Important factors that influence contracting to pave the way for the Physical Internet

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Important factors that influence contracting to pave the

way for the Physical Internet

Master thesis

Julia Mair am Tinkhof

2942585

MSc Technology Operations Management

University of Groningen, Faculty of Economics and Business

Supervisor: prof. dr. K.J. Roodbergen

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ACKNOWLEDGEMENTS

First of all, I need to thank professor Kees Jan Roodbergen for his supervision and support during my research project. Every time I got lost in the networks of the Physical Internet, he guided me with valuable feedback. Even though it was not always easy for me, his motivation and expertise helped me to be where I am now. I learned a lot throughout the thesis process and the knowledge and skills I developed will be beneficial for my future.

Furthermore, I would like to thank my interview partners, which gave me practical insights and information for my thesis. They gave me extensive answers to all my questions and made ideas about the future of logistics more tangible for me.

During my masters, I shared very good, but also very stressful times with my study friends. Together with them, even the busiest times were filled with happiness. Thank you, Bas, Martin, Michele, Nikos, Thomas and a special thank you to Marta and Rianne; I know I found friends for life in you. I would like to thank my housemates, which made me feel home in Groningen from the beginning on. To my friends back at home and in other places in the world, I would like to say thank you for being there for me from far. My family stands behind me, with everything I do, thank you all for that. The biggest thank you, goes to my parents. They supported me and my ideas and I would not be writing this now, if it wasn’t for them. Danke, Mama und Tata!

Finishing my studies means that I will leave Groningen. I learnt a lot during my time here, professionally and personally. This place will always be special to me, no matter where life’s journey will take me. I think this quote represents a good end to this chapter of my life.

“The key is not to prioritize what's on your schedule, but to schedule your priorities.”

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ABSTRACT

Purpose - The Physical Internet (PI) is a new initiative that aims towards an open and shared logistics network. Products flow seamlessly through the network based on real time decisions, just like data through the internet. The concept in practice makes logistics more economic and environmentally friendly. The goal of this thesis is to find out more about organizational and strategic factors around contracting towards the implementation of the PI. The focus lies on factors that can be changed even now, in order to prepare for the concept.

Design/ methodology/ approach - An explorative case study was conducted using information from academic literature, media and the business world. To get practical insights, interviews were held with seven company representatives of six different companies and a field expert, and innovative concepts and business models were analysed.

Findings – A number of factors that enhance the transition towards the PI were identified and divided in five groups, named legal, framing and relational factors, new players and performance metrics. Research and practical limitations/-implications – The thesis at hand shows factors in contracting that enhance the transition and transformation towards the PI. Due to the explorative nature of the research, generalizing the results without further research is only possible to a very limited extent. Value – The PI is a future vision which asks for new business models and contracts that build a legal basis to unfold its value. So far, no research has been done about contracting in the PI and therefore this research builds a starting point for further research.

Keywords – Physical Internet, outsourcing, contracting, factors

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III

LIST OF FIGURES

Figure 1 - Current Distribution Flows Compared to PI Flows (Montreuil et al. 2012) ... 3

Figure 2 - Adapted Framework for Research Design (Eisenhardt & Graebner 1989) ... 5

Figure 3 - Overview Interview Partners ... 8

Figure 4 –Steps in Data Analysis (Miles et al. 2014) ... 10

Figure 5 - Coding Scheme Derived from Collected Data ... 11

LIST OF TABLES

Table 1 - Combinations of Keywords for Literature Research ... 6

Table 2 - Choice of Academic Journals ... 7

Table 3 - Overview Interview Partners ... 7

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1. RESEARCH OBJECTIVE

Logistics accompany us within our everyday life. From food to e-commerce, everything is spread all over the world, organized through the logistics networks. Current logistics services are limited by a system of independent supply chain networks. Now imagine a vertical and horizontal collaboration among different network owners. Through a transparent, shared and interconnected network a higher stage of efficiency can be reached (Montreuil 2011). The Physical Internet (PI) could be a new concept for such an interconnected network that may replace logistics.

