Chapter 1.4 – Ports and Distribution Networks

Authors: Dr. Theo Notteboom and Dr. Jean-Paul Rodrigue

Ports are nodes within distribution networks that include warehouses and fulfillment centers and provide the management of freight flows.

1. Ports as Locations for Distribution Centers

The dynamics in distribution networks are affected by the large-scale development of inland ports. The range of functions of inland logistics centers is wide-ranging from simple cargo consolidation to advanced logistics services. Many inland locations with multimodal access have become broader logistics zones and have assumed a significant number of traditional cargo handling functions and services. They have also attracted many related services, among other distribution centers, shipping agents, trucking companies, forwarders, container repair facilities, and packing firms. Quite a few of these logistics zones are competing with seaports for the location of warehousing and distribution facilities. Shortage of industrial premises, high land prices, congestion problems, the inland location of markets, and severe environmental restrictions are some of the well-known arguments for companies not to locate in a seaport.

Notwithstanding the rise of inland ports and inland logistics platforms in many parts of the world, seaports typically remain key constituents of many supply chains. Several ports have actively stimulated logistics polarization in port areas by enhancing flexible labor conditions, smooth customs formalities (combined with freeport status), and powerful information systems. Logistics activities can take place at the terminal, in a logistics park where several logistics activities are concentrated, or, in the case of industrial subcontracting, on the site of an industrial company. While there is a clear tendency in the container sector to move away from the terminal, an expansion of logistics on the terminals can be witnessed in other cargo categories. As such, a mix of pure stevedoring and logistics activities occurs.

An array of port-centric logistics activities are performed at terminals, mainly around two tiers. The first tier covers the activities directly to the cargo, while the second tier concerns freight distribution. Concerning the second tier, many seaports have created logistics parks inside the port area or in the immediate vicinity of the port. Three basic types of port-centric logistics parks in seaport areas can be distinguished:

  • Traditional seaport-based logistics park. This type of logistics park is associated with the pre-container area in seaports. It is mainly associated with manufacturing and heavy industry having a high material input carried by maritime transportation. Others were created to convey the benefits of free trade zones outside specified custom regulations.
  • Container-oriented logistics parks. This is the dominant type with a number of large warehouses in proximity to or co-located with the container terminal locations and intermodal terminal facilities. A core element is the container freight station (CFS), a facility where cargo is consolidated into containers (stuffing) for exports or deconsolidated (destuffing) into domestic cargo loads for inland distribution.
  • Specialized seaport-based logistics parks. Covers a variety of functions, often closely related to the characteristics of the seaport. The park may focus on the storage of liquid bulk (chemicals), on trade in which a combination of warehousing and office space is offered to several import-export companies, or on high-value office-related employment in which Fourth Party Logistics Service Providers, logistics software firms, and financial service providers.

Logistics parks also have a functional orientation depending on the general directions of the flows, with export, intermediate, and import focuses. A non-exhaustive list of logistics activities that typically opt for a location in a port includes:

  • Logistics activities involving large volumes of bulk cargoes, suitable for inland navigation and rail.
  • Logistics activities directly related to companies that have a production site in the port area.
  • Logistics activities related to cargo that needing flexible storage to create a buffer (products subject to seasonality or irregular supply).
  • Logistics activities with a high dependency on short sea shipping.

Moreover, ports are competitive areas for distribution centers in a multiple import structure and as consolidation centers for export cargo. The decision to locate a distribution center inside a port implies advantages and disadvantages that include:

  • Good integration and cooperation between terminal operations and distribution center activities.
  • Possibility to re-export from the port to other markets.
  • Reduce local traffic congestion and pollution when operating distribution activities inside the port area.
  • Port real estate tends to be more expensive than the surrounding areas. The market price of port real estate is often higher, particularly because it is scarcer and located in high accessibility and connectivity areas. Port managers want to avoid facing opportunity costs linked to the sub-optimal use of prime locations in the port area. Still, port managers cannot price the port real estate too high as they have to consider the competitive setting in attracting logistics operations.
  • Port real estate tends to be priced differently. Very often, the logistics service provider cannot buy the land as most ports are landlords whereby the port authority gives the port real estate in concession to the private port or warehouse operator for a specific term.
  • Manufacturers have less flexibility because of the constraint to call the port where the distribution center is located, giving fewer routing options. A distribution center located at an intermediate location can have more options and benefit from inter-port competition.
  • Logistics service providers might decide not to locate a distribution center in a port partly because of the complexity of the dock labor system. This can involve a lack of experience with the existing social dialogue patterns in that port, such as labor unions.
  • In some cases, the port is located far away from the final destination of goods and offers a locational disadvantage.

