

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Usually the labourers are not paid monthly wages, but are e.g., fruit, coas, and the like, and most bulk cargoes have to be remunerated on the basis of work shifts. The dock labour sufficiently trimmed and levelled in the holes. board prescribes the minimum cargo that must be handled by a During unloading, the weight of the cargo loaded is checked by the gang of labourers in each shift. If the gang exceeds this target, vessel’s draught makings, which are situated on both sides of the then they are additionally compensated on piece rate basis. steam and stem posts of the vessel. As far as possible, it is The onerous nature of the work involved may be appreciated endeavoured to keep the vessel on an even keel, with possibly a when one considers the various types of cargo involved. For slightly deeper immersion at the stem. There must be no list in the example, the stevedores may have to cope with bulk cargo, such vessel, caused by greater weight of cargo on one side than the other. as timber, coal or grain; the cargo may be on a unit basis, such as Due consideration must also be given to the state of the vessel at bales, cases, crates, boxes and even refrigerated cargo. Container the time of discharge, in order to allow discharging operations to cargo poses its own problem in loading and discharge, requiring proceed without distributing stability. modem mechanical equipments. In some cases, it may be Bulk cargoes are treated differently from other types of . possible that the vessel has to load, or discharge, all the types. . Grain, for example, has to be carried in accordance with the A vessel is said to be “breaking bulk” immediately she com- regulations imposed by the Merchant Shipping Acts. Conse- mences to discharge cargo. “Forced discharge” signifies the quently, shifting boards have to be fitted fore and aft the holds, compulsory discharge of I cargo short of destination through with adequate feeders and similar gear in the tween decks to accident, sacrifice, or other extra-ordinary circumstances. A vessel prevent unnecessary shifting in the cargo. Coal must be sailed “light” when she sails “in ballast”, i.e. when she has no adequately trimmed and ventilated, with its weight properly cargo to board. To “stem” a vessel is a term peculiar to the coal distributed throughout the holds. trade, means to load her, or to arrange to load her, or arrange to Goods (such as machinery) are usually stowed in the lower load her with a coal cargo within a specified time. holds to assist to the stability of the boat, whereas light goods On board the vessel itself, there are appliances available for the constitute, as far as possible, top stowage. Where cargo is likely lifting and lowering of cargos, such as derricks,gin- to be damaged by contact or otherwise, “dinnage”, consisting blocks,winches,wire and rope falls. of mate and similar merchandise, is used to give the necessary Usually, this work is put into the hands of “deck hands”, and protection. In Lloyd’s Register a note may occasionally be seen other stevedores are employed below in the ship’s hold for the against a vessel “cargo battens not fitted”. This is important proper storage of cargo. The rigging of the vessel is performed because the cargo in such a vessel may be more readily damaged by “riggers”, who attend to the necessary equipment on board by ship’s sweat. for the handling of cargo. “Slinging” is a term covering the Some classes of cargo require special treatment, for example, those operation of shifting the cargo to or from the vessel by slings, likely to be damaged by heat must be stowed away from the boilers. or the charge made for this operation. “Cranage” is the charge Odoriferous cargo must be kept apart from other cargo likely to be made by dock or port authorities for the use of cranes for damaged by taint. Acids must be kept on their own as far as loading or unloading heavy cargo which cannot be handled by possible. Casks must be stowed with their bungs up. Earthenware ship’s tackle. must be given top stowage, if it can be Stowage Operational considerations by arranged, and protected by strew. In general, the must stevedores endeavour to limit the possibility of damage. Stevedores, who are in charge of loading and unloading cargo While the loading is proceeding, a “stowage plan” is carefully have to take into consideration the following: prepared {often in different colours) so that the master has an adequate knowledge of the cargo for which he is responsible. Generally, cargo may be homogenous, or heterogeneous. The Copies of the stowage plan are sent to agents abroad, and are former is merchandise of a similar type, such as cases, boxes, and available at the shipowners’ office if perusal is required. the like, whereas the latter denotes cargo very dissimilar in kind. The stevedores have to consider these factors when Question For Self Analyzation: loading the cargo. Q1 Explain the role of intermediatory. What are the different Broadly, the stevedores have to take into account the following: 1. types of intermediatory? Availability of cargo, according to the ports of discharge. 2. The Q2 What are functions of shipping agent? general stability of the ship. Q3 Explain the term Freight broker and Freight 3. The prevention as far as possible of damage to the cargo by forwarder.Also explain what are the duties of freight shifting, contact, sweat, bad stowage, and similar causes. broker on Charted Ship. Consequently, to meet the first consideration, the layout of the Q4 Write short notes on: cargo is carefully considered, with due allowance given to a. Custom House Agent bottom stowage, and the avoidance of space wastage in each b. Stevedores hold, to load the vessel as completely as possible. Goods are securely lashed” or “checked off’ (wedged) to avoid displace- ment by the rolling or pitching of the vessel during the voyage. For some types of cargo care has to be exercised in ventilation,

191 Collaborative Planning, Forecasting and Replenishment (CPFR) It is a concept and a business practice that aims to enhance supply chain integration by supporting and assisting joint practices. CPFR seeks cooperative management of inventory through joint visibility and replenishment of products throughout the supply chain. Information shared between suppliers and retailers aids in planning and satisfying customer demands through a supportive system of shared information. CPFR is a strategy for improving supply chain efficiency and effectiveness by making demand transparency drive the execution of the supply chain participants to maximize value for the end-customer. Fundamentally, the aim of CPFR is to convert the supply chain from a disjointed, ineffective and inefficient “push” system to a coordinated “pull” system based upon end customer demand. Trading partners move to selling through their customer firms (to their end-customers) rather than to their customer firms. CPFR aims to enhance supply chain integration by supporting and assisting joint practices. CPFR seeks cooperative management of inventory through joint visibility and replenishment of products throughout the supply chain. Information shared between suppliers and retailers aids in planning and satisfying customer demands through a supportive system of shared information. This allows for continuous updating of inventory and upcoming requirements, making the end-to-end supply chain process more efficient. Efficiency is created through the decrease expenditures for merchandising, inventory, logistics, and transportation across all trading partners[1].

CPFR Model

CPFR Model was originally presented by VICS in their VICS CPFR Guidelines in 1998 as a 9 step process (VICS 1999):

1. Develop Front End Agreement 2. Create the Joint Business Plan 3. Create the Sales Forecast 4. Identify Exceptions for Sales Forecast 5. Resolve/Collaborate on Exception Items 6. Create Order Forecast 7. Identify Exceptions for Order Forecast 8. Resolve/Collaborate on Exception Items 9. Order Generation The CPFR reference model provides a general framework for the collaborative aspects of planning, forecasting and replenishment processes. The main processes shown in the model have four stages that are performed in circle. Each stage will be described in detail below [2]:

▪ Strategy & Planning, Collaboration Arrangement is the process of setting the business goals for the relationship, defining the scope of collaboration and assigning roles, responsibilities, checkpoints and escalation procedures. The Joint Business Plan then identifies significant events affecting supply and demand during the planning period, such as promotions, inventory policy changes, store openings/closings, and product introductions. ▪ Demand & Supply Management is divided into Sales Forecasting aimed at predicting consumer demand in a point of sale, and Order Planning/Forecasting aimed at predicting future product ordering and delivery requirements based upon the sales forecast, inventory positions, transit lead times, and other factors. ▪ Execution consists of Order Generation, which transitions forecasts to firm demand, and Order Fulfillment, the process of producing, shipping, delivering, and stocking products for consumer purchase. ▪ Analysis tasks include Exception Management, the active monitoring of planning and operations for out-of-bounds conditions, and Performance Assessment, the calculation of key metrics to evaluate the achievement of business goals, uncover trends or develop alternative strategies CPFR Benefits

CPFR benefits from demand point of view:

▪ Enhanced Relationship ▪ Implicitly, CPFR strengthens an existing relationship and substantially accelerates the growth of a new one. ▪ Buyer and seller work hand-in-hand from inception through fruition on business plan, base, and promotional forecasts. ▪ Continual CPFR meetings strengthen this relationship. ▪ Greater Sales ▪ The close collaboration needed for CPFR implementation drives the planning for an improved business plan between buyer and seller. ▪ The strategic business advantage directly translates to increased category sales. ▪ Category Management ▪ Before beginning CPFR, both parties inspect shelf positioning and exposure for targeted SKUs to ensure adequate days of supply, and proper exposure to the consumer. ▪ This scrutiny will result in improved shelf positioning and facings through sound category management. ▪ Improved Product Offering ▪ Before CPFR implementation, the buyer and the seller collaborate on a joint product offer that includes SKU evaluation and additional product opportunities. CPFR benefits from supply point of view:

▪ Improved Order Forecast Accuracy ▪ CPFR enables a time-phased order forecast that provides additional information, a longer lead time for production planning, and improved forecast accuracy vs. either stand-alone VMI/CRP or other industry tools. ▪ Inventory Reductions ▪ CPFR helps to reduce forecasting uncertainty and process inefficiencies. ▪ How much inventory does your company hold to “cover up” forecasting errors or a trading partner’s inability to provide a product available in a timely manner? ▪ With CPFR, the product can be made-to-order instead of made-to-store on the basis of forecasting. ▪ Improved Technology ROI ▪ Through the CPFR process, technology investments for internal integration can be enabled with higher quality forecast information. ▪ Your company will benefit by driving internal processes with common, high- quality data. ▪ Improved Overall ROI ▪ As other processes improve, the return on investment in CPFR can be substantial. ▪ Increased Customer Satisfaction ▪ With fewer out-of-stocks resulting from better planning information, higher store service levels will prevail offering greater consumer satisfaction.

CPFR – Collaborative, Planning, Forecasting and Replenishment Model CPFR is a technique that combines intelligence of all the partners involved in a supply chain to plan and fulfill the customer demand. Main objective of is to increase the efficiency of the supply chain network by concentrating on reducing the inventory costs, transportation and logistics costs and increasing availability to the customer. It provides a framework which gives the flow of goods, services and information. CPFR aims at integrating all the players in a supply chain. In CPFR all the suppliers and retailers share their information and this information helps in forecasting the inventory in a better and more efficient way and making sure the inventory is constantly updated. It has evolved from an Open Source initiative called CFAR.

Walmart and P&G are some of the major companies using CPFR to optimize their supply chains. Some time back when one of P&G’s executives Mike Graen, who was a part of the Walmart team (P&G was among Walmart’s biggest supplier), was assigned to help the two companies become more efficient by using information technology and sharing information. The two companies shared their data and this benefited both of greatly and they made a $50 million swing in their profitability. This shows the power of collaborating and sharing information across the supply chain and how it can help all the organizations involved.

The CPFR Model The key elements in the CPFR model are: Strategy and Planning, Demand and Supply Management, Execution and Analysis

The steps involved in developing agreements for collaboration between the various partners

• • Develop the Front End Agreement • • Create the joint business plan • • Create Sales Forecast • • Identify exceptions in the Sales Forecast • • Resolve or Collaborate on Exception Items • • Create Order Forecast • • Identify Exceptions in Order Forecast • • Resolve/Collaborate on Exception Items • • Order Generation

Challenges involved with CPFR

• Since CPFR tries to integrate all the partners, their roles and responsibilities will have to be clearly defined. So selecting partners becomes tough. • As all the organizations share different goals and objectives, deciding on common goals and objectives is hard. • Preparing detailed plans for operations, inventory control and logistics will be a challenge. • Sometimes if one of the organizations is in a stronger position, that organizations might try to influence others to by applying pressure. For example Dell being a powerful company dictates its terms to the suppliers and they have to carry Dell’s inventory for them. So this also affects the CPFR. • When integrating all the partners in the supply chain, some of them might not be willing to share certain confidential information with the other partner and this is an additional challenge. This was the case with Herman Miller when their suppliers weren't willing to provide them with certain details which they required. • The change in culture required also is challenging. As the size of the supply chain increases, the harder it becomes to manage the culture changes needed.

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Erp Concept for Enterprise Management and Knowledge Management Era

Ivona Vrdoljak Raguž University of Dubrovnik Croatia

1. Introduction Development of information and communication technologies has influenced the evolution of all kinds of computer applications in the organization. At the same time external environment and phenomenon of globalisation have become more complex with new requires and conditions for enterprises. In that context, effective information system has become necessity for every organization in order to increase competitiveness by cutting down costs through better logistics. In these circumstances enterprises have two challenges: to create and implement an infrastructure for information technologies with applications for storing and sharing information and to effectively use these information for decision making process. Success for enterprises depends upon a significant flow of information and goods in the supply chain, client relationship and the ability to perform e-business (Vuković et al., 2007). E-business is concerned specifically with information systems solution packages used by enterprises for e-business transaction purposes for meeting customer requirements in Business-to-Business (B2B) and Business-to-Consumer (B2C) exchanges. Popular among the e-business applications for B2B are Supply Chain Management (SCM) and Enterprise Resource Planning (ERP) systems and may include online purchase or procurement between customer and supplier. For B2C e-business application the best example is Customer Relationship Management (CRM) system. Information technology includes all matters concerned with the computer science and technology, design, development, installation and implementation of information systems and applications. IT is a framework for achieving strategic goals of an enterprise that incorporates a variety of commercial software packages that are related to various areas of an organisation such as finance, accounting, human resources, inventory, procurement and customer service. It is recognized that the ability to provide right information at the right time brings a great advantage to the world of complex business relationships and competitiveness. ERP as an enterprise-wide set of management tools that balance demand and supply, having the ability to link customers and suppliers into a complete supply chain, to employ proven business processes for decision-making, and to provide high degrees of cross- functional integration among sales, marketing, manufacturing, operations, logistics, purchasing, finance, new product development, and human resources, thereby enabling people to run their business with high levels of customer service and productivity, and to simultaneously lower costs and inventories, while providing the foundation for effective e- commerce (Wallace & Krezmar 2001).

www.intechopen.com 114 New Trends in Technologies: Control, Management, Computational Intelligence and Network Systems

ERP as an e-business application for B2B allow the organisation to better understand its business, resources and plan for the future (the popular ERP packages in the market are: SAP, BAAN, Oracle Financials JD Edwards and People soft). The purpose of this paper is to explore ERP concept and its implementation in enterprises. The research framework examines importance of ERP concept and its implementation as a main factor for competitiveness for large Croatian enterprises. The result of the research reveals that the ERP systems are not insufficiently used in large Croatian enterprises. Details of the results, implications of the findings, and conclusions are presented and discussed. The present study provides a starting – point for further research of implementation process of ERP systems in Republic of Croatia.