Taking the Internet as an example to follow, Montreuil (2011) gives insights on how the architecture of the Internet could be adapted to logistics. The PI is about shipping physical objects just as information flows through the internet. Imagine a world where your e-mail is a physical object and such as within the internet the sender can rely on the network to bring the object to the receiver (ALICE 2016). Similar to a network of servers that forms the Internet, a network of logistic hubs forms the basis for the PI. The PI can be seen as a well-thought-out, parallel use of all transport modes: For every transport order, a real-time decision about the best possible choice of transport modes, routes and content of containers is made (Montreuil 2011). In addition to that, objects are stored where they are needed. Just as internet servers host data of different users, the warehouses that are connected to the PI hubs, will store goods of different owners. The goal is that the goods are located closer to the point of consumption and therefore shipped faster (Montreuil 2012). The PI takes care of optimizing the loads and routes for the whole orders across the network and is looking for the best and cheapest services for users.

Logistics networks are dealing with goods, but also with information, which still must be digitalized and standards are needed in order to enable universal interconnectivity. To grow from where we are now towards where we want to be within the PI, a structured development plan for actors in supply chains is needed. The PI would belong to many different parties that are all users of the network. To form a legal proof for agreements among these different stakeholders, contracts are necessary. By analysing current circumstances around contracting from different points of view, gaps can be identified. Finding influencing factors in contracting will bring us closer to a structured development process for all actors in logistics. For this purpose, the following research questions will be addressed within the thesis at hand:

“Which factors in current contracting enhance the introduction of the Physical Internet?”

1. What are factors that play a role in current outsourcing contracts based on current literature? 2. What are factors that play a role in current outsourcing contracts from a company viewpoint? 3. What are factors that play a role in current outsourcing contracts in opinion of experts in the

field of transportation logistics?

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2 This thesis intends to identify circumstances that influence contracts. It will assess their suitability and readiness for the transition to the PI environment. To the knowledge of the author there is no paper on contracting in the PI environment, due to the innovative character of the concept. Therefore, the focus lies on general literature about contracting in outsourcing and on innovative concepts in logistics that already exist. New business models are developing and contractual agreements are necessary as a basis for legal relationships between stakeholders. Value creation pattern may change and we have to rethink the basics of logistics.

An initial literature review is followed by a structured in-depth literature review combined with insights by experts and pioneers in the field of innovative logistics and transportation. Combining them all allows to form a connection between theory and practice, leading to a duality of contributions. The information gathered will help us to analyse, if current circumstances in contracting are compatible with the flexible concept of the PI.

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2. THEORETICAL BACKGROUND

The Economist was the first to use the term Physical Internet in a 2006 edition (Markillie 2006). Montreuil, who could not stop thinking about the idea behind those two words, picked them up and developed the idea further. In the internet manifesto by Montreuil (2012), the Physical Internet (PI) is defined as a global open system of interconnected logistics. The concept makes use of the newest technologies in order to enable real-time decisions about the best possible transportation modes, routes and locations. Containers are standardized and range from small boxes to maritime containers. Goods are encapsulated in so called π-containers according to their size and are then combined with other encapsulated goods. All this enables to move, store, realize, supply and use physical objects in a more efficient and sustainable way (Montreuil 2011). Furthermore, logistical chains become more flexible and adaptive. A simulation study from 2012 analysing two top French retailers and their suppliers showed the effects of integrating existing infrastructure, facilities, demand patterns as well as service levels into the PI. This integration enabled cost savings from 4-26% of the overall costs and showed three times less greenhouse gas emissions (Montreuil 2012). To visualize such changes, Figure 1 graphically depicts an example of how the current distribution flows (left) would change within the PI (right).

Figure 1 - Current Distribution Flows Compared to PI Flows (Montreuil et al. 2012)

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4 Such and other current practices in international trade could hinder the actual productivity and effectivity that the logistics networks offer. A low price is more important than the sustainability or effectivity of the logistics action. There are no standard containers that fit all transport modes, across countries or even companies. This also means that there is a lack of synchronisation between different transport modes is lacking (Montreuil 2011). Logistics systems and networks are incompatible with each other. Most of the time, logistics currently use clearly defined shipments. If there is a problem, it is difficult to perform well, since the network does not offer a feasible alternative solution. Information about demand and capacity is private and therefore any unused capacity is lost. This lack of information leads to excessive travel, which in turn leads to the need of more manpower, loads that sit idle and trucks that are not full (Montreuil 2011).

The rise in digitalization brought the development of the Internet of Things and structured information sharing across organizations is possible. The transport information is more independent of logistics operators and all logistics assets could be connected. Logistical chains become more flexible and reconfigurable in real time (Montreuil 2011). The PI network offers different possibilities in case of short notice changes or problems along a transport. This allows decentralized decision making, which is more robust and resilient (Montreuil 2012).