2. Warehousing Activities in Supply Chains

A. Warehouses and fulfillment centers

Warehousing involves the administrative and physical actions required to store and distribute goods and materials located at the beginning, middle, and end of the supply chain or near production and industrial facilities. Warehousing facilities act as important nodes in logistics networks and have become key components of informational flow management. The terms warehouse and fulfillment center are often used interchangeably but can have very different connotations. Both are large buildings that hold inventory. However, the use of cases and services provided are often quite different.

warehouse is a facility designed to store goods for longer periods of time. Goods stored in a warehouse have usually not yet been sold and are held in inventory until a buyer is found. A warehouse is driven by the supply of manufacturers and wholesalers.

There are warehousing providers geared toward businesses that primarily do wholesale or B2B orders in large quantities. Some major retailers will have their own warehouse(s) to store excess inventory, while others rent warehousing space in conjunction with other businesses.

distribution center (or fulfillment center) is a facility that performs consolidation, warehousing, packaging, decomposition, and other functions linked with handling freight. Orders are received, processed, and filled. Their main purpose is to provide value-added services to freight, which is stored for relatively short time periods (days or weeks). Goods stored in a distribution center have usually been sold and are in transit to their destination. They can also perform light manufacturing activities such as assembly and labeling. A distribution center tends to focus on the demand of customers.

Thus, a fulfillment center is focused on getting orders to customers in a timely fashion and can relieve companies of managing this process when a 3PL is used. Orders are increasingly processed through online platforms linking demand with available inventory, which is stored strategically in preparation for fulfilling customer orders. Once an order has been placed, inventory is picked (i.e. order picking process), and boxes are packed, then labeled and, if needed, consolidated for shipment. Fulfillment centers can process both B2B orders, typically a high volume of goods sent to a large customer such as a retailer, as well as B2C orders. Fulfillment companies work with cut-off times for orders to be placed. For example, customer orders placed by noon local time will be processed in the fulfillment center and shipped out the same day.

In contrast to a warehouse, fulfillment centers turn inventory over quickly. The challenge is to make sure there is enough inventory on hand before shipment. Unlike warehouses that are more static or inactive, fulfillment centers thus have continuous movement in a more complex operational setting. Typical fulfillment services include receiving inventory, order picking, kitting and packing items, labeling shipments, and managing returns. The equipment used in distribution centers and (rapid) fulfillment centers includes forklifts, (automated) stacking cranes, shelves, cargo consolidation and deconsolidation infrastructure (such as conveyor belt systems), a cargo management system, scanning devices (barcode, QR-scanner, or a system of radio frequency identification tags – RFID) and loading bays for trucks (and occasionally also rail). Modern fulfillment companies highly depend on technology for delivering fulfillment services. Every step of the fulfillment process is automatically documented in real-time.

Like most segments of the supply chain, warehousing has gone through several evolutionary stages. Initially, warehouses were used in proximity to manufacturing facilities as a primary means to store materials needed to produce finished goods waiting to be transported to the customer. Since most production facilities were located close to ports and major access points, the need for inland or part-way warehouses was rather limited. Except for the production and sales storage areas, where buffer and cargo bundling activities surrounding ports and major transport nodes took place, little or no warehousing activity was present. This changed with the onset of globalization, containerization, and the emergence of more complex and global supply chains. Warehousing slowly evolved from a purely industrial derived activity to a more defined and specialized industry. It is still part of the production process and takes a more prominent role in the logistics and transport industry by offering rapid fulfillment and added value activities.

Activities linked to warehousing are limited to the basic storage of goods within a covered storage space and the activities like receipt, identification, verification (customs), and retrieval. The term warehousing is, therefore, a universal connotation. Still, the types of specific warehousing facilities differ greatly depending on the stage within the supply chain (distance to consumer) and the level of specialization of the product. As a rule of thumb, the closer to the consumer and the more specialized the product, the more complex the required storage facilities and related activities.