2. ERP historical perspectives The evolution of ERP systems is a reflection of added layers of functionality to its germ-cell Materials Requirements Planning (MRP) of the 70’s. Manufacturing Resource Planning (MRP II) emerged in the 80’s and then followed by Enterprise Resource Planning (ERP) systems in the 90’s and ERP II in the 2000’s (see Table 1). ERP offers one integrated solution that aligns information technology and business processes into one repository. The ERP progression parallels the development of the economy, which was considerably instituted on the tangible assets during the 70’s. But, over time this dependency gradually skewed towards the intangible assets and intellectual capital.

1960s Enterprise Resource Planning (ERP) is born in the early 1960s from a joint effort between J.I. Case, the manufacturer of tractors and other construction machinery, and partner IBM. Material Requirements Planning or MRP is the initial effort. This application software serves as the method for planning and scheduling materials for complex manufactured products. 1970s Initial MRP solutions are big, clumsy and expensive. They require a large technical staff to support the mainframe computers on which they run. 1972 Five engineers in Mannheim, Germany begin the company, SAP (Systemanalyse und Programmentwicklung). The purpose in creating SAP is to produce and market standard software for integrated business solutions.1975 Richard Lawson, Bill Lawson, and business partner, John Cerullo begin Lawson Software. The founders see the need for pre-packaged enterprise technology solutions as an alternative to customized business software applications.1976 In the manufacturing industry, MRP (Material Requirements Planning) becomes the fundamental concept used in production management and control. 1977 Jack Thompson, Dan Gregory, and Ed McVaney form JD Edwards. Each founder takes part of their name to create the company moniker. Larry Ellison begins Oracle Corporation. 1978 Jan Baan begins The Baan Corporation to provide financial and administrative consulting services. 1979 Oracle offers the first commercial SQL relational database management system. 1980 JD Edwards begins focusing on the IBM System/38 in the early 1980s. MRP (Manufacturing Resources Planning) evolves into MRP-II as a more accessible extension to shop floor and distribution management activities. 1981 Baan begins to use Unix as their main operating system. 1982 Baan delivers its first software product. JD Edwards focuses on the IBM System/38.

www.intechopen.com Erp Concept for Enterprise Management and Knowledge Management Era 115

1983 Oracle offers both a VAX mode database as well as a database written entirely in C (for portability). 1984 Baan shifts the focus of their development to manufacturing. 1985 JD Edwards is recognized as an industry-leading supplier of applications software for the highly successful IBM AS/400 computer, a direct descendant of the System/38. 1987 PeopleSoft is founded by Dave Duffield and Ken Morris in 1987. 1988 PeopleSoft’s Human Resource Management System (HRMS) is developed. 1990 Baan software is rolled out to 35 countries through indirect sales channels. The term ERP (Enterprise Resource Planning) is coined in the early 1990’s when MRP-II is extended to cover areas like Engineering, Finance, Human Resources, and Project Management. 1991 PeopleSoft sets up offices in Canada. This leads the way to their presence in Europe, Asia, Africa, Central and South America, and the Pacific Rim. 1995 Baan grows to more than 1,800 customers worldwide and over 1,000 employees. 1999 JD Edwards has more than 4,700 customers with sites in over 100 countries. Oracle has 41,000 customers worldwide (16,000 U.S.). PeopleSoft software is used by more than 50 percent of the human resources market. SAP is the world’s largest inter-enterprise software company and the world’s fourth largest independent software supplier overall. SAP employs over 20,500 people in more than 50 countries. To date, more than 2,800 of Baan’s enterprise systems have been implemented at approximately 4,800 sites around the world. 2001 – 9/11 occurs creating a drop in demand for new ERP systems 2002 Most ERP systems are enhancing their products to become “Internet Enabled” so that customers worldwide can have direct access to the supplier’s ERP system. 2004 – Services Oriented Architecture (SOA) becomes a standard that ERP vendors work towards. This software architecture allows different systems to communicate between one another. 2003-2005 Industry consolidation occurs: Oracle – E-Business Suite, JD Edwards, Peoplesoft, and Seibel Microsoft – Navision, Axapta, Great Plains, and Solomon Infor – Baan, Mapics, and a slew of other products Sage – Best Software is acquired The consolidations continue to occur and the key players (SAP, Oracle, Infor and Microsoft) continue to build out their products. The next phase of ERP systems will be the merged products, including Oracle’s Fusion and Microsoft’s project green’s end product.

Table 1. ERP history (www.erpandmore.com)

2.1 Phase 1: Manufacturing integration (MRP) MRP systems were developed in the ‘70s. MRP is connected with simple production operations. It represents a more advanced concept of earlier efforts to process the bill of materials. The inventors of MRP were looking for a better method for ordering material, and they found it in that concept. The basic concept for planning material requirements is based upon the four questions which represent its logic (Vuković et al., 2007): • What are we going to make? • What does it take to make it? • What do we have? • What do we have to get?

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These four questions are called the universal manufacturing equation. It has a logic that is applied in production enterprises. MRP simulates the universal manufacturing equation. It uses the master schedule to answer the question what are we going to make, the bill of material to answer the question what does it take to make it, and inventory records to answer the question what do we have, and to determine future requirements, thus answers the question what do we have to get. The main function of MRP is to guarantee the availability of a required material. MRP is used for planning the supply and production of materials for internal use, assembly, production or distribution, and it has to be available at the right time and in the right quantity. The planning process includes monitoring of stock size, automatic creation of orders for materials, intermediate production or its divisions. By functioning in that way, MRP attempts to maintain a balance between the minimum safe inventory size and the costs. Classic inventory management treats every single material, element or product separately, not taking account of the frequency of use and consumption of one part or another. The MRP approach is different because a lot of customers order individual products in packages, so that demand is not entirely independent. There must be a connection between demand of nuts and bolts, paint and brushes, etc. MRP recognizes this connection and attempts to balance demand and supply (Vuković et al., 2007). MRP becomes a formal mechanism for priority management in changing production surroundings. The changes in production surroundings are not possible or probable—they are inevitable. The function of MRP that is directed at keeping deadlines and on changes in the production of enterprises is called the Priority Planning. Capacity is a factor that is of equal importance when compared with the previous two factors (Wight, 1993). Tools for capacity planning in the production enterprise, as related to the MRP computer system are: • Sales and operations planning, • Master scheduling, • Demand management, • Rough-cut capacity planning. The total development of these tools has led to the next step of planning evolution. Due to the above MRP shortcomings in the 1970’s, the Manufacturing Resource Planning system (MPR II) has emerged in the 1980’s. Sadagopan (1998) stated that, unlike MRP, MRP II addresses the entire manufacturing function and not just a single task. The increased functionality enabled MRP II to check the feasibility of a production schedule taking into account the constraints, and to adjust the loading of the resources, if possible, to meet the production schedule. While Siriginidi (2000) added the possibility of the integration with other shops , MRP II has certain extensions like rough cut capacity planning and capacity requirements planning for production scheduling on shop floor as well as feedback from manufacturing shops on progress of fabrication. This last functionality requires a more integrated system. MRP II is more than a material management tool as indicated by Koch (2001) and within the logistic vision, the technology of MRP II, manufacturing resource planning offers an interpretation of both the main problems of manufacturing as material flow, and the tools and procedures needed to solve these problems by realizing a full control system. However, Swan et al (2000) observed that MRP II has been widely promoted by technology suppliers as the definitive “best practice” solution for production management and control. But, enterprises have encountered many problems in implementing MRP II - including organizational not just software. However, prior to these findings, Foxlow (1994) reported that there is a need for new knowledge-based manufacturing software, incorporating

www.intechopen.com Erp Concept for Enterprise Management and Knowledge Management Era 117 artificial intelligence techniques, offers benefits to companies whose products are complex, highly varied, or made-to-order. However, these are precisely the areas where conventional MRP II systems are widely perceived as having failed.

2.2 Phase 2: Enterprise resource planning (ERP) With the evolution of concepts like MRP and MRP II, we arrive at the currently used concept of enterprise resource planning or ERP. The foundation for ERP is the same as in MRP II. ERP has developed as a set of business processes, thanks to the development of information and communication technologies, while its conceptual development is just one step in the evolution of enterprise management (Vuković et al., 2007). The ERP systems were also faced with their own implementation and integration problems. The major difficulties with integration, however, appeared during the augmentation of core ERP systems with legacy systems. The main reasons to implement the ERP concept are (Vuković et al., 2007): • Integration of financial information. • Integration of clients orders. • Standardization and speed of production processes. • Stock sizing. • Human resources information standardization. It is essential is to draw a difference between the concept of ERP and the ERP system. ERP systems enable the realization of the ERP concept.

2.3 Phase 3: Customer-centric Resource Planning (CRP) The range of ERP functions was further expanded at the end of the 1990s to include “front office” functions such as sales, marketing and e-commerce. E-commerce applications needed to be connected to back-end systems and thus forced many ERP software providers including SAP, PeopleSoft and BAAN_ to reinvent themselves as CRP providers. While traditional ERP solutions were equipped to support the “make-to- stock configure-to-order business model”, CRP systems are able to meet the e-commerce “build-to-order fulfil-to- order” requirement. Effective manufacturing and service delivery in the e-commerce model require customer-centric, continuous planning instead of the classic ERP assumption of long planning cycles (Bosilj-Vukšić & Spremić, 2005).

2.4 Phase 4: Inter-enterprise Integration (XRP) or ERP II Since the world of the 2000s has become one of interconnected enterprises creating global information systems, the scope of ERP systems comprises the entire value chain of the enterprise, its customers, suppliers and trading partners. The main goal of the XRP system is to provide intelligent decision-support capabilities in order to reduce inventory, foster strategic pricing, improve cycle times and increase customer satisfaction throughout the supply chain management and selling chain management. To achieve this goal, an XRP model must support the integration of external and internal business activities with the suppliers and customer’s information and processes (Bosilj Vukšić & Spremić, 2005). ERP systems were also faced with their own implementation and integration problems. The major difficulties with integration, however, appeared during the augmentation of core ERP systems with legacy systems. Themistocleous and Irani (2001) stated that ERP systems were then introduced to overcome integration problems. However, organizations did not

www.intechopen.com 118 New Trends in Technologies: Control, Management, Computational Intelligence and Network Systems abandon their existing systems when adopting an ERP solution, as ERP systems focus on general processes and initially did not allow much customization. The problems of integration within the core of ERP systems have resulted in multiple shortcomings as reported by DeSisto (1997) that poor ERP integration resulted in high order error rates, incorrect billing and shipping addresses, misquoted pricing and discounts, and misquoted “out of stock” inventory.

3. ERP defined There are a numerous definitions of ERP but in this paper the most popular definitions will be presented. Wallace and Krezmar define ERP as an enterprise-wide set of management tools that balance demand and supply, having the ability to link customers and suppliers into a complete supply chain, to employ proven business processes for decision-making, and to provide high degrees of cross-functional integration among sales, marketing, manufacturing, operations, logistics, purchasing, finance, new product development, and human resources, thereby enabling people to run their business with high levels of customer service and productivity, and to simultaneously lower costs and inventories, while providing the foundation for effective e-commerce. An enterprise resource planning system is a business management system that comprises integrated sets of comprehensive software that can be used, when successfully implemented, to manage and integrate all business processes and functions within an organization. They usually include a set of mature business applications and tools for financial and cost accounting, sales and distribution, management of materials, human resources, production planning and computer integrated manufacturing, supply chain, and customer information (Žabjek et al., 2008). Klaus, Rosemann and Gable define ERP as a logical and compact software solution which strives toward the integration of all processes in an organization, in the aim of presenting a comprehensive view of the organization through singularity of information and IT architecture (Roseman & Gable 2000), whereas Yen, Chou and Chang (Yen et al., 2002), describe ERP as a software which can be used to integrate information through all functions of organization in order to automate all business processes. Rao (2000) described an ERP system as a software solution to produce the right product on the right place, at the right time, and for the right price, containing the best industrial and management practice captured in those solutions. It is necessary to emphasize that ERP is not a software, software package or set of computer applications. Software packages of ERP systems, or ES, provide support for efficient resource planning or ERP. The main function of ERP is to integrate operational procedures within the department, along with the MIS, and to relocate organizational resources in changing surroundings. ERP systems are integrated software solutions which are used for resource management of the organization. ERP systems are used for resource planning, and also for the concept of combining unique departments systems and utilizing the methods which are most appropriate for problem solving. The main goal of ERP is to implement the best practices for all business processes. It may be said that ERP is a key business strategy today, and the greatest advantage of its implementation is the ability to fundamentally eliminate multiple systems within an organization, with no more redundancy. Implementing ERP on platforms is not always easy because of the massive re-engineering process that involves security, quality assurance, and training for members of the organization entrusted to use the ERP systems. In addition

www.intechopen.com Erp Concept for Enterprise Management and Knowledge Management Era 119 to maximizing the operational effectiveness of the ERP, IT managers, system security officers, and system developers will find themselves challenged on security and control issues (Vuković et al. 2007).

4. Characteristics of ERP systems When most people refer to the “core” ERP applications or “modules,” they mean the back- office capabilities to manage human resources, accounting and finance, manufacturing, and project-management functions. However, major ERP suites from Oracle, PeopleSoft, and SAP now provide much more—including modules for sales force automation, business intelligence, customer relationship management, and supply chain management (Musaji, 2002). There are some significant differences between ERP and non-ERP systems. These differences are (Musaji, 2002): • In ERP systems, certain control procedures leave no documentary evidence of performance. For some other procedures, the evidence of performance is indirect; it may be included in the program logic or in the operator’s instructions. Therefore, compliance tests may have to be structured differently in an ERP environment and observation of the client’s procedures may become more important. • In ERP systems, information is often recorded in a form that cannot be read without the use of a computer. • Financial and business information is often generated automatically by ERP systems based on data previously entered, without further human instructions. • Errors that might be observed in non-ERP systems may go undetected because of the reduced human involvement in computerized processing. There is a danger that errors in processing may be applied to a large number of transactions without being noticed. • With proper controls, ERP systems can be more reliable than non-ERP systems. This is because ERP systems subject all data to the same procedures and controls. Non-ERP systems are subject to random human error. Although computer processing will usually be consistent, errors may still occur; for example, if the computer is incorrectly programmed. • It is difficult to make changes after an ERP system has been implemented. Therefore, we should be aware of the organization’s plans to introduce significant new systems or to make major modifications to existing systems. It is advisable to review new systems or modifications before implementation so that a preliminary assessment can be made of the adequacy of control procedures, in order to ensure an adequate audit trail, and to plan any necessary changes in the audit approach. ERP systems vary from the simplest, batch-controlled type to complex integrated applications that perform a number of functions simultaneously.