According to Montreuil (2011), the PI can be seen as decentralized: Horizontal and vertical collaboration with other actors in the logistics supply chain enable the optimization across the whole network. Vertical collaboration is the collaboration of companies up and down the supply chain (Rodrigues et al. 2015; Barratt 2004), whereas horizontal collaboration is defined as a relationship that identifies and realizes synergies among suppliers, customers and logistics service providers (Rodrigues et al. 2015). For this study we look at four main categories of actors: shippers, logistics service providers (i.e. 3PL, 4PL), facilitators (i.e. governments, knowledge institutes, industrial organizations) and trustees (Cruijssen 2012). Their relationships to each other may be direct or indirect. Each of the actors plays a different role in logistics transports and has different interests. Therefore, contracts are necessary to form a legal basis between partners.

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3. METHODOLOGY

The benefits arising from the PI, are highlighted in Chapter 2. But there are many intra-organisational factors that need to be explored first in order to lead companies towards this new concept. As we have argued in the previous chapter, no research about contracting in the PI is conducted. Therefore, it is of importance to look at current practices and opinions of actors in logistics to find possible fields of research. An explorative approach has been chosen to find factors around contracting that may hinder companies to apply parts of the PI concept already now. This research examines different actors along logistics value chains. Interviews with company representatives help to identify and understand the interconnections and interdependences that come with outsourcing contracts.

Since contracting may have to change in the future, we are looking at current circumstances regarding contracts and the factors influencing them. The factors are then assessed based on their suitability in the PI. This research is looking for answers to “how”, “why” and “what” questions (Yin 2013). How are agreements between actors in the supply chain decided and on what information are they based? What are the needs of innovative concepts to be applied in logistics? Due to the explorative nature of this research, information from multiple input sources such as academic literature, interviews with company representatives, innovative concepts or business models is gathered. Many papers about contracting in outsourcing focus on revenue-, cost- and risk-sharing or pricing-models, however, considering these models is out of scope for this research.

The unit of analysis is supply chains, since they are the major entity, that is analysed in this study. The method of a case study gives us the flexibility to look at contracting in a broader setting and from different perspectives in the supply chain (Yin 2013). Factors around outsourcing are found through an iterative process of categorizing data in a systematic way. These factors form hypotheses that can be tested further. Eisenhardt & Graebner (1989) propose a framework for theory building, which will guide throughout this research in an adapted form (see Figure 2).

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6 3.1 Data Selection

As introduced in the previous section, the data selection forms the start of the research. Qualitative data as input for the study was gathered from multiple sources. This chapter will give an overview of selection criteria applied for each source.

For the literature search, a set of keywords was developed. The initial combinations of keywords (outsourcing; contract; logistics; supply chain) were adapted following an iterative process. The relevance of context and content of articles was checked by considering the abstract of the publication. After finding many articles in the list of hits that were not relevant for the research at hand, combinations of keywords were refined and the search was repeated with the new combinations. To build on most recent literature in the field of logistics contracting and outsourcing, we focus on academic articles published between 2011 and 2016. One reason for this choice is the increasing interest in horizontal collaboration in literature and by companies (Mason et al. 2007; Cruijssen 2012). Horizontal collaboration across supply chains in addition to vertical collaboration along supply chains is the basis for creating a good network. The overall search of academic literature was conducted in the digital database Web of Science and included combinations of keywords indicated in Table 1. There may be other combinations of keywords that seem logical, but the following seemed most appropriate for this research.

Table 1 - Combinations of Keywords for Literature Research

Keyword search in Web of Science

Outsourcing AND contract

Outsourcing AND contract AND logistics Outsourcing AND contract AND supply chain Outsourcing AND contract AND information sharing Supply chain management AND information sharing

Supply chain management AND performance management AND logistic service provider Supply chain AND outsourcing AND contract

Supply chain AND information sharing AND contract Supply chain AND information sharing AND coordination

Logistic AND supply chain AND network AND information sharing

The set of journals included in the search (see Table 2) was chosen on the following criteria:

- High number of published papers on outsourcing and contracting in logistics between 2011 and 2016

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7 Table 2 - Choice of Academic Journals

Area Abbreviation Journal title

Operations Management IJPE International Journal of Production Economics IJPR International Journal of Production Research JOM Journal of Operations Management