B. Main trends in the warehousing sector

The main economic and logistics trends impacting the warehousing sector are roughly the same as the trends impacting the logistics industry. Globalization, just-in-time supply chains, mass customization, and increased sustainability all play their role. The resulting landscape is increasingly complex by its geography, the supply chains involved, the distribution networks, and its technologies. Continuous innovation and efficiency improvements are key to keeping a competitive edge in this rapidly evolving market. The warehousing sector has been subjected to several specific trends:

  • Lean warehousing. The lean principles were originally created in the automotive industry in order to reduce waste in terms of time and inventory. It is a strategy also used in the logistics and warehousing sector, resulting in cost reduction, customer satisfaction, and production efficiency. The lean warehousing philosophy aims to reduce activities that do not generate added value for the customer. By reducing various types of waste in the process, such as too much inventory, or too many movements (no optimized workspace distribution), the lean principles impact the core of the warehousing.
  • Green and sustainable warehouses. The warehousing sector is undergoing a green wave and an improved sustainable footprint by specializing and optimizing the warehouse and transporting goods in an environment-friendly fashion. Several principles enable large-scale environmental impact reductions, such as the use of sustainable construction materials, energy efficiency, and the use of electric equipment.
  • Collaborative warehousing. A group of warehouse managers can share warehousing space according to their respective availability and locations. The underlying operating model requires high levels of trust and data sharing using advanced IT management systems.
  • TMS and WMS alignment. A TMS (Transportation Management System) is software used to plan freight operations with a given allocation of supply and demand, such as finding carriers and rates, the routing, and the related transactions (bill of lading, receivables). A Warehouse Management System (WMS) is software used to manage all warehousing operations, from inventory to shipping and receiving. Advanced capabilities like directed put away, cycle counting, and master schedules allow users to track and control everything happening in a warehouse using real-time information, which is constantly at their disposal. WMS and TMS integration may lead to optimized operation solutions by creating better planning, accurate delivery times, and faster processes while increasing visibility throughout the supply chain. The main benefits linked to such integration include improved visibility (transparent supply chain), operational synchronization (shelf distribution and truck distribution alignment), pick efficiency improvements (batch sizes linked to transport mode), and improved customer service.
  • Labor management software gives the ability to track the productivity of warehouse employees. For example, it allows comparing the time it takes an employee to finish a task to a pre-defined standard. The data collected helps avoid bottlenecks in the order fulfillment process before they occur, thereby indirectly improving lead times. This technology also allows for easier decision-making and increased labor productivity and accuracy.
  • Voice-enabled technology complements classic input options for warehousing activities. The devices allow employees to interact with software applications through microphones and headphones. This creates a hands-free work environment and facilitates their jobs to a great extent. The picking process is made easier since users are now directed to pick designated items for an order. Information on location, quantity, and other useful items are given directly through the headphones.

3. Regional Distribution Networks

Many warehousing facilities have evolved or have been specifically designed to act as distribution centers as part of an extensive regional distribution network. The decoupling of orders and delivery incites the reconfiguration of distribution networks. The trend towards the decoupling of orders and deliveries is reinforced by the rise of digital ordering platforms and the associated rise of e-fulfillment and e-commerce. Therefore, distribution networks have to adapt to new requirements. When it comes to the regional distribution of goods, corporations are challenged to find optimal solutions at various levels:

  1. The choice of the distribution system.
  2. The location of distribution centers.
  3. The location of value-added logistics services (VALS).

A. Choice of distribution system

A general distribution structure does not exist as corporations have a multiplicity of options. They can opt for direct delivery without going through a distribution center, distribution through the main distribution center (MDC), distribution through a group of national distribution centers (NDCs) or regional distribution centers (RDCs), or a tiered structure in which one or a few MDCs and several NDCs and RDCs are combined to form a distribution network. These decisions are based on the characteristics of the respective supply chains, the type of products, and the demand level.

Multiple determinants exist when choosing between a centralized distribution center in comparison with several decentralized distribution centers. On the one hand, the number of distribution centers serving regional markets is growing, favoring inland locations close to markets. On the other hand, the number of centers serving global markets is also growing, favoring locations close to large international seaports or airports. The choice between the various distribution channels depends on the type of product (consumer goods, semi-finished products, and foodstuffs) and the frequency of deliveries. For example, in the fresh food industry, main distribution centers are unusual because perishability dictates a local distribution structure. In the pharmaceutical industry, main distribution centers are common. Regional or local distribution centers are still not present because the pharmaceutical products are often manufactured in one central plant and delivery times are not critical (hospitals often have their own inventories). However, in the high-tech spare parts industry, all of the distribution center functions can be present because spare parts need to be delivered within a few hours. High-tech spare parts are usually costly, which incites the use of centralized distribution structures).