4.1 Implementation of ERP systems Parry and Graves (2008) noted that implementation of an ERP system does not end with the system “going live“ (Markus et al. 2000). It is an ongoing process where new functionality, modules, updates, and corrections need to be carried out in conjunction with changes in organisational processes (Kremmergaard & Moller 2000). These software and process changes continue throughout the lifetime of an ERP system as it evolves in parallel with the organisation. Many publications have described the ERP lifecycle as having different phases (Markus et al. 2000, Markus & Tanis 2000, Ross & Vitale 2000, Parry & James-Moore 2005);

www.intechopen.com 120 New Trends in Technologies: Control, Management, Computational Intelligence and Network Systems however, Markus and Tanis’s (2000) ERP lifecycle model has been widely accepted. They refer to an “enterprise systems experience cycle“, and describe four distinct phases within this journey: the “Chartering” phase during which decisions leading to the funding of an enterprise systems will be made; the “Project „phase where the ERP software is configured and rolled out to the organisation; the „Shakedown“ phase where the company makes a transition from go-live to normal operations; the “Onward and Upward „phase during which the company captures the majority of business benefits from the ERP system and plans further steps of technology implementation and business improvement. This final phase refers to the management of ERP systems that covers ERP operations, ERP upgrades, and ERP maintenance such as error fixing and minor enhancements (Markus et al. 2000, Markus & Tanis 2000, Nah & Lau 2001). Following initial implementation, there are subsequent revisions, re-implementations, and upgrades that transcend what is normally considered as management of ERP system (Chang 2004). Management activities for software systems are commonly classified as one of the four distinct types: (1) corrective, (2) perfective, (3) adaptive, and (4) preventive (Pressman 1992). The figure 1 below shows how ERP can support IT process. It shows Modules in an ERP based integration approach.

INTEGRATION

ERP INDIVIDUALLY 2nd ERP SPECIAL PACKAGE DEVELOPED PACKAGES APPLICATION(S) MODULE(S) MODULE(S) MODULE(S)

MODULES

OUT OF CUSTOMIZED ERP PACKAGE FRAMEWORK THE TECHNOLOGY BOX

FUNCTIONAL FIT DEVELOPMENT TECHNIQUE CUSTOMIZATION AND ADDITONAL DEVELOPMENT

SELECT ERP PACKAGES DEVELOP ERP INDIVIDUALLY IMPLEMENTATION TECHNOLOGY

INTEGRATE BEST OF BREED CHOICES

Fig. 1. Modules in an ERP based integration approach (Thomas Herzog, 2006)

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4.2 Critical success factors in ERP implementation Table 2 presents the main factors revealed from the literature review and that are found to be vital for successful ERP implementation: top management support, business plan and vision, re-engineering business process, effective project management and project champion, teamwork and composition, ERP system selection, user involvement, education and training (AL-Fawaz et al., 2008).

Critical Success Factor References Al-Mashari et al. (2003); (Umble et al., 2003); Top management support Zhang et al. (2002) Loh and Koh (2004); Schwalbe, (2000); Business plan and vision Somers and Nelson (2004); Nah (2003) Davison (2002); Hammer and Champy Re-engineering business process (2001); Somers and Nelson (2004); Nah (2003); Murray and Coffin (2001) Effective project management and project Zhang et al.,( 2002); Somers and Nelson champion (2004); Remus (2006); Loh and Koh, (2004) Loh and Koh (2004); Al-Mashari et al., Teamwork and composition (2006); Remus (2006); Nah (2003); Rosario (2000) Wei and Wang (2004); Shehab et al., (2004); ERP system selection Everdingen et al. (2000); Sprott (2000) User involvement Esteves et al., (2003); Zhang el at (2002) (Woo 2007); Nah et al., (2003); Zhang et al. Education and training (2002) Table 2. Critical success factors in ERP implementation ((AL-Fawaz et al., 2008). Žabjek, Kovačić and Indihar Štemberger have given more complex literature reviewed when a factor in ERP implementation (table 3) is about critical success.

Top management Al-Mashari et al., 2003; Al-Sehali, 2000; Akkermans support. and Van Helden, 2002; Esteves-Souza and Pastor- Collado, 2000; Gargeya and Brady, 2005; Gattiker, 2002; Gupta, 2000; Harrison, 2004; Holland and Light, 1999; Jarrar et al., 2000; Mabert et al., 2003; Magnusson et al., 2004; Parr and Shanks, 2000; Skok and Legge, 2002; Somers and Nelson, 2004; Somers and Nelson, 2001; Sternad et al., 2007; Umble et al., 2003; Yen et al., 2002; Zhang et al., 2003. Clear goals and Al-Mashari et al., 2003; Al-Sehali, 2000; Akkermans objectives. and Van Helden, 2002; Gargeya and Brady, 2005; Holland and Light, 1999; Mabert et al., 2003; Magnusson et al., 2004; Parr and Shanks, 2000; Reif, 2001; Somers and Nelson, 2004; Somers and Nelson, 2001; Sternad et al., 2007; Umble et al., 2003.

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Project team Akkermans and Van Helden, 2002; Esteves-Souza organization and and Pastor-Collado, 2000; Gargeya and Brady, competence. 2005; Jarrar et al., 2000; Mabert et al., 2003; Magnusson et al., 2004; Parr and Shanks, 2000; Reif, 2001; Skok and Legge, 2002; Somers and Nelson, 2004; Somers and Nelson, 2001; Sternad et al., 2007; Umble et al., 2003. User training and Al-Mashari et al., 2003; Al-Sehali, 2000; education. Akkermans and Van Helden, 2002; Gupta, 2000; Jarrar et al., 2000; Mabert et al., 2003; Magnusson et al., 2004; Skok and Legge, 2002; Somers and Nelson, 2004; Somers and Nelson, 2001; Sternad et al., 2007; Umble et al., 2003; Zhang et al., 2003. Business Process Al-Mashari et al., 2003; Akkermans and Van Reengineering. Helden, 2002; Esteves-Souza and Pastor-Collado, 2000; Gargeya and Brady, 2005; Gattiker, 2002; Harrison, 2004; Jarrar et al., 2000; Magnusson et al., 2004; Skok and Legge, 2002; Somers and Nelson, 2004; Somers and Nelson, 2001; Sternad et al., 2007; Zhang et al., 2003. Change Aladwani, 2001; Al-Mashari et al., 2003; Al-Sehali, Management. 2000; Akkermans and Van Helden, 2002; Esteves- Souza and Pastor-Collado, 2000; Gargeya and Brady, 2005; Holland and Light, 1999; Jarrar et al., 2000; Magnusson et al., 2004; Parr and Shanks, 2000; Skok and Legge, 2002; Somers and Nelson, 2004; Somers and Nelson, 2001; Sternad et al., 2007; Umble et al., 2003; Yen et al., 2002. Communication. Aladwani, 2001; Al-Mashari et al., 2003; Al-Sehali, 2000; Akkermans and Van Helden, 2002; Esteves- Souza and Pastor-Collado, 2000; Gargeya and Brady, 2005; Holland and Light, 1999; Mabert et al., 2003; Magnusson et al., 2004; Somers and Nelson, 2004; Somers and Nelson, 2001; Sternad et al., 2007; Yen et al., 2002. User Aladwani, 2001; Al-Sehali, 2000; Esteves-Souza and involvement and Pastor-Collado, 2000; Gattiker, 2002; Magnusson et participation. al., 2004; Skok and Legge, 2002; Somers and Nelson, 2004; Sternad et al., 2007; Yen et al., 2002; Zhang et al., 2003. Legacy system Al-Sehali, 2000; Akkermans and Van Helden, 2002; management. Gattiker, 2002; Reif, 2001; Somers and Nelson, 2004; Somers and Nelson, 2001; Sternad et al., 2007; Umble et al., 2003; Zhang et al., 2003.

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Consulting Al-Mashari et al., 2003; Al-Sehali, 2000; Akkermans services. and Van Helden, 2002; Harrison, 2004; Magnusson et al., 2004; Skok and Legge, 2002; Somers and Nelson, 2004; Somers and Nelson, 2001; Sternad et al., 2007 Project Al-Mashari et al., 2003; Al-Sehali, 2000; Akkermans Management. and Van Helden, 2002; Esteves-Souza and Pastor- Collado, 2000; Magnusson et al., 2004; Reif, 2001; Somers and Nelson, 2004; Somers and Nelson, 2001; Sternad et al., 2007; Umble et al., 2003; Yen et al., 2002; Zhang et al., 2003. Sponsorship. Akkermans and Van Helden, 2002; Esteves-Souza and Pastor-Collado, 2000; Parr and Shanks, 2000; Skok and Legge, 2002; Somers and Nelson, 2004; Somers and Nelson, 2001; Sternad et al., 2007. System, Al-Sehali, 2000; Akkermans and Van Helden, 2002; technological. Gargeya and Brady, 2005; Gattiker, 2002; Jarrar et al., 2000; Parr and Shanks, 2000; Somers and Nelson, 2004; Somers and Nelson, 2001; Sternad et al., 2007; Zhang et al., 2003. Minimal Esteves-Souza and Pastor-Collado, 2000; Gargeya Customization and Brady, 2005; Mabert et al., 2003; Somers and Nelson, 2004; Somers and Nelson, 2001; Sternad et al., 2007. Table 3. Critical success factors in ERP implementation. Source: Adjusted and updated upon Sternad et al., 2007 in Žabjek et al. 2008.

5. Knowledge management era Knowledge has become the most important input implemented in business organisations. Numerous books, articles and special editions of journals have already been devoted to explaining concept of knowledge and its management in organisations. It is not necessary to dwell on these, except to iterate that the key components of successful knowledge management are strategy, culture, technology, organisation and people (Drew, S., 2000). Different authors are bound to put different definitions of the knowledge management. For example, Wiig sees knowledge management as a process of facilitating and managing knowledge-related activities such as creation, capture, transformation and use (Wiig, 1997). Brooking understands knowledge management as an activity, which is concerned with strategy and tactics to manage human-centred assets (Brooking, 1997). On the other hand Bair defines it as a set of policies, organisational structures, procedures, applications and technologies intended to improve the decision-making effectiveness of a group or a firm (Bair, 1997). Finally according to Harris, knowledge management is a discipline that promotes a collaborative and integrated approach to the creation, capture, organisation, access and use of an enterprise's information assets (Harris, 1998). Knowledge management comprises information, communication, human resources, intellectual capital, brands, etc. Knowledge Management (KM) has tactical and operational

www.intechopen.com 124 New Trends in Technologies: Control, Management, Computational Intelligence and Network Systems perspectives. KM is more detailed and focuses on facilitating and managing knowledge- related activities such as creation, captures, transformation and use (e.g. Wiig et.al,). Enterprises tend to pursue one or several of five basic knowledge-centred strategies (Wiig, K. M., 1997): • Knowledge strategy as business strategy – emphasises knowledge creation, capture, organisation, renewal, sharing, and use in all operations; • Intellectual asset management strategy – emphasises enterprise-level management of specific intellectual assets such as patents, technologies, operational and management practices, customer relations, organisational arrangements, and other structural knowledge assets; • Personal knowledge strategy – emphasises personal responsibility for knowledge- related investments, innovations and competitiveness, renewal, effective use and availability to other or knowledge assets within each employee's area of accountability; • Knowledge creation strategy – emphasises organisational learning, basic and applied research and development, and motivation of employees to innovate and capture lessons learned to obtain new and better knowledge that will provide improved competitiveness; • Knowledge transfer strategy – emphasises systematic approaches to transfer knowledge to points of action where it will be use to perform work. This strategy includes knowledge sharing and adopting best practices. Since the importance of knowledge rapidly grows, there is a growing need for knowledge management, especially the management of processes in which knowledge is created and used (Quintas & Geoff, 1997). Most authors observe human capital as a system consisted of three elements. The first element is intellectual capital. It refers to fundamental individual attributes such as cognitive complexity and the capacity to learn, together with the tacit and explicit knowledge, skills and expertise an individual builds over time (Gratton & Ghoshal, 2003). The second element of human capital is social capital – which is about who one knows, and how well one knows them. The third element is emotional capital based on a self-esteem, courage and resilience. These three different elements are highly inter-related. Social capital helps individuals to develop intellectual capital by accessing the knowledge and skills that those people possess. Emotional capital brings the integrity and self- awareness to build open and trusting relationships, which underpin the creation of social capital. As an example of the world leading company at the field of intellectual capital, it is mentioned Swedish insurance company, "Skandia", which has comprehended the importance of knowledge and intellectual capital, ten years ago. For better insight of their business accomplishments, usually observation and furtherance, "Skandia" has developed the scheme for intellectual capital (intellectual capital is composed of several important following components): IC was seen as the sum of human and structural capital. Human capital was defined as the knowledge, skill and experience of employees. Structural capital, however, was the extension and manifestation of human capital into innovations, business processes and relationships with dealers and others (Roos, 1998). Intellectual capital management (ICM) and knowledge management (KM) are multidimensional and cover most aspects of an enterprise operation. There is overlap but there are also major differences. For example, KM has tactical and operational aspects and is more detailed. The ICM and KM role is to keep and sustain the present and future body of knowledge in order to guarantee the firm's long-term viability and profitability. Management of knowledge is becoming a new business philosophy and is treated as a source of power and together with Intellectual Capital represent the enterprise's future

www.intechopen.com Erp Concept for Enterprise Management and Knowledge Management Era 125 potential. There is considerable overlap in the scope of intellectual capital management and knowledge management. ICM focuses on building and governing intellectual assets from strategic and enterprise governance perspectives with some focus on tactics. Its function is to take overall care of the enterprise's intellectual capital. The management of intellectual capital is a strategic activity which positively modification efficiency of enterprises and means that the enterprise (Tipurić, D., 1999): • Apprehended the role and importance of employees in resumption of competitive advantages; • Defined its key competence in economic surroundings; • Developed the system for creating necessity know-how; • Installed the system of rewarding; • Developed the specific culture for encouragement of experimenting and expanding total knowledge.