POM Journal of Production and Operations Management ITOR International Transactions in Operational Research Supply Chain Management JPDLM Journal of Physical Distribution and Logistics

Management

SCMIJ Supply Chain Management: An International Journal

Management General MS Management Science

Management Information Systems

JMIS Journal of Management Information Systems

To get a practical perspective on the topic at hand, stakeholders along the supply chain are interviewed. The focus lies on companies that currently work with innovative concepts within logistics or that are actively interested in such. Table 3 gives an overview of the interview partners, followed by the role of each company in the value chain. The description of the company and the company size give a short introduction of the respective interview partners and show the motives for choosing them. Table 3 - Overview Interview Partners

Name Role Description of company Company size

Rene Bruijne, Transfollow IT and legal services

Moved from paper to digital, by offering a platform that enables tracking, data exchange and a digital signature

11-50

Jasper Van Rijckevorsel, Just Cargo

Crowdsourced delivery services

Innovative delivery concept that tries to mix-and-match customer with chauffeur based on closest location

11-50

Erik Bertholet and Theo Smit, Groningen Seaports (GS)

Logistics hub Provides industrial and small-medium-sized customers with complete package of port services; active interest and investments in PI

50-200

Willemien Akerboom, EGS Logistics intermediate

Working on innovative concept of synchro modal transport within Europe, in line with some PI visions

200-500

Michiel Nijdam, Port of Rotterdam (PoR)

Logistics hub Competitive position as a logistics hub and world-class industrial complex; active interest and investments in PI

1.000-5.000

Shipper (adapted by the author)

Consumer goods supplier

Strong global presence with position to see the supply chain from end-to-end; high interests in the development of the PI

10.000+

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8 Figure 3 depicts an overview of the companies (outer yellow circles) and the reasons for choosing them (white inner circles). Based on the companies’ role in the supply chain, each company is assigned a category of questions. The answers to those questions play an important part in the iterative research cycle by giving additional input, as well as research material.

Figure 3 - Overview Interview Partners

The business models of Uber, Airbnb and Flexport were often referenced by the interview partners and therefore investigated more closely in this research. All three companies connect demand with supply via an Internet platform. Uber and Airbnb are part of the top five most valuable technology start-up’s in 2016 (Fortune Business Magazine 2016), having no inventory on hand. The freight forwarder and start-up Flexport wants to be the Uber of the ocean (Flexport 2016). We analysed their business models and policies, as well as media reports.

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9 because of the practical focus on international relationships between shippers. The company Tri-Vizor gave valuable contribution to the project in test cases. As neutral trustee and facilitator among horizontally cooperating companies, Tri-Vizor is interesting for this research.

3.2 Data collection

The next step in this study, is the data collection according to the criteria defined in Chapter 3.1. Because of the iterative character of the research method, the collection of data goes hand in hand with the data analysis. Once collected, the data is already organized and analysed and therefore serves as a better basis for every input that follows (Miles et al. 2014). Having chosen the supply chain approach, every interview or new input from literature is seen as a new piece of the puzzle to give a more complete picture on factors that influence outsourcing contracts. By following tactics, such as good data management during the research, quality criteria can be ensured (see Table 4).

Table 4 – Research Quality Criteria According to Yin (2013)

For the company interviews, questions were developed in form of a check-list. Some of the questions were adapted according to the different roles the companies play within the value chain. Part one of the interviews differed for each company, since the questions were formulated based on the company’s role within the supply chain. The questions were based on current contracts and conditions under which the company would be willing to give away the decision about transports. In part two, interview partners should name factors that are different now from how they were five to ten years ago. They were also questioned about factors they had in mind that make contracting inflexible and parties that would not agree on changing. In part three, interview partners should imagine how their customers would change over the coming years and which new parties would enter the market. Furthermore, they

Test Tactics applied in the research Research stages Construct

validity

- Multiple evidence was gathered during the study through eight semi-structured interviews

- Transcripts of the recordings were sent to participants for their approval

Data collection and analysis (Chapter 3.2-3.3)

Internal validity

- The data gathered from the interviews was analysed based on themes found in the initial literature review

- The data gathered during the semi-structured interviews was analysed by cross-comparing the responses provided by the participants with the data gathered through the literature search

Data analysis (Chapter 3.3)

External validity

- A total of eight interview partners participated in the study Research design (Chapter 3)

Reliability

- A database with all data, including interview transcripts, documents and memos was developed and updated regularly by using Atlas.ti

- Data was coded and analysed and the process documented in form of notes and memos

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10 were asked how they would prepare for the PI and which organizational challenges such a network would bring.