Corporations often opt for a hybrid distribution structure of centralized and local distribution facilities. For instance, they use an MDC for medium- and slow-moving products and RDCs for fast-moving products. These RDCs typically function as fulfillment centers rather than holding inventories. The conventional or multi-country distribution structures are being replaced by merge-in-transit, cross-docking, or other fluid logistics structures. The cross-docking principle means that the products are almost immediately transferred from the discharge area to the load area with no or limited storage.

Cost-service trade-offs also have an impact on the choice between a centralized or decentralized distribution network configuration. On the one hand, the centralization of inventories offers an opportunity to reduce costs. On the other hand, storing products close to the final consumers could help increase customer responsiveness. Europe and North America are illustrative of these complex distribution dynamics.

B. Location selection for distribution centers

A second key decision level in developing a regional distribution network concerns decisions on the locations of the distribution centers once the distribution system has been chosen. When referring to distribution centers, the terms warehouse and fulfillment center are often used interchangeably but can have very different connotations.

Distribution center location analysis has received considerable attention. The optimal distribution location decisions involve careful attention to inherent trade-offs among facility costs, inventory costs, transportation costs, and customer responsiveness. Also, they are influenced by the inventory stocking policy of the corporation. The variables that affect site selection are numerous and quite diverse and can be quantitative or qualitative. Of particular relevance are centrality, accessibility, market size, firm’s reputation and experience, land and its attributes, labor (costs, quality, productivity), capital (investment climate, bank environment), government policy and planning (subsidies, taxes), and personal factors and amenities.

Conventional location selection criteria have emphasized cost-related variables such as economies of scale and transportation costs. They include major factors that may strongly influence international location decisions, such as the costs of the factors of production (land, labor), infrastructure, labor characteristics, political factors, and economic factors. Nowadays, however, non-cost-based variables also play an important role when selecting the location of distribution centers, such as infrastructure support, local labor market characteristics, and institutional factors.

C. Value-added logistics services

The third key decision level in developing a regional distribution network refers to deciding where to add value to products. Many products need to be made country or customer-specific (labeling, kitting, adding manuals in local languages) before they can be delivered to the customer. Historically these country or customer-specific activities were mostly done in the factory, leading to high inventory levels. Due to the increasing variety of products and shorter product life cycles, many companies have chosen to move their country and customer-specific kitting or assembly operations as close to the customer as possible. This implied that the traditional storage and distribution functions of many distribution centers are supplemented by light manufacturing activities such as customizing and localizing products, adding components or manuals, product testing, quality control, or even final assembly.

Value-added logistics services (VALS). Activities integrating the production and distribution segments of a supply chain. They range from low-end activities that add little value to the goods, mostly transport and storage, to high-end activities such as postponed manufacturing, including systems assembly, testing, and software installation.

VALS connect production and transport chains in areas where international inflows and outflows of goods can be linked to regional flows. Logistics platforms incorporate additional functions such as back-office activities, such as managing goods and information flows, inventory management, tracking and tracing of goods, and fulfilling customs and other formalities. While setting up their logistics platforms, logistics service providers favor locations that combine a central location, such as proximity to the consumers market, with an intermodal gateway function. Seaports and sites along hinterland corridors typically meet these requirements.

VALS are a prime source for revenue generation and value-added in distribution centers and warehousing facilities. A key issue to logistics service providers is to decide on where to perform these value-added logistics services. These activities can be performed at the source in the country of export (e.g. in a Chinese warehouse), an intermediate location (e.g. a distribution center near a major port), or somewhere close to the consumer markets (e.g. close to an inland logistics platform). Even if VALS often take place in distribution centers and warehouses, the factors influencing the location decision of distribution centers are not necessarily identical to the determinants that guide the location of VALS. A complex interaction between selection factors determines where to perform value-added logistics activities at the level of the choice of the distribution system, the location of distribution centers, and the logistical characteristics of the product concerned.