6. ERP concept and enterprise knowledge ERP packages led to better production planning, quality and inventory control, expense management and more efficient distribution. The primary objective of ERP systems is to seamlessly improve the internal efficiency through order fulfilment. However, information on just one side of the business equation is ineffective in achieving a competitive advantage in the new global economy. The new market demands a distributed knowledge network, which necessitates the participation of the entire value chain from customer to supplier, and in some cases, even from competitors. Enterprises that strategically maximize the impact of these new knowledge flows will be in a position of competitive advantage in the emerging networked economy. This requires synergetic relationships between CRM, KM, and supply chain within one system (Mirghani, 2005). According to Thompson and Close (2001) since the beginning of 1997, the major ERP vendors (e.g., SAP, PeopleSoft and Oracle) have attempted to expand their dominant position in the financial, manufacturing and human capital management enterprise applications markets into the increasingly lucrative customer relationship management (CRM) market. Until recently, these attempts have mostly failed to meet client expectations. However, their labours are beginning to pay off. Although ERP systems interconnect different departments through the various modules, but to some extent, ERPs initially created functional silos by enforcing the business process workflow through single technology. This silo effect needs to be counterbalanced by implementing KM initiatives that promote the communication and knowledge sharing among various value network collaborators. The KM initiative as supportive mechanism for ERP will reveal different kinds of knowledge to different stakeholders. The conventional ERP systems have tremendously improved order fulfilment and intra-organization business process workflow, but fell short to address the inter-enterprise business process complexities. The latter requires a full collaboration ecosystem that attracts valued customers and shareholders from all directions to share the pertinent business knowledge. The leverage of human intellectual capabilities has been the focus of ERP. Directing and maintaining intellectual energy while attempting a restructuring or re-engineering program is seen as a typically difficult example of this much overlooked area. Gartner defined ERP as “a business strategy and a set of industry-domain-specific applications that build customer and shareholder value by enabling and optimizing enterprise and inter-enterprise collaborative operational and financial processes”. This definition transformed the

www.intechopen.com 126 New Trends in Technologies: Control, Management, Computational Intelligence and Network Systems traditional back-office ERP system from internal transactional system into a complete value network system that incorporates the front-office functionalities for various partner communities. Integrating the front office with ERP indisputably offers an information visibility strategy that pushes the right information to the right people at the right time through the right communications channels (Mirghani, 2005). From systems point of view, ERP and KM systems need to be implemented simultaneously in the framework of integrated enterprise information systems. Simultaneous implementation of ERP and KM systems requires incorporation of both KM and ERP into enterprise business processes and incorporation of KM into ERP system development. Despite the different focus of ERP and KM systems, the two systems, to some extent, have common goals. Both ERP and KM aim at improving business processes to achieve better business performance, with tasks based on data, information and knowledge. ERP systems emphasize the efficiency of business processes in enterprises. To achieve the goals, ERP systems maintain mechanism for data/information consistency through high degrees of standardization, formalization and specialization. KM systems devote to the knowledge processes of enterprises such as knowledge creating, storing, transferring and sharing. In perspectives of enterprises, the ultimate goals of the two systems are helping enterprise survive in the global market by improving their performance. In summary, ERP and KM systems manage the business from the point of views of physical and knowledge assets, respectively. With a proper framework in which ERP and KM can cooperate with each other, an enterprise can benefit from the advantages of ERP and KM and be successful in global competition. INFORMATION QUALITY

SYSTEM CONSULTANT QUALITY

SATISFACTION VENDOR KNOWLEDGE ERP SUCCESS

INDIVIDUAL IMPACT ORGANIZATION

ORGANIZATIONAL IMPACT

Fig. 2. Knowledge management for ERP success model (Sedera et al. 2003) The interrelation between Knowledge Management and ERP has two facets (Hosain et. al., 2002):

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• On the one side, implemented Enterprise Systems can serve as a main source for Knowledge Management. As Enterprise Systems support various areas of a company such as procurement, manufacturing, warehousing, sales, distribution, and accounting, an analysis of a run-time data can provide the knowledge manager cost-effectively with useful data about the current process performance. This perspective characterizes Enterprise Systems as a knowledge repository and can be described as “Enterprise Systems for Knowledge Management”. • On the other side, the management and especially the implementation of an ES solution requires a substantial amount of specific knowledge and expertise. Thus, a separate ES- related Knowledge Management can be identified that covers the entire management of knowledge in an ES project. This perspective can be characterized as “Knowledge Management for Enterprise Systems” In 2003 Sedera with his colleagues has proposed a model of Knowledge Management that is crucial for ERP success. In this study knowledge was identified as a key driver of ERP success but also needs further analysis to understand the complete influence of knowledge and other possible dimensions of knowledge.

7. ERP systems and its implementation in large Croatian enterprises ERP systems can be considered as a “standard tool” for every large enterprise in a global economy and in the time of large competitiveness at the international market. For example “Supply Chain Management” includes e-procurement, payment and organizational optimization and without ERP as a integral source of data, ERP system will be impossible to implement. The analysis “Enterprise Resource Planning Systems and competitiveness of large Croatian enterprises” conducted by Nikša Alfirević from the Faculty of Economics Split, Croatia in 2003 that has been accessible from the secondary source of research and has shown that the users of SAP information system in large Croatian enterprises can be divided in two main categories: • Enterprises with a foreign proprietary – they buy ERP systems to follow standards of “mother-companies” • Small group of progressive domestic companies that are oriented to export and international business. This research (Alfirević, 2003) has been conducted at the end of 2002 and the beginning of 2003. The summary of the most important conclusions of that research will be presented in this paper. The source for analysis has been 200 leading domestic enterprises (ranked by the income) and published in a study “Privredni vjesnik” in 2002. Although the analysis of 200 enterprises cannot show all trends at the ERP market, the fact is that this source presents the majority of potential ERP users and that from this analysis all relevant indicators of market situation can be measured. The analysis has shown that 68% of the surveyed enterprises do not have implemented ERP system and that ERP systems are not used enough. There is a large gap when is about investment in ERP systems in Croatia and in the rest of the world. This study has also shown that there is a significant correlation among ERP systems and relative performance measures ROA and Net profit margin (Spearman coefficient of correlation). Conducted analysis has also shown that in Republic Croatia there is a relatively low level of investment in ERP technologies but that enterprises that implement ERP achieve better

www.intechopen.com 128 New Trends in Technologies: Control, Management, Computational Intelligence and Network Systems business results (it can be concluded that implementation of ERP systems is very important for competitiveness). It is possible to connote that the situation of ERP systems implementation in large Croatian enterprises has not change much in the years that have accompanied from the conducted research because all trends that are presented at the professional journals in Republic Croatia show this trend. Further researches and practice has to be oriented to adaptation of ERP systems to specifics of Croatian economy which will help to improve export capabilities and competitiveness of Croatian economy.

8. Conclusion To adapt to today’s challenging and competitive business environment, organizations are implementing ERP systems to achieve a capability to plan and integrate enterprise and to be more responsive to customer demands. Today, ERP is still evolving, adapting to developments in technology and the demands of the market. Four important trends are shaping ERP’s continuing evolution: improvements in integration and flexibility; extensions to e-business applications, a broader reach to new users; and the adoption of Internet technologies. Taking a closer look at each will help you understand where ERP is headed. Despite the fact that ERP integrates and optimises the flow of information across the entire organization’s supply chain, the implementation of such software packages can be costly, and may even require reengineering the entire business operations. Combinations of factors have to be considered when undertaking an ERP implementation including: top management support, business plan and vision, Re-engineering business process, effective project management and project champion, careful package selection process, teamwork and composition, user involvement and education and training (Al-Fawaz et al., 2008). ERP and KM systems emphasize different characteristics, but the primary goal of the both systems is to improve the competitiveness of enterprises in global markets. From systems point of view, ERP and KM systems need to be implemented simultaneously in the framework of integrated enterprise information systems. Simultaneous implementation of ERP and KM systems requires incorporation of both KM and ERP into enterprise business processes and incorporation of KM into ERP system development. Despite the different focus of ERP and KM systems, the two systems, to some extent, have common goals. Both ERP and KM aim at improving business processes to achieve better business performance, with tasks based on data, information and knowledge. In this paper study of implementation of ERP systems in Republic Croatia has been shown. Analysis has shown that in Republic Croatia there is a relatively low level of investment in ERP technologies but that enterprises that implement ERP achieve better business results. It can be said that in the future enterprises in Republic Croatia and especially large Croatian enterprises have to orient more to advantages of IT especially when is about role of IT in improvement of export capabilities of large enterprises and in general when is about competitiveness of Croatian economy.

9. References Al-Fawaz, K., Al-Salti, Z., Eldabi, T. (2008). Critical Success Factors in ERP implementation: a review, European and Mediterranean Conference on Information Systems 2008, May 25-26 2008, Dubai

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Alfirević, N. (2003). ERP sustavi nedovoljno iskorišteni u Hrvatskoj, SAP MAG, 05. listopada 2003. URL www.sap mag.com.hr Alfirević, N. (2003). ERP sustavi nedovoljno iskorišteni u Hrvatskoj, SAP MAG, 06. listopada 2003. URL www.sap mag.com.hr Al-Mashari M, Ghani S,W Al-Rashid W. (2006), ‘A study of the Critical Success Factors of ERP implementation in developing countries’. Internet and Enterprise Management, 4(1): 68-95. Bosilj Vukšić, V. & Spremić, M. (2005). ERP system Implementation and Business Process Change: Case Study of a Pharmaceutical Company, Journal of Computing and Information Technology - CIT 13, No. 1., 11–24. Chang, S. I., 2004. ERP life cycle implementation, management and support: implications for practice and research. Paper presented on Track 8 organizational systems and technology, ERP/EAI (ERPII) systems issues & answers (OSERP), at 37th Hawaii international conference on system sciences, 2004 Hawaii, 80227c. DeSisto, R. (1997). ERP Integration Strategies for TES Systems. Gartner: Research Note: TU- 724-344 Esteves J Pastor J Casanovas J 2003, ‘A goal/question/metric research proposal to monitor user involvement and participation ERP implementation projects’, Information Resources Management Association Conference (IRMA), Philadelphia (USA) 325-327 Foxlow, T. (1994). Knowledge-based Manufacturing: The Key to Recovery. Logistics Information Management, Vol. 7, No. 4., 23-26. Hammer, M. & Champy, J. (2001). ‘Reengineering the Corporation: A Manifesto for Business Revolution’, Harper Business, New York, NY, USA Koch, C. (2001). Enterprise resource planning: Information technology as a steamroller for management politics? Journal of Organizational Change Management 14: (1): 64-8. Kremmergaard, P. & Moller, C. (2000), A research framework for studying the implementation of enterprise resource planning systems. Proceedings of the 23rd information systems research seminar in Scandinavia, Lingatan, Sweden, 139–162. Loh T. C. & Koh S. C. (2004), ‘Critical elements for a successful enterprise resource planning implementation in small- and medium-sized enterprises’, International Journal of Production Research, 42(17) 3433–3455. Markus, M.L., et al., (2000), Learning from adopters’ experiences with ERP: problems encountered and success achieved. Journal of Information Technology, 15 (4), 245–265. Markus, M. L. & Tanis, C. (2000). The enterprise systems experience – from adoption to success. In: R.W. Zmud, ed. Framing the domains of IT research: glimpsing the future through the past. Cincinnati: Pinnaflex. Mirghani M., ERP II: Harnessing ERP Systems with Knowledge Management Capabilities, Journal of Knowledge Management Practice, June 2005 Musaji, Y. F. (2002). Integrated Auditing of ERP systems, John Wiley & Sons, Inc., New York Nah, F. F.-H. & Lau, J.L.-S. (2001), Critical factors for successful implementation of enterprise systems, Business Process Management Journal, 7 (3), 285–296. Nah, F. F-H., Zuckweiler, K.M., et al. (2003) ‘ERP implementation: chief information officers’ perceptions of critical success factors’, International Journal of Human-Computer Interaction, 16(1):5–22. Parry, G. C., Price, P., & James-Moore, M. (2003). ERP: implementation and maintenance in a lean enterprise. London: Society of British Aerospace Companies [SBAC] & DTI.

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Parry, G. & Graves, A. (2008) “The importance of knowledge management for ERP systems“, International Journal of Logistics: Research and Applications, Vol. 11, No. 6, December 2008, 427–441 Pressman, R. S. (1992). Software engineering, a practitioner’s approach. 3rd ed. NewYork: McGraw-Hill Book Co. Rosemann, K. H. & Gable, G.G. (2000). What is ERP?. Information System Fronters, Vol. 2, No. 2., 141-162. Rao, S.S. (2000), “Enterprise resource planning: business needs and technologies”, Industrial Management & Data Systems, Vol. 100, No. 2, pp. 81-88. Remus U. (2006). ‘Critical Success Factors of Implementing Enterprise Portals’. Proceedings of the 39th Hawaii International Conference on System Sciences Ross, J.W. & Vitale, M.R. (2000), The ERP revolution: surviving vs. thriving. Information Systems Frontiers, 2 (2), 233–241. Sadagopan, S. (1998). The World of ERP. ERP 98 Top Management Workshop. Bangalore. IIM Shehab, E., Sharp, M., Supramaniam, L. & Spedding, T. (2004), ‘Enterprise resource planning: An integrative review’. Business Process Management Journal, 10 (4): 359-386. Sedera, D., Gable, G, & Chan, T. (2003). “Knowledge management for ERP success”, 7th Pacific Asia Conference on Information Systems, 10-13 July 2003, Adelaide, South Australia, 1405-1420 Siriginidi, S. R. (2000). Enterprise Resource Planning in Reengineering Business. Business Process Management Journal, Vol. 6., No. 5., 376-391. Schwalbe K. (2000). ‘Information Technology Project Management, Cambridge, MA. Somers T. M. & Nelson K. G. (2004), ‘A taxonomy of players and activities across the ERP project life cycle’, Information and Management, 41(3):257–278. Swan, J., Newell, S. & Robertson, M. (2000). The diffusion, design and social shaping of production management information systems in Europe. Information Technology & People Vol. 13., No. 1., 27-46. Themistocleous, M. & Irani, Z. (2001). Benchmarking the benefits and barriers of application integration. Benchmarking: An International Journal, Vol. 8., No. 4., 317-331. Thompson, E. & Close, W. (2001). "ERP Vendors Are a Safe Choice for CRM, but Not for All". Gartner Research Note: Markets, M-13-3257 Vuković, A., Džambas, I. & Blažević, D., (2007). Razvoj ERP koncepta i ERP sustava, Eng. Rev. Vol. 27., No. 2., 37-45 Wallace, T. F. & Krezmar, M. H. (2001). ERP: Making It Happen, John Wiley & Sons, Inc., New York Wei, C. & Wang, M. (2004), ‘A comprehensive framework for selecting an ERP system’. International Journal of Project Management, 22: 161–169. Wight, O. W. (1993). The Executive's Guide to Successful MRP II, John Wiley and Sons, New York Woo H. 2007. ‘Critical success factors for implementing ERP: the case of a Chinese electronics’ manufacturer. Journal of Manufacturing Technology Management, 18 (4), 431-442 Yen, D. C., Chau, D. C. & Chang, J. (2002). Synergetic Analysis for Web-based Enterprise Resource Planning Systems, Computer Standards and Interfaces, No. 24., 337-346. Zhang L, K. O. Lee K. O, Banerjee P (2002). ‘Critical Success Factors of Enterprise Resource Planning Systems Implementation Success in China’. Proceedings of the 36th Hawaii International Conference on System Sciences Žabjek, D., Kovačić, A., & Indihar Štemberger, M. (2008), Business process management as an important factor for a successful ERP system implementation, Ekonomska istraživanja, Vol 21., No. 4., 1-18.

www.intechopen.com New Trends in Technologies: Control, Management, Computational Intelligence and Network Systems Edited by Meng Joo Er

ISBN 978-953-307-213-5 Hard cover, 438 pages Publisher Sciyo Published online 02, November, 2010 Published in print edition November, 2010

The grandest accomplishments of engineering took place in the twentieth century. The widespread development and distribution of electricity and clean water, automobiles and airplanes, radio and television, spacecraft and lasers, antibiotics and medical imaging, computers and the Internet are just some of the highlights from a century in which engineering revolutionized and improved virtually every aspect of human life. In this book, the authors provide a glimpse of the new trends of technologies pertaining to control, management, computational intelligence and network systems.

How to reference In order to correctly reference this scholarly work, feel free to copy and paste the following:

Ivona Vrdoljak Raguž (2010). ERP Concept for Enterprise Management and Knowledge Management Era, New Trends in Technologies: Control, Management, Computational Intelligence and Network Systems, Meng Joo Er (Ed.), ISBN: 978-953-307-213-5, InTech, Available from: http://www.intechopen.com/books/new-trends- in-technologies--control--management--computational-intelligence-and-network-systems/erp-concept-for- enterprise-management-and-knowledge-management-era

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Impact of Technology on Logistics and Supply Chain Management

Rajiv Bhandari F-303, Arenja Complex, Sector 8, C.B.D Belapur Navi Mumbai 400614, 9819884293 Email – [email protected]

Abstract:- The word logistics has its origin from Greek word “logistike” which means the art of calculating. However, the modern interpretation of the term logistics has its origin in the military, where it was used to describe the activities related to the procurement of ammunitions, and essential supplies for troops located at the front. Logistics not only includes activities related to the physical movements of the goods but also manages relationship with suppliers and customers. However Logistic management is a means whereby the needs of customers are satisfied through integration and coordination of the supply chain. The main objective of the paper is to determine the various technology used in logistics and supply chain management including information technology, communication technology and automatic identification technology. The paper also discusses the impact of the technology on logistics and supply chain management. The author mainly focuses on the secondary data for collecting data relating to various technology used in logistics and supply chain management. The author draws conclusion that Technology is a vehicle to enhance supply chain competitiveness and performance by enhancing the overall effectiveness and efficiency of logistics system. Moreover various innovations in technology have made the task easier and faster besides being less laborious.

I. INTRODUCTION The council of logistic management defines logistics as “that part of supply chain process that plans, implements, and controls the efficient, effective, forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customer requirement”. In ordinary language the same can be defined as right product, at the right place, in right time, and in right condition. However supply chain consists of all stages that are required to satisfy the customer request. It starts from supplier passes through manufacturer, distribution, retailer and finally reaches the customer. The supply chain management is the oversight of materials, information and finances as they move in the process from supplier to manufacturer to wholesaler to retailer to customer. The emerging new technologies are creating strategic opportunities for the organizations to build competitive advantages in various functional areas of management including logistics and supply chain management. However the degree of success depends on the selection of the right technology for the application, availability of proper organizational infrastructure, culture and management policies. In logistics, information, communication and automation technologies has substantially increased speed of identification, data gathering, processing, analysis and transmission, with high level of accuracy and reliability. Technology is a means to enhance business competitiveness and performance. It plays a major role in success of supply chain by enhancing the overall effectiveness and efficiency of the logistics system. In logistics many new technologies are used in developed country while in India adoption process is very slow. However due to liberalization of the Indian economy the competitive pressure is building up and the only option to face the competition in to go in for technology enabled operations. The latest technologies being used in logistics and supply chain management are segregated into  Automatic Identification Technology  Communication Technology  Information Technology

II. OBJECTIVES  To determine the various technology used in logistics and supply chain management.  To discusses the impact of technology on logistics and supply chain management.

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Automatic Identification Technology Automatic Identification (Auto ID) is the term used to describe the direct entry of data or information in the computer system, programmable logic controllers or any microprocessor-controlled device without operating a keyboard. These technologies include Bar Coding, Radio Frequency Identification (RFID) and Voice Recognition. Auto ID can be used for tracking the containers, packages, cartons or a truck carrying the goods on time bound dispatches to the customers. The benefits of Auto ID include accuracy, cost saving, speed and convenience of data storage and processing of information.

The significant Automatic Identification technologies in use are –  Bar coding – Bar coding is a sequence of parallel lines of different thickness with spaces in between. These bars are nothing but the items of information in the codified form, which can be read with the help of a scanner. Historically bar codes was first used in a supermarkets in USA in 1952.The information printed in bar code include, country code, manufacturer name, product details, date of manufacture, material content etc.These details are required at user end for inventory management. The bar codes are used in diverse industries such as retail, pharmaceutical, consumer goods, electronics, automobiles etc.

The bar coding offers the following advantages. . Ease in identification of inventory items during storage, retrival, pickup, inspection and dispatch. . Reduce paper work and processing time leading . Reduce human error . Increases logistics system productivity through speed, accuracy and reliability.

Impact of Bar code technology on operations of logistics and supply chain management  Procurement operation – The parts and components brought from suppliers are assigned bar codes, which contain information on item name, batch number, date of manufacture, order no, serial no etc. The information in bar code helps in identifying and tracking the component. In the warehouse, when the goods enter through a conveyor, they are further scanned by the hand held scanner or scanner fixed alongside the conveyor. The information decoded by the scanner is immediately logged in the central computer which helps real time update of inventory records.  Processing – During the order processing the bar code will help in keeping identification of items based on their date of entry into the warehouse or store. This will ease material storage, retrival and dispatch in FIFO (First in First out) inventory management system.  Production operation – During the production process the identification of in-process and finished items become easier due to bar coding. The various bathes at different stages of production can be easily tracked.  Distribution operation – During distribution, barcode helps in identifying and tracking the transit of finished goods to the customers. BARCODE

 Radio Frequency Identification (RFID) – RFID is an Automatic Identification and Data Capture (AIDC) technology. RFID first appeared in tracking and access applications during 1980. RFID-based systems allows for non contact reading and are effective in manufacturing and other hostile environment where bar codes could not survive. These are used as an alternative to Barcodes to communicate the inventory data to the reader via radio waves. RFID wirelessly exchanges information between a tagged object and a reader. 7th International Business Research Conference 20 | Page Indian Education Society's Management College and Research Centre IOSR Journal of Business and Management (IOSR-JBM) e-ISSN: 2278-487X, p-ISSN: 2319-7668 PP 19-24 www.iosrjournals.org

An RFID system is compromised of the following components as mentioned below. . One or more tags called Radio Frequency Tags (RFTs), which includes a semiconductor chip and antenna. . One or more read/write devices also called readers. . Two or more antennas one on the tag and one on the reader. . Application software and the host computer system. .

RFTs The reader is connected to the central computer. Radio Frequency Tags (RFTs) are a piece of silicon chip to store data in the microcircuit. The RFTs are programmable with erasable memory. Data is stored in coded form and communicated to the reader through waves. The basic principle of tag is that antenna emits the radio signals.RFTs are very useful to accompany truck shipments. The tag will contain information on , consignee, inventory items, quantity and value, what time the item travelled certain zone; even the temperature etc.The reader receives the tag signal with its antenna, decodes it and transfers the data to the host computer system. RFTs can be attactched to virtually anything-from a semi tractor, to a pallet, containers etc. RFTs will avoid paperwork and can be helpful in quick clearance at octroi and custom posts. In the warehouse, the barcodes can be applied to the individual inventory items while RFTs can be applied to pallets, containers etc.These will allow the staff to directly communicate to the warehouse computer.

RFID has significant impact on logistics and supply chain of many sectors  RFID helps Indian exporters to global retailers like WAL-MART get better and more visibility into movement of their goods within the supply chain and thus become more competitive.  Improve the ability of manufacturers to better manage the inventory levels.  Improve the complex distribution system for the Defense operation.  Improve the complex tracking and distribution operations of the Indian Postal services.  Improve the tracking, logistics and planning operations of Indian Railways, state public transport agencies  Implement automatic toll collection on vast network of highways.

Case study of RFID Technology  Procter & Gamble(P&G) Company Before – P&G used bar codes to track shipments of goods from factory to retail outlets, but couldn’t do much to halt the supply shortages on store shelves. After – P&G used RFID is tracking shipments, and eventually individual products, so that they can be stocked on demand in stores. P&G expects to cut its costs by $400 million a year.  Ford Motor Company Before – Assembly-line workers running low on parts would have to pick up a phone and call the replenishment department to get more parts and then wait for parts. After – Ford puts RFID tags on each parts bin. Warehouse operators now know in seconds, when supplies run low, and automatically deliver parts as needed to workers on the assembly line.  Voice Interactive System – This technology was developed in 1980.It is used in the field like medical, manufacturing, warehousing etc. In warehouse application; it allows the worker or operator to communicate the data to central computer without using the keyboard. It keeps the warehouse workers hands free to pickup, pack and inspect the goods. He can read the part /item number while driving the forklift or picking the inventory and move from one pallet to other pallet. Due to online data transmission to central computer there will be real time data updating.

III. COMMUNICATION TECHNOLOGY The communication, either oral or written has a very crucial role in business success. The following are the few emerging communications technologies, which are enablers to superior customer service leading to competitiveness through the speed and accuracy in communication. 7th International Business Research Conference 21 | Page Indian Education Society's Management College and Research Centre IOSR Journal of Business and Management (IOSR-JBM) e-ISSN: 2278-487X, p-ISSN: 2319-7668 PP 19-24 www.iosrjournals.org

 Electronic Data Interchange (EDI) - EDI technology is used for transfer of business documents from one computer to other computer. With EDI the business documents such as , cheques, and challans are sent electronically from one organization to another. In fact EDI is a drive towards paperless document transfer or transactions. The difference between the email message and EDI message is that, E- mail is composed and interpreted manually, while EDI message is composed using one software and interpreted by other software. E-mail data is not structured while EDI data or message is structured.EDI message has legal standing in the court of law. The benefits of using EDI technology in logistics and supply chain management involves  Faster transactions- real time document transfer in the supply chain.  Just-in-Time manufacturing technique can be adopted.  Reduction in transaction cost due to paperless operations  Reduction in order cycle time and inventory that will help to improve the competitiveness of the customers.  Improve the corporate trading relationships between parties in the supply chain and creating barriers for competitors.

 Very Small Aperture Terminal (VSAT) - The satellite communication channels are playing a crucial role in real time data collection and its exchange, which is vital for customer service. To trace and track the goods carrier, a dish antenna is fixed on the vehicle. This allows the communication between driver, consignor and consignee. The real – time interaction helps in having the up-to-date information on the location of truck and the delivery position. Example. – Wal-Mart the retail giant of USA is using this system for controlling the inventory movement.  Geographical positioning System (GPS) – The GPS is more accurate system used in developed countries wherein a vehicle could be traced accurately with the help of Geo Stationary Satellites to the accuracy of one meter in terms of latitude and longitude. Once the position of the vehicle is known, it can be transmitted to consigner or consignee through the transmission network i.e. mobile phones or internet.

 Geographical Information System (GIS) – GIS are the software tools for visualization of special location of any entity on earth which is stored in databases relating to geography .This could be in terms of physical maps of the surface of earth, layout of inner surface of earth or a layout of streets or roads.GIS in integration with GPS is used in logistical operation for tracking and tracing of the consignment location to the extent of road or street in particular city.

 Web Based Tracking –Logistics service providers operating in India are extending the services of web- based tracking of consignments to their clients. AFL, Fed-Ex, Blue Dart and others are providing the status report of the consignment to their clients. The clients can download this report by connecting through the Internet. This information helps in planning the dispatch schedule and also making follow up with clients for payment collections.

 Automated Guided Vehicle System (AGVS) - The system makes use of magnetic or optical guidance system. The magnetic system uses energized wire laid on the warehouse floor for guiding the material handling equipment. In AGVS operator is eliminated. The new generation AVGS are guided with video and do not follow the fixed path. AGVS can perform all the material handling operation without any human involvement. Robot coupled with AGVS is used to pick up exact material requirement for a customer order.

 Information Directed System (IDS) - In this a centralized computer controls the material handling equipment. The communication between the equipment and the computer is through radio frequency. The required movement are fed into computer and it assigns the jobs to the individual equipments considering its maximum loading capacity and handling speed.IDS can perform variety of complex material handling jobs such as multiple order picking or multiple vehicle loading by the same material handling equipment leading to enhancement in warehouse productivity and flexibility in handling variety of jobs.

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Information Technology (IT) – IT consists of hardware and software that captures, analyses and provide information wherever it is needed. Since the supply chain management is defined as network of organizations, these organizations cannot form a network unless they are connected through IT resulting into transparency in the supply chain and aligning the supply chain activities towards customer. Example – The success of supply chain of DELL was due to IT, where internet was used to collect order from customer directly and shared the information with the suppliers so that they can forecast better, and supply to the requirement.

The IT tools used in logistics and supply chain management are-  Enterprise Resource Planning (ERP) - ERP is integrated software, encompassing all the business operations and bring about significant change in the way people work. ERP is a business solution that addresses to certain identified business issues. ERP is very expensive and complex exercise which require sufficient amount of planning. In India major ERP in use is SAP, Oracle which has been developed by foreign companies to suit the business environment prevailing in those countries. However, some Indian companies like Ramco Systems developed ERP to suit Indian business environment.

ERP helps in optimization of supply chain management and develop competitiveness by ensuring the following advantages . Quicker response to customer requirement. . Reduction in inventory costs. . Improvement in service levels- internal and external. . Improvement in inventory turnover rate . Reduction in logistics cost.

Example - The companies like Hindustan Lever, Colgate and Nestle have implemented ERP in their supply chain system resulting in minimum inventory of raw material and finished goods and benefit in terms of cost reduction

 Distribution Requirement planning(DRP)- It is another IT tool and also a sophisticated planning approach that takes into consideration multiple distribution stages and the characteristics of the distribution system. The finished goods inventory requirement is determined by DRP considering the customer demand at multiple distribution centers located in different markets.DRP helps in consolidating the shipments to multiple locations spread over the vast geographical area, and thus help in reducing freight cost. DRP improves inventory visibility in the supply chain resulting into reduction in inventory level and warehouse space requirement.  Automated Inventory tracking system (AITS) - The AITS is an IT tool that gives real time status of the inventory levels of all the items at retail stores, feeder and mother warehouses. For replenishment of items sold, information is conveyed directly to the supplier after the item inventory level is checked at feeder and mother warehouses. The supplier initiates the action to replenish the inventory item depending on the item take-off rate at retail stores, its safety stock, inventory in transit etc thereby optimizing the inventory in the supply chain.

Example – Wal-Mart, a leading US retail chain giant controlling the inventory investments throughout the supply chain with the help of AITS.

Impact of IT on functions of logistics and supply chain management are as follows  Procurement- In the initial period the procurement process in the organization was done by a separate department on the basis of least price from the supplier. In the next generation with the advent of IT the

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e-procurement is done where online auctions are conducted and strategic relations are forged with good suppliers by long term contracts and relationships.  Planning –In the initial period before the advent of IT, production and distribution planning was done based on historical data. There was not much linkage with business planning and production changed with varying demand. However with the advent of IT planning approach include collaborative planning, forecasting and replenishment(CPRF). It involves long term commitment to information sharing for collaborative planning purposes like joint business planning(SKUs, brands) and financial planning.(sales, inventory, safety stock, pricing, fill rate).  Web-based collaboration- The web-based collaboration application enables to share and collaborate with supply chain partners on forecasts, replenishment and promotions plans to deliver the highest level of customer service and profitability.  Scheduling –In the initial period the scheduling was done to improve asset utilization and reduce manufacturing costs. However with the advent of IT strong linkage is established between supply chain partners and customers. As such scheduling is done to serve the customer at the right time.  Inventory management –In the initial period every department tried to minimize the inventory by transferring it to the next level of the supply chain. Thus the total inventory cost in the supply chain was high as there was no transparency of the inventory held in the supply chain. However with the advent of IT, techniques such as collaborative replenishment and vendor managed inventory were followed where manufacturer takes the responsibility to replenish the distributor inventory, resulting in inventory control and access to demand information.  Logistics and warehouse management – In the initial period logistics was more manual intensive and there was no visibility of the movement of goods. However due to the advent of IT and technologies like RFID and GPS complete visibility in movement of goods is assured resulting into efficient logistic and warehouse management.  Customer service –In the initial period customer service was only reactive. The complaints or information was difficult to reach the concerned department and was time consuming process. However with the advent of IT, customer service is more proactive as it reaches the customer through internet and takes continuous feedback from them.

IV. CONCLUSION “Technology” is vehicle to enhance supply chain competitiveness and performance by enhancing the overall effectiveness and efficiency of logistics system. Hence choosing the right technology for various logistics activities or sub-processes is very crucial to any business to gain competitive advantage in today’s competitive market. Example – A cycle manufacturer must see how it can integrate the smallest component provider- namely, a brake shoe supplier and also the dealer at the rural center, in order to optimize production run and retain the customer instead of losing to the competitor. Today integration in the supply chain is possible due to available technology leading to efficiency in the supply chain only if the supply chain partners adopt the right strategy.

REFERENCES [1]. Chirstopher Martin, Logistics And Supply Chain Management, Pitman Publishing Co London, 2001. [2]. Coye J.J, Bardi E.J,Langgley C.J,“The Management of Business Logistics”, Thomson Asia 2003. [3]. David Simchi Levi, Philip Kamisky And Edith Simchi Levi, Designing And Managing The Supply Chain, Irwin Mc Graw Hill, New York, 2000. [4]. Mohanty R.P And Deshmukh S.G, Advanced Operation Management, Pearson Education 2003. [5]. Michel Quayle & Bryan Jones, Logistics- An Integrated Approach, Tudor Disiness Publishing, UK, 1999. [6]. Raghuram G & N Nahgaraj- Logistics And Supply Chain Management,Mc Millan India Ltd- 2001. [7]. R.Sarin(Brigadier), Automating And Spare Parts Inventory Management, Indian Management,Febuary 2000. [8]. Vittal N. & B.S. Sahay, Supply Chain Management For Global Competitiveness, Macmillan- 1999.

7th International Business Research Conference 24 | Page Indian Education Society's Management College and Research Centre

WAL-MART'S SUPPLY CHAIN

MANAGEMENT PRACTICES

OPER - 020

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N This case was written by P. Mohan Chandran, under the direction of Vivek Gupta, ICFAI Center for Management Research (ICMR). It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. o

The case was compiled from published sources. t  2003, ICFAI Center for Management Research. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means – electronic or mechanical, without permission. C

To order copies, call 0091-40-2343-0462/63/64 or write to ICFAI Center for Management Research, Plot # 49, Nagarjuna Hills, Hyderabad 500 082, India or email [email protected]. Website: www.icmrindia.orgo p y

OPER/020

WAL-MART'S SUPPLY CHAIN MANAGEMENT PRACTICES

“When you start to collapse the supply chain, accuracy in execution becomes critical. Any lack of accurate information and processes creates costly bottlenecks in the flow of goods and materials.”

-- Bruce Richmond, Global head, Andersen Consulting.

INTRODUCTION

The US-based Wal-Mart ranked first in the global Fortune 500 list in the financial year 2001-02 earning revenues of $219.81 billion (Refer Table I). Wal-Mart was the largest retailing company in the world. The company was much bigger than its competitors in the US – Sears Roebuck, K- Mart, JC Penney and Nordstrom combined (Refer Exhibit I). In 2002, Wal-Mart operated more than 3,500 discount stores, Sam’s Clubs and Supercenters in the US and more than 1,170 stores in all major countries across the world. The company also sold products on the Internet through its website, walmart.com.

TABLE I GLOBAL FORTUNE 500 LIST (2002) Rank Company Revenues (in $ millions) 1 Wal-Mart Stores 219,812.0 2 Exxon Mobil 191,581.0 3 General Motors 177,260.0 4 Ford Motor 162,412.0 5 Enron 138,718.0 Source: www.fortune.com

Wal-Mart was one of the largest private sector employers in the world, with employee strength of approximately 1.28 million. DThe company’s founder, Sam Walton (Walton) had always focused on improving sales, constantly reducing costs, adopting efficient distribution and logistics management systems and using innovative information technology (IT) tools. o According to analysts, Wal-Mart was able to achieve a leadership status ((Refer Exhibit II)) in the retail industry because of its efficient supply chain management practices. Captain Vernon L. Beatty, aide-de-camp to the commander, NDefense Supply Center, Columbus, Ohio said, “Supply chain management is moving the right items to the right customer at the right time by the most efficient means. No one does that better than Wal-Mart.”o This case was written by P. Mohan Chandran, under the direction of Vivek Gupta, ICFAI Center for Management Research (ICMR). t  2003, ICFAI Center for Management Research. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means – electronic or mechanical, without permission. C

To order copies, call 0091-40-2343-0462/63/64 or write to ICFAI Center for Management Research, Plot # 49, Nagarjuna Hills, Hyderabad 500 082, India or email [email protected]. Website: www.icmrindia.orgo p y Wal-Mart's Supply Chain Management Practices

BACKGROUND NOTE

Walton was born in 1918 at Kingfisher, Oklahoma, US. After graduating from the University of Missouri in 1940, Walton worked for the famous retailer, J C Penney. In his first job, Walton had displayed the qualities of a good salesman. He realized the importance of building loyalty among customers as well as employees. In the mid 1940s, Walton gave up his job and decided to set up his own retail store. He purchased a store franchise from Ben Franklin in Newport, Arkansas. It was here that he learnt his first lessons in retailing – offering significant discounts on product prices to expand volumes and increase overall profits. The business was successful and Walton soon acquired a second store within three years.

Walton not only looked for opportunities to open stores in other small towns but also explored the possibility of introducing innovative practices such as self-service. As the need for people to manage his stores increased, Walton tried to attract talented and experienced people from other stores. By 1969, Walton had established 18 Wal-Mart stores, reporting an annual sale of $44 million. In mid 1970s, Wal-Mart acquired 16 Mohr-Value stores in Michigan and Illinois. By the late 1970s, the retail chain had established a pharmacy, an auto service center, and several jewellery divisions.

In the 1980s, Wal-Mart continued to grow rapidly due to the huge customer demand in small towns, where most of its stores were located. Commenting on the growth of Wal-Mart, Walton said: “When we arrived in these small towns offering low prices every day, customer satisfaction guaranteed, and hours that were realistic for the way people wanted to shop, we passed right by that old variety store competition, with its 45 percent mark ups, limited selection and limited hours.” Wal-Mart stores were located at a convenient place in a big warehouse-type building and targeted customers who bought merchandise in bulk. Customers could buy goods at wholesale prices by becoming members and paying a nominal membership fee. By 1984, there were 640 Wal-Mart stores in the US, generating sales of about $4.5 bn and accruing profit of over $200 mn.

Wal-Mart suffered a setback in 1992, when Walton died after a prolonged illness. But it continued its impressive growth in the 1990s, focusing more on establishing its stores overseas. In 1992, Wal-Mart expanded its operations in Mexico by entering into a joint venture with Cifra. Two years later, the company acquired 122 Woolco stores from Woolworth, Canada. By 1997, Wal-Mart had become the largest volume discount retailer in Canada and Mexico. In 1997, Wal-Mart acquired the 21-store German hypermarket chain, Wertkauf. Other international expansion efforts included the purchase of Brazilian retailer Lojas Americans’ 40 percent interest in their joint venture, and the acquisition of four stores and additional sites in South Korea from Korea Makro. In January 1999, Wal-Mart expanded itsD German operations by buying 74 stores of the hypermarket chain, Interspar. The stores were acquired from Spar Handels AG, which owned multiple retail formats and wholesale operations throughout Germany. o By 2002, Wal-Mart had emerged as the largest company in the world in terms of revenues. Analysts felt that Wal-Mart had come a long way since 1979, when the company generated annual revenues of more than a billion dollar for Nthe first time. By 1993, the company was doing a billion dollar business in a week and by 2001, it was crossing the billion dollar mark in every 1.5 days. Analysts attributed this phenomenal growth to Wal-Mart’s continued focus on customer needs and reducing costs through efficient supply chain maonagement practices. The company was able to offer a vast range of products at the lowest costs in the shortest possible time. This was possible mainly due to two factors – Wal-Mart’s highly automatedt distribution centers, which significantly reduced shipping costs and time, and its computerized inventory system, which speeded up the checking out time and recording of transactions. C o 3 p y

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MANAGING THE SUPPLY CHAIN

PROCUREMENT AND DISTRIBUTION

Wal-Mart always emphasized the need to reduce its purchasing costs and offer the best price to its customers. The company procured goods directly from manufacturers, bypassing all intermediaries. Wal-Mart was a tough negotiator on prices and finalized a purchase deal only when it was fully confident that the products being bought were not available elsewhere at a lower price. According to Claude Harris, one of the earliest employees, “Every buyer has to be tough. That is the job. I always told the buyers: ‘You are negotiating for your customer. And your customer deserves the best prices that you can get. Don’t ever feel sorry for a vendor. He always knows what he can sell, and we want his bottom price. ‘We would tell the vendors,’ Don’t leave in any room for a kickback because we don’t do it here. And we don’t want your advertising program or delivery program. Our truck will pick it up at your warehouse. Now what is your best price?”

Wal-Mart spent a significant amount of time meeting vendors and understanding their cost structure. By making the process transparent, the retailer could be certain that the manufacturers were doing their best to cut down costs. Once satisfied, Wal-Mart believed in establishing a long- term relationship with the vendor. In its attempt to drive hard bargains, Wal-Mart did not even spare big manufacturers like Procter & Gamble (P&G). However, the company, generally, preferred local and regional vendors and suppliers.

In 1998, Wal-Mart had over 40 distribution centers located at different geographical locations in the US. Over 80,000 items were stocked in these centers. Wal-Mart’s own warehouses directly supplied 85 percent of the inventory, as compared to 50-65 percent for competitors. According to rough estimates, Wal-Mart was able to provide replenishments within two days (on an average) against at least five days for competitors. Shipping costs for Wal-Mart worked out to be roughly 3 percent as against 5 percent for competitors.

Each distribution center was divided into different sections on the basis of the quantity of goods received and was managed the same way for both cases and palletized goods. The inventory turnover rate was very high, about once every two weeks for most of the items. Goods meant for distribution within the US usually arrived in pallets, while imported goods arrived in re-usable boxes or cases. In some cases, suppliers delivered goods such as automotive and drug products directly to the stores. About 85% of the goods which were available at the stores passed through the distribution centers.

The distribution centers ensuredD a steady and consistent flow of products to support the supply function. As Wal-Mart used sophisticated barcode technology and hand-held computer systems, managing the center became easier and more economical. Every employee had an access to real- time information regarding the inventoory levels of all the products in the center. They had to just make two scans – one to identify the pallet, and the other to identify the location from where the stock had to be picked up. Different barcodes were used to label different products, shelves and bins in a center. The hand-held computerN guided an employee with regard to the location of a particular product from a particular bin or shelf in the center. When the computer verified the bin and picked up a product, the employee confirmed whether it was the right product or not. The quantity of the product required from the centero was entered into the hand-held computer by the employee and then the computer updated the information on the main server. t The hand-held computer also enabled the packaging department to get accurate information about the products to be packed. It displayed all information aboutC the storage, packaging and shipping of a particular product thus, saving time on unnecessary paperwork.o It also enabled the center 4 p y Wal-Mart's Supply Chain Management Practices supervisors to monitor their employees closely enabling them to give directions and even guide them even on the move. This enabled the company to satisfy customer needs quickly and improve the level of efficiency of the distribution center management operations.

Each distribution center had facilities for maintaining personal hygiene such as shower bath and fitness centers. It also had provision for food, sleep and personal business. The distribution center could also be used for meetings and paperwork. The truck drivers of Wal-Mart sometimes availed these facilities.

LOGISTICS MANAGEMENT

An important feature of Wal-Mart’s logistics infrastructure was its fast and responsive transportation system. The distribution centers were serviced by more than 3,500 company owned trucks. These dedicated truck fleets allowed the company to ship goods from the distribution centers to the stores within two days and replenish the store shelves twice a week. The truck fleet was the visible link between the stores and distribution centers. Wal-Mart believed that it needed drivers who were committed and dedicated to customer service. The company hired only experienced drivers who had driven more than 300,000 accident-free miles, with no major traffic violation.

Wal-Mart truck drivers generally moved the merchandise-loaded trailers from Wal-Mart distribution centers to the retail stores serviced by each distribution center. These retail stores were considered as customers by the distribution centers. The drivers had to report their hours of service to a coordinator daily. The coordinator scheduled all dispatches depending on the available driving time and the estimated time for travel between the distribution centers and the retail stores. The coordinator informed the driver of his dispatches, either on the driver’s arrival at the distribution center or on his return to the distribution center from the retail store. The driver was usually expected to take a loaded truck trailer from the distribution center to the retail store and return back with an empty trailer. He had to dispatch a loaded truck trailer at the retail store and spend the night there. A driver had to bring the trailer at the dock of a store only at its scheduled unloading time, no matter when he arrived at the store. The drivers delivered the trailers in the afternoon and evening hours and they would be unloaded at the store at nights. There was a gap of two hours between unloading of each trailer. For instance, if a store received three trailers, the first one would be unloaded at midnight (12 AM), the second one would be unloaded at 2 AM and the third one at 4 AM.

Although, the trailers were left unattended, they were secured by the drivers, until the store personnel took charge of themD at night. Wal-Mart received more trailers than they had docks, due to their large volume of business.

Wal-Mart maintained a strict vigilo over its drivers by keeping a record of their activities through the “Private Fleet Driver Handbook” (Refer Exhibit III). The purpose of the book was to educate the drivers with regard to the code of conduct. It also included the terms and conditions regarding the safe exchange of trailers with the storeN personnel and the safety of Wal-Mart’s property. This book also contained a list of other activities, the non-compliance of which would result in the termination of the driver. o To make its distribution process more efficient, Wal-Mart also made use of a logistics technique known as ‘cross-docking.’ In this system, the finishedt goods were directly picked up from the manufacturing plant of a supplier, sorted out and then directly supplied to the customers. The system reduced the handling and storage of finished goods,C virtually eliminating the role of the distribution centers and stores. There were five types of cross-dockingo (Refer Exhibit IV). 5 p y

Wal-Mart's Supply Chain Management Practices

In cross docking, requisitions received for different goods from a store were converted into purchase or procurement orders. These purchase orders were then forwarded to the manufacturers who conveyed their ability or inability to supply the goods within a particular period of time. In cases where the manufacturer agreed to supply the required goods within the specified time, the goods were directly forwarded to a place called the staging area. The goods were packed here according to the orders received from different stores and then directly sent to the respective customers.

To gain maximum out of cross-docking, Wal-Mart had to make fundamental changes in its approach to managerial control. Traditionally, decisions about merchandising, pricing and promotions had been highly centralized and were generally taken at the corporate level. The cross- docking system, however, changed this practice. The system shifted the focus from “supply chain” to the “demand chain,” which meant that instead of the retailer ‘pushing’ products into the system; customers could ‘pull’ products, when and where they needed. This approach placed a premium on frequent, informal cooperation among stores, distribution centers and suppliers with far less centralized control than earlier.

INVENTORY MANAGEMENT

Wal-Mart had developed an ability to cater to the individual needs of its stores. Stores could choose from a number of delivery plans. For instance, there was an accelerated delivery system by which stores located within a certain distance of a geographical center could receive replenishment within a day.

Wal-Mart invested heavily in IT and communications systems to effectively track sales and merchandise inventories in stores across the country. With the rapid expansion of Wal-Mart stores in the US, it was essential to have a good communication system. Hence, Wal-Mart set up its own satellite communication system in 1983. Explaining the benefits of the system Walton said, “I can walk in the satellite room, where our technicians sit in front of the computer screens talking on the phone to any stores that might be having a problem with the system, and just looking over their shoulders for a minute or two will tell me a lot about how a particular day is going. On the screen, I can see the total of the day’s bank credit sales adding up as they occur. If we have something really important or urgent to communicate to the stores and distribution centers, I, or any other Wal-Mart executive can walk back to our TV studio and get on that satellite transmission and get it right out there. I can also go every Saturday morning around three, look over these printouts and know precisely what kind of work we have had.”

Wal-Mart was able to reduceD unproductive inventory by allowing stores to manage their own stocks, reducing pack sizes across many product categories, and timely price markdowns. Instead of cutting inventory across the board, Wal-Mart made full use of its IT capabilities to make more inventories available in the case ofo items that customers wanted most, while reducing the overall inventory levels. Wal-Mart also networked its suppliers through computers. The company entered into collaboration with P&G for maintaining the inventory in its stores and built an automated re- ordering system, which linked all computersN between P&G and its stores and other distribution centers. The computer system at Wal-Mart stores identified an item which was low in stock and sent a signal to P&G. The system then sent a re-supply order to the nearest P&G factory through a satellite communication system. P&G then deliveredo the item either to the Wal-Mart distribution center or directly to the concerned stores. This collaboration between Wal-Mart and P&G was a win-win proposition for both because Wal-Mart coult d monitor its stock levels in the stores constantly and also identify the items that were moving fast. P&G could also lower its costs and pass on some of the savings to Wal-Mart due to better coordination.C o 6 p y Wal-Mart's Supply Chain Management Practices

Employees at the stores had the ‘Magic Wand,’ a hand-held computer which was linked to in-store terminals through a radio frequency network. These helped them to keep track of the inventory in stores, deliveries and backup merchandise in stock at the distribution centers. The order management and store replenishment of goods were entirely executed with the help of computers through the Point-of-Sales (POS) system. Through this system, it was possible to monitor and track the sales and merchandise stock levels on the store shelves. Wal-Mart also made use of the sophisticated algorithm system which enabled it to forecast the exact quantities of each item to be delivered, based on the inventories in each store. Since the data was accurate, even bulk items could be broken and supplied to the stores. Wal-Mart also used a centralized inventory data system using which the personnel at the stores could find out the level of inventories and the location of each product at any given time. It also showed whether a product was being loaded in the distribution center or was in transit on a truck. Once the goods were unloaded at the store, the store was furnished with full stocks of inventories of a particular item and the inventory data system was immediately updated.

Wal-Mart also made use of bar coding and radio frequency technology to manage its inventories. Using bar codes and fixed optical readers, the goods could be directed to the appropriate dock, from where they were loaded on to the trucks for shipment. Bar coding devices enabled efficient picking, receiving and proper inventory control of the appropriate goods. It also enabled easy order packing and physical counting of the inventories.

In 1991, Wal-Mart had invested approximately $4 billion to build a retail link system. More than 10,000 Wal-Mart retail suppliers used the retail link system to monitor the sales of their goods at stores and replenish inventories. The details of daily transactions, which approximately amounted to more than 10 million per day, were processed through this integrated system and were furnished to every Wal-Mart store by 4 a.m., the next day. In October 2001, Wal-Mart tied-up with Atlas Commerce for upgrading the system through the Internet enabled technologies.

Wal-Mart owned the largest and most sophisticated computer system in the private sector. The company used Massively Parallel Processor (MPP) computer system to track the movement of goods and stock levels. All information related to sales and inventories was passed on through an advanced satellite communication system. To provide back-up in case of a major breakdown or service interruption, the company had an extensive contingency plan.

By making effective use of computers in all its company’s operations, Wal-Mart was successful in providing uninterrupted service to its customers, suppliers, stockholders and trading partners.

THE BENEFITS REAPED

Wal-Mart strongly believed and constantly emphasized on strengthening its relationships with its customers, suppliers and employees.D The company was very vigilant and sensed the smallest of changes in store layouts and merchandising techniques to improve performance and value for customers. The company made efforts to capitalize on every cost saving opportunity. The savings on cost were always passed on to theo consumers, thereby adding value at every stage and process.

Wal-Mart also enjoyed the benefits of low transportation costs since it had its own transportation system which assisted Wal-Mart in deliveringN the goods to different stores within (or sometimes less than) 48 hours. Transportation costs for Wal-Mart were estimated at approximately 3% of the total costs as compared to 5% for their competitors. Having its own transportation system enabled Wal-Mart to replenish the shelves four times fastero than its competitors.

Wal-Mart priced its goods economically and the prices varied from day to day. The company enjoyed good bargaining power as it purchased huget quantities. This enabled it to price its products competitively and pass on the benefits to the consumers. The company offered higher discounts than any other retailer and they earned good revenuesC in the form of higher volumes. Low pricing ensured that the sales volumes were high and consistent.o 7 p y

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The benefits of an efficient supply chain management system included reduction in lead time,1 faster inventory turnover, accurate forecasting of inventory levels, increased warehouse space, reduction in safety stock and better working capital utilization. It also helped reduce the dependency on the distribution center management personnel resulting in minimization of training costs and errors. The stock-out of goods and the subsequent loss arising out of it was completely eliminated.

Wal-Mart’s supply chain management practices resulted in increased efficiency in operations and better customer service. It eliminated old stocks and maintained quality of goods. Bar coding and radio frequency technologies enabled accurate distribution of goods. Cross-docking also helped Wal-Mart to reduce inventory storage costs. It also helped to cut down the labor and other handling costs involved in the loading and unloading of goods.

QUESTIONS FOR DISCUSSION:

1. Wal-Mart has been able to achieve respectable leadership in the retail industry because of its focus on supply chain management. Discuss in detail the distribution and logistics system adopted by Wal-Mart.

2. The use of innovative information technology tools had benefited Wal-Mart’s supply chain management. In the light of the above statement, briefly explain how IT benefited Wal-Mart’s logistics and inventory management.

3. What were the supply chain management processes adopted by Wal-Mart and how far were they effective? Discuss.

4. What was the nature of benefits derived by Wal-Mart from the efficient supply chain management practices and how far it has contributed to its sustainable competitive advantage? Explain.

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1 The time taken for goods to reach Wal-Mart stores from the place of manufacture.o 8 p y Wal-Mart's Supply Chain Management Practices

EXHIBIT I

WORLD’S 25 LARGEST RETAIL COMPANIES BY SALES (2002) 2001 Sales Rank by Company Rank Country Sector (in mn Market Name Dollars) Cap. 1 Wal-Mart U.S. Discount Store 217,800 1 2 Carrefour France Hypermarket 67,721 6 3 Ahold Netherlands Supermarket/Hypermarket 64,902 12 4 Home Depot U.S. Home improvement 53,553 2 5 Kroger U.S. Supermarket 50,098 13 6 Metro AG Germany Diversified 48,264 32 Discount 7 Target U.S. 39,175 5 Store/Department store 8 Albertson’s U.S. Supermarket 37,931 20 9 Tesco U.K. Supermarket/Hypermarket 37,378 9 Department store/General 10 Sears, Roebuck U.S. 35,847 14 merchandise 11 Safeway U.S. Supermarket 34,301 15 12 Costco U.S. Wholesale club 34,137 11 13 Rewe Gruppe Germany Diversified 33,640 P ITM 14 France Diversified 32,922 P Enterprises Department store/Drug 15 J.C.Penny U.S. 32,004 48 store 16 Aldi Gruppe Germany Food/Discount store 30,000 P Edeka Gruppe 17 Germany Diversified 29,392 P (incl. AVA) Supermarket/ 18 J Sainsbury U.K. 27,121 25 Hypermarket Pinault- 19 Printemps- France Diversified 27,079 27 Redoute 20 Walgreen U.S. Drug store 24,623 3 21 Leclerc France Diversified 24,195 P

Hypermarket/ 22 Auchan France 23,478 P Diversified

Tengelmann D 23 Germany Diversified 23,393 P Gruppe 24 CVS U.S. Drug store 22,241 18 25 Lowe’s U.S. o Home Improvement 22,111 7 Source: www.chainstoreage.com Note: *P: Privately owned N All amounts are in millions of U.S. dollars, using the average 2001 exchange rates. All data is corporate level for retail-diversified companies, excluding VAT and non-retailing revenue when available. The different businesses of Japanese Conglomerates areo accounted for separately.

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EXHIBIT II

THE STRENGTH OF WALMART Yearly sales $220 billion Total employees across the globe 1.28 million Number of stores worldwide 4,382 Number of Supercenters 1,060 Number of Sam’s Clubs 495 Number of new stores opened in 2002 420 Number of suppliers 30,000 Number of Wal-Mart’s in Texas (US) 316 Value of 100 shares of Wal-Mart (as on January 28, 2003) $11.5 million purchased in 1970 @ $16.50 per share Wal-Mart’s rank/position among all retailers in the US (in terms of 1 grocery sales) Wal-Mart’s rank in jewellery sales 1 Number of pallets shipped by Wal-Mart truck every week 50 million Annual sales of hot dogs by Wal-Mart every year (approx) 70 million Percentage of dry dog food bought by Wal-Mart in the US 35% Total occupied floor area of Wal-Mart 18.3 square miles Percentage of toothpaste bought by Wal-Mart 24% Yearly advertising expenditure $498 million Yearly purchase of gold for Wal-Mart by its suppliers 18.4 metric tonne Highest one-day sales record till date (November 23, 2001) $1.25 billion Number of Learjets owned by Wal-Mart 18 Number of pilots owned by Wal-Mart 60 Number of employees employed by Wal-Mart in China 4000 Yearly sales of 850 McDonalds stores that operate inside Wal-Mart $1.3 billion stores Number of customers everyday at Wal-Mart stores worldwide 15.7 million Number of every day visitors at Wal-Mart’s website, walmart.com 4, 50,000 Number of items stored by a Wal-Mart Supercenters 1,00,000 Items stored by walmart.com 6,00,000 Estimated market capitalization of Wal-Mart in 2020 $11.1 trillion Source: www.business2.com. D

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EXHIBIT III

PRIVATE FLEET DRIVER HANDBOOK Wal-Mart's Private Fleet Driver Handbook contained terms and conditions with regard to termination of the truck drivers. According to the Wal-Mart's Private Fleet Driver Handbook, a driver could be terminated from his job if he refused to deliver an assignment given to him. However, if a driver refused to deliver the assignment due to fatigue or insufficient rest, the refusal was not considered as a violation. This book included other rules, the violation of which would result in immediate termination of the driver. This book was maintained by Wal-Mart to create awareness about the role, duties and responsibilities of a driver towards the company, society and profession in various situations. The expected actions of each driver and the 'code of behavior' was clearly detailed in this handbook and the driver had to strictly adhere to these rules and regulations. However, drivers were not terminated simply because they violated the rules and terms mentioned in the handbook. The facts, circumstances, situations and other collaborative evidence were taken into account and thoroughly assessed to decide about the termination. When a driver violated a rule or 'code of behavior', he was not terminated immediately, but was first taught the correct code of behavior by Wal-Mart.

For example, though the handbook mentioned that drivers had to be very polite and kind while dealing with the store personnel and others, a driver was not terminated for being rude. Instead, he was given a warning and asked to behave properly. He was terminated only when he showed no improvement. The drivers were also required to secure the truck trailers at the time of delivering them to the stores. The inability or failure to do so was not considered as a breach of contract that would result in immediate termination. However, a driver was once terminated from his job (in the year 2000) by Wal-Mart's then Private Fleet Manager, Mr. Paul Darwin, (who took charge in 1998) for leaving a trailer unsecured at one of the stores near a highway.

Moreover, according to the rules mentioned in the handbook, the drivers should exchange the truck trailers in a totally 'safe and responsible' manner, so that neither the trailers are damaged during exchange or in transit, nor does it result in any loss to other people in the form of injury, etc. When a driver leaves an unloaded trailer in front of the Wal-Mart store for the store personnel to pick it up, he should ensure that the trailer is properly safeguarded and secured against a closed dock in the store. This would ensure that no other person would gain access to the unloaded trailers.

For Wal-Mart, an avoidable accident was a more severe offense than refusing to deliver an assignment for dispatch. Mr. Paul Darwin, the then Private Fleet Manager of Wal-Mart, once dismissed a driver for beingD involved in an accident that could have been avoided or prevented. However, the driver's dismissal was later withdrawn. Source: U.S. Dept. of Labor, www.oalj.dol.govo

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EXHIBIT IV

TYPES OF CROSS DOCKING Opportunistic Cross docking In this method of cross docking, exact information about where the required good was to be shipped and from where it has to be procured and the exact quantity to be shipped, was needed. This method of cross docking enabled the company to directly ship the goods needed by the retail customers, without storing them in the warehouse bins or shelves. Opportunistic cross docking could also be used when the warehouse management software, installed by the retailer, alerted him that a particular product was ready for moving and could be moved immediately.

Flow-through Cross docking In this type of cross docking, there was a constant inflow and outflow of goods from the distribution center. This type of cross docking was mostly suitable for perishable goods, which had a very short time span, or goods that were difficult to be stored in the warehouses. This cross docking system was mostly followed by the supermarkets and other retail discount stores, especially for perishable items.

Distributor Cross docking In this type of cross docking, the manufacturer delivered the goods directly to the retailer. No intermediaries were involved in this process. This enabled the retailer to save a major portion of the costs in the form of storage. As the retailer did not need to maintain a distribution center for storing various kinds of goods, he helped him save warehouse costs. The lead time for the delivery of goods from the manufacturer to the consumer was also drastically reduced. However, this method had some disadvantages too. The transportation costs for both the manufacturer and the retailer tended to increase over a period of time, when the goods were required to be transported to different locations several times. Moreover, the transportation system had to be very fast. Otherwise, the very purpose of cross docking was lost. The transportation system should also be highly responsive and take the responsibility for the delays in delivery of the goods. The retailer was at a greater risk. He lost the advantages of sharing the risks with the manufacturer. This type of cross docking was suitable only for those retailers who had a large distribution network and could be used in situations when goods had to be delivered in a short span of time.

Manufacturing Cross docking In Manufacturing cross docking, these cross docking facilities served the factories and acted as temporary and “mini warehouses.” Whenever a manufacturing company required some parts or materials for manufacturing a particular product, it was delivered by the supplier in small lots within a very short span of time, just when it was needed. This helped reduce the transportation and warehouse costs substantially.

Pre-Allocated Cross Docking Pre-allocated cross docking Dis very much like the usual cross-docking, except that in this type of cross docking, the goods are already packed and labeled by the manufacturer and it is ready for shipment to the distribution center from where it is sent to the store. The goods can be delivered by the distribution center directly to the storeo without opening the pack of the manufacturer and re-packing the goods. The store can then deliver the goods directly to the consumer without any further re- packing. Goods received by the distribution center or the store are directly sent into the outbound shipping truck, to be delivered to the consumer,N without altering the package of the good. Cross docking requires very close co-ordination and co-operation of the manufacturers, warehouse personnel and the stores personnel. Goods can be easily and quickly delivered only when accurate information is available readily. The informationo can be managed with the help of Electronic Data Interchange (EDI) and other general sales information.

Source: Compiled by ICMR through sources including wetb.nps.navy.mil, colby.com.au, wiralogistics.com and tli.isye.gatech.edu C o 12 p y Wal-Mart's Supply Chain Management Practices

ADDITIONAL READING AND REFERENCES:

1. Ortmeyer, K.Gwendolyn, and Lattin M. James, "A Theoretical Rationale for Every Day Low Pricing by grocery retailers," Stanford Graduate School of Business, 1991. 2. "Distribution and Retailing in China – Revolution and Competition", www.alberta.org, November 12, 1996. 3. Rowat, Christine, "Cross docking: The move from supply to demand", www.dmg.co.uk, August 1998. 4. Hulet, D.William, "Global Warming and Wal-Mart, Why global warming is a municipal government concern", www.elements.nb.ca, September 1998. 5. "Cross Docking and Cross Docking Network Design", www.tli.isye.gatech.edu, 1998-99. 6. "Cross docking delivers for Retail", www.spscommerce.com, 1999. 7. Harrington, Lisa, “Digital Age warehousing," Penton Media, www.industryweek.com, July 19, 1999. 8. "Distribution strategies, Supply Chain analysis at Volkswagen of America," www.eng.auburn.edu, 2000. 9. O'Brien, P. Kevin, "Value Chain Report- Warehouse Management Systems Add Value," www.industryweek.com, www.iwvaluechain.com, February 10, 2000. 10. Weiscott, N. Maria, "Warehouse Evolution: High Tech Developments Get Industry Cooking", Plants, sites and parks magazine, www.bizsites.com, February/March, 2000. 11. "Cross-docking in the U.K," Siemens Dematic, www.siemensdematic.com.au, 2001. 12. "What is cross docking?, The Warehouse Word, www.colofwhousing.com.au, 2001. 13. Colosino, Robert and Medwyk, Nicholas, "Wholesale Distribution, Managing complex supply chain requirements in the foodservice industry," wholesaledistribution.services.ibm.com, April 11, 2001. 14. Daudelin, Alexandre, "Supply Chain Management the Wal-Mart Way,” Supply Chain and Logistics Journal, www.infochain.org, April 21, 2001. 15. "Wal-Mart.com: The Physical giant goes Virtual," Red Herring Magazine, www.redherring.com, May 7, 2001. 16. Hutten, Staffen and Nyberg, Anna, "Voluntary retail chains and the threats and opportunities of European Integration," www.snee.org, May 15, 2001. 17. "It's not only the retail side, Wal-Mart Distribution", www.Wal-Martwatch.com, January 6, 2002. 18. "Stauffer V Wal-Mart stores, Inc., www.oalj.dol.gov, June 14, 2002. 19. Coyle, J. John, Bardi, J. Edward, Langley, C. John, "The Management of Business Logistics: A Supply Chain Prospective," www.house.gov, June 25, 2002. 20. "Thrify Wal-Mart PartnerD for Flat Rate Rental Plan," Auto Rental News, www.autorentalnews.com, July 29, 2002. 21. "Trans-loading, Cross docking," www.commoditylogistics.com, October 23, 2002. o N o t C o 13 p y

Case Study: Logistics of Supply Chain Challenges for the Red Cross

The Red Cross, a humanitarian organization, faces logistical challenges that far surpass that of Walmart or Dell. Up to 80% of their costs are in logistics, so it is not surprising that they should seek excellence in their supply chains. But their operations are fraught with uncertain and urgency, so many of the principles that apply to business supply chains do not fit as readily. The International Federation of Red Cross Red Crescent Societies (IFRC) is the largest humanitarian organization in the world, composed of 186 separate National Societies. Coordinating such a dispersed organization is no easy feat, as was made clear when Hurricane Mitch struck Honduras in 1998. IFRC was very slow to organize relief efforts. Its aid did not begin reaching victims until weeks after the event, long after other aid organizations were already on the ground. This lackluster performance caused donors to wonder whether their dollars were well spent and whether the IFRC was capable of managing a world-class supply chain that could respond to disasters in an efficient and cost-effective way. The early version of IFRC’s Supply Chain IFRC’s cumbersome supply chain was centrally managed in its headquarters in Geneva, Switzerland. Whenever disaster struck, a team from Geneva would go evaluate the damage and send back information to create the Relief Mobilization Table, which described what was needed and where. Tents, blankets, food, water, medical supplies, and thousands of other items might be on the table. The data is then sent out to suppliers, the separate National Societies, and also to donors, letting everyone know where to send relief supplies. These agents would then ship the goods to IFRC’s emergency units near the disaster area, handling custom clearances, inventory, warehousing and other logistics duties. Then the emergency units would distribute the supplies to local partners, who transported them to the beneficiaries. This centralized supply chain model stumbled badly, especially because of poor information flow and lack of transparency about who was sending what. The disaster side might be flooded with blankets and tents, yet never receive desperately needed telecom equipment. Many organizations send unsolicited goods, which often hindered IFRC’s ability to obtain and distribute the needed relief supplies. Failure to coordinate transportation led to unnecessarily high costs for multiple transatlantic flights and shipments. It is clear that IFRC needs a supply chain that is able to handle uncertainty. IFRC’s New Supply Chain Management System To improve its performance, IFRC began to transform its supply chain into a decentralized model, creating three regional logistics units in Dubai, Kuala Lumpur and Panama. These units pre-position supplies in warehouses for the most common disasters in their areas, so they can ramp up quickly. For the Information System, IFEC deployed the Humanitarian Logistics Systems (HLS), created especially for disaster recovery by the Fritz Institute. Although Enterprise Resource Planning (ERP) vendors offer supply chain modules along with their core modules for finances and human resources, their products are not designed for situations with so much uncertainty. Instead, IFRC needed a relatively simple system with a single data repository that could handle rapid mobilization. It also needed a system that could be accessed in real time in the field by its regional units, emergency teams, and also the local National Societies. The HLS is a web-based software that supports several essential functions that helped transform the IFRC supply chain. First, it maintains country and disaster data for the regional units, so they can intelligently pre-position supplies. Once disaster strikes, the system can aggregate the items needed and generate the mobilization table. The software also manages appeals to potential donors, helping to avoid the duplication that plagued earlier efforts. For procurement, the software helps manage supplier relationships by tracking agreements and requests for bids, as well as generating standard purchase orders and invoices. HLS includes tables for tracking shipping information, and it can generate shipping documents, receipts for goods, and reports on where items in the pipeline are currently located and where they can be expected. Testing the New Supply Chain Management System The IFRC’s new supply chain was first tested when an earthquake struck Indonesia and the justopened Kuala Lumpur Regional Unit took the lead. Although glitches, occurred, the supply chain was in motion in just three days, less than a third of the time it took IFRC to mobilize for the earthquake in Pakistan the previous year. The operation was also much more cost-effective, an estimation that it reduced cost by half. A Portal for Reporting Getting needed supplies to disaster-affected areas as quickly as possible is the first step toward helping as many people as possible survive. But the Red Cross also helps reduce psychological stress by offering an online-people finding and reporting service called the Safe and Well Website. When bombs exploded at the finish line for the Boston Marathon in 2013, spectators and runners could quickly visit the website with their mobile phones to report they were safe and well, reassuring their family members. The IFRC continues to improve its technology-supported supply chain and communications, to help people who need it around the world. Discussion Questions: 1. What were the deficiencies in the previous Red Cross supply chain? (Provide at least 3 deficiencies) 2. What role did IT play in the new Red Cross supply chain? (Provide at least 3 roles) 3. What other elements are part of the new Red Cross supply chain? (Provide at least 3 examples) 4. What were the business results for the Red Cross? (Provide at least 3 results) 5. What complimentary assets would Red Cross need in order to reap the full benefits of the new information system deployed. (Provide at least 3 complementary assets)