A funnel approach was used by starting with general questions regarding the company or personal opinions, while in the end, questions became more detailed towards the PI. This approach should avoid biasing the interviewee regarding later questions. To ensure quality of the information gathered, the interviews were recorded and transcribed right after the interviews. The complete list of questions can be found in Appendix A, while the full transcripts are excluded from this thesis.

3.3 Data Analysis

The data analysis is a part of the iterative research process described in Chapter 3.2. The input data for this research consists of article quotations, online information, videos and quotes of interviews as well as ideas or observations in form of memos. Keeping in mind the aim of exploring and understanding the current factors around contracting, the data was analysed with the final goal to assess the factors for their readiness in the PI. Figure 4 shows the steps followed in line with the model proposed by Miles et al. (2014). Each step is described in detail to show how the data was processed and which decisions were made to create the final coding scheme (see Figure 5).

Figure 4 –Steps in Data Analysis (Miles et al. 2014)

The data for this research was collected as described in Chapter 3.2. All information was processed right after collection by incorporating it in the Atlas.ti database. Atlas.ti enables a grounded approach to reporting even with the quantity of data. The collected data was reduced by labelling relevant information based on its meaning (first-order-code). Through this so called open coding, first categories could be identified at an early stage. Since data was collected at different points in time, categories were adapted based on the new information. Irrelevant data was removed from the database, but stored locally to ensure later access, if needed. When all data was collected, every category was reviewed in-depth. Explicit criteria were defined for every category resulting in descriptive codes (second-order-code). These descriptive codes were scanned for pattern and relationships in the categories and interpretative codes emerged (third-order-code). After a first draft of the coding scheme was developed, the raw data was analysed again by looking for additional confirming or contradicting information regarding the scheme. As a final step, factors in form of descriptive codes were assessed based on their readiness in the PI. Since factors exist in many forms, hybrids may exist and some factors are closer to the PI and others. Indications for future developments that are needed to get closer to a world in the PI were made (link to the PI). The coding scheme in Figure 5 gives an overview of the developed structure and is presented in the following chapter.

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11 Figure 5 - Coding Scheme Derived from Collected Data

4. FINDINGS

In the previous chapters, the collection and analysis of the data was described. This chapter presents the findings of this research. The categories that emerged through that process can be divided in five groups, which indicate the first five sub-chapters that follow. The sequence of factors described in each sub-chapter is in line with the coding scheme presented in Figure 5 and can therefore easily be followed. The results contain information gathered through interviews and can be recognized by the italic citations containing name and organization of the interview partner. In addition, results are based on literature that matched the selection criteria. The detailed data selection can be found in Chapter 3.1. The findings are collected from various sources and some terms may not be clear to the reader from the introduction and background of this thesis. Terms that are not mentioned in the previous sections of this thesis are indicated with a star* and the proper definition can be found in the glossary in Appendix B. The following chapters will introduce groups of factors that influence contracting.

4.1 Findings regarding legal factors

Transport documents – In order to develop an open and shared network, it is necessary that elemental functionalities are based on law. In current logistics, containers are still accompanied with many paper documents. Even though steps are made towards digitalized information about transports, there is still a lot of paper involved in the process – Tavasszy, TU Delft. Transfollow is an example for an innovative initiative that gives out digital consignment notes to its members (Transfollow 2016). Such new initiatives call for conventions that support their functionality on an international level. Nevertheless, the convention that should ease international use of digital documents for transports has not been ratified by most European countries yet – Nijdam, PoR. Even though there are many concepts that already work with digital documents around transports, legal papers still need to accompany the

Descriptive codes (second-order-codes) Interpretative codes (third-order-codes) Transport documents Carrier liability

Regulatory policies for business models Duration contracts

System standard/ compatibility Decision outsourcing

Trust

Negotiation power

Contract/ payment power

Role of orchestrator new players Mutual benefits/ costs

Measurement of performance Price sensitivity/ added value

legal factors

framing factors

relational factors

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12 transport – Nijdam, PoR. In the PI, all information around transports, including legal documents, need to be digitalized to enable a real-time management of the container (Ballot et al. 2014). Even though, there are some hybrid models existing that already deal with digital legal documents, an international legal basis is not set yet.

Carrier liability – If transports are shipped in a multi-modal way, national and international law overlap (Cruijssen 2012). International conventions that are active now, still differentiate carrier liability for each mode of transport – Bruijne, Transfollow. Montreuil does not specify, how liability should be coped with, but discusses the rules that specify that liability is transferred with the change of operator dealing with a transport (Ballot et al. 2014). To move towards a multi-modal transport, it is necessary to have an international law that holds for all transport modes. Bruijne from Transfollow states, that “the revolution would be, if all liabilities for all modes of transport are

made equal.”

Regulatory policies for business models – New business models that emerged with the rise of the Digital Internet are not always welcomed by traditional markets as could have been seen recently. Users of Airbnb did not pay hospitality taxes and Uber was accused for lacking employee benefits (Zervas et al. 2015; Pickell 2016; Surowiecki 2015). Because of missing regulations for such sharing economies, clashes emerge with traditional markets (Oskam & Boswijk 2016). Business models in the PI would look different than they do today (Montreuil 2011). To avoid a wrong start by discriminating market competitors or parties that follow traditional business models, regulatory policies for new business models need to be adapted or developed. Since the existing logistics infrastructure is partly or fully owned by governments, they need to make sure that the usage is fair for everyone.

Legal factors: Laws need to support and regulate the use of innovative concepts or business models that then can be applied in current logistics.

4.2 Findings regarding framing factors

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13 short-term (Montreuil 2011). Standard contracts need to be developed, to be applied for dynamic transport orders or for a shorter period of time. On the other hand, more short-term contracts increase the paperwork among companies.

System standard/compatibility – The increasing collaboration among companies lead to automatization and integration of systems (Schoenherr et al. 2015), i.e. EDI systems*, ERP systems*, CRM*. To connect different systems for the exchange of information, high investment costs are associated (Cruijssen 2012). Currently, EDI systems* are the most used among companies (Audy et al. 2012). But every connection with partners is different and very time consuming – Akerboom, EGS. In the PI, every actor along the network needs to be interconnected. According to Ballot et al. (2014), the same layer that is used for current EDI systems* connections, is the monitoring layer in the PI. This layer entails real-time information about prices, performances or contracts signed. To enable companies the connection to the PI, they need to have a certain level of technology and the set-up of such systems needs to be affordable for smaller and medium sized companies as well.

Decision outsourcing – The outsourcing of a transport decision to external parties enables the optimization within their whole network. But certain characteristics such as price or needs of goods, influence the outsourcing of the decision about the transport. Companies mostly determine the route and mode of transport for their cargo – Akerboom, EGS. Companies want their goods to be delivered directly, rather than not having control over them; even if they have to pay more for the transport – V. Rijckesvorsel, Just Cargo. Because of the innovative character of new concepts, not all customers are willing to give away decisions regarding their transports. EGS tries to encourage their customers to let go of the decision regarding transport mode and route. By doing so, the freight forwarder can optimize container transports within their network. The only information needed by the customer is the time and place of departure and wished arrival – Akerboom, EGS. This is already very close to how the PI should work. Decision making is done by algorithms that find the best mode, route and intermediate location to transport the goods. Companies can monitor their container all along the transport, but they do not have the control over the routing or the transport mode.

Framing factors: Certain conditions need to be fulfilled in order to enable the functioning of new ideas or technologies.

4.3 Findings regarding relational factors

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14 the company introduced a serious game, called SynchroMania, which simulates the benefits of their service. By playing this game with customers, EGS experienced a mind-shift regarding the fit and functionality of this service for their transports. According to Akerboom, internal trust in the service among colleagues and departments has to be there. This is approved by Rodrigues et al. (2015), which state that intra-company trust is just as important as external trust. In the end, a corporate culture in innovative companies is what can attract new customers and partners. In the PI, trust can be ensured through certifications that actors need to have in order to enter the network. To obtain such certifications, a minimal level of practice is required (Ballot et al. 2014). By ensuring quality in the network, trust in the functionality of the services offered can be enhanced.

Negotiation power – Power is a force which is regularly used in outsourcing relationships, if there are sufficient providers available at the market. Mediated power can be described as the controlling of other partners in the supply chain (Handley et al. 2012). Handley et al. (2012) state that this use of power is a sign of contract management difficulties. In the current market, shippers dominate negotiation power, because they have the choice for logistics providers, while those face a very competitive environment (Cruijssen 2012; Eng-