Thus, the diversity of VALS indicates where to perform these activities. The logistics characteristics of different products also play a key role in making the location decision. These characteristics will impact operational decisions related to shipment scale, frequency and velocity, and the associated infrastructural level. For instance, fashion goods and commodities have different logistics factors which require different supply chain strategies. Fashion goods have a relatively high product shelf value and profit margin, a short product life cycle, high demand variability and seasonality, a distribution focus measured in service requirements instead of costs, and high requirements in terms of market response flexibility. On the other hand, commodities have a relatively low product shelf value and profit margin, a long product life cycle, low demand variability, a distribution focus measured in costs rather than service level, and low market response flexibility requirements.

When considering VALS, the most relevant logistics characteristics of products include:

  • Distribution focus measurements. For most labor-intensive activities, the lower costs may outweigh the associated higher costs of transport and the longer lead times. As a result, these activities are performed in a warehouse at the source or a centralized distribution center. In contrast, service-oriented activities that imply quick responses typically operated near the final market within several decentralized distribution centers. The higher the service requirement, the closer to the final market the VALS are positioned, and the more relevant are decentralized distribution center.
  • Intensity of distribution and economies of scale. The delivery frequency is expected to increase as manufacturers and retailers seek to achieve even greater economies linked with low levels of inventory as well as time-based distribution. This is a paradox between pressures toward economies of scale and high-frequency delivery. While centralized distribution systems are sensitive to large economies of scale and low delivery frequency, lower economies of scale and a high delivery frequency push logistics services in the opposite direction.
  • Replenishment lead time and demand uncertainty. Replenishment lead time is the time that elapses once an order has been placed until it is physically on the shelf and available for consumption. Generally, the longer the replenishment lead time, the more safety stock needs to be kept, and the more relevant in keeping the inventory in a centralized distribution center structure. The demand variability of the product is also a major element affecting logistics decisions. Stable and predictable demand would lead to a location closer to low-cost sites and centralized distribution. Unstable and unpredictable demand requires a quicker response and a higher service level, resulting in locations closer to the final market and the decentralization of distribution.
  • Ratio of transportation costs over total costs. A high ratio of transportation costs as part of total costs implies longer transport distances within supply chains and energy costs. The share of transportation costs in total costs is determined by factors such as the future balance between global sourcing strategies and more local sourcing and the continued attractiveness of low-cost countries in global supply chains. In other words, a high share of transportation costs in total costs might motivate logistics service providers to move their activities closer to the customers.
  • Product life cycle. Longer life cycles are typical for standard products, such as canned soup, which have relatively stable customer demand, lower market requirements, and a lower profit margin. This kind of product is more appropriate to operate at a centralized low-cost site. VALS on products with a shorter life cycle would be better performed closer to the final markets.
  • Market response flexibility. If the products are needed to respond fast to any changes in the market, it would be better to position the VALS near the customer base.
  • Product profit margin. A low-profit margin product will have to reduce costs and be better served via a more centralized distribution concept. High-profit margin products generally demand a closer link with the customers to increase the service level.
  • Country-specific products or packaging requirements. For example, if packaging requirements result in product volume increasing significantly, it would be better to perform this activity close to the final market to reduce shipping volume and transportation costs. However, power supply customization can easily be implemented in product manufacturing to meet regional standards.

When deciding where to operate VALS, distribution systems are first selected, then a specific location for the distribution center(s). Finally, what kind of VALS to perform at each of the distribution centers. However, VALS can also have a significant impact on the choices regarding the structure of distribution systems and the location of distribution centers. This is due to differences in logistics characteristics and requirements for each product category. The mix of structural logistics factors related to products will have a significant impact on determining which distribution network structure will be adopted, where to locate distribution centers, as well as where to operate VALS.

It is also important to notice that once a VALS location has been selected, the situation does not remain unchanged. At a certain moment, the factors behind the selection of a specific VALS location may change, requiring an adjustment. This can range from a few weeks to a few months, depending on the scale of the inventory and the availability of new facilities on the leasing market. Relocating a distribution center takes much longer. Once a distribution center has been set up, the logistics service provider typically operates the facility for at least 5 to 10 years, mainly because of the sunk costs. A complete change in the choice of the distribution system will be even more complex and time-consuming. By redistributing the location of VALS within existing nodes, a short-term impact on the quality and service attributes within the distribution network can be experienced without having to change the distribution structure or facility location.


Related Topics


References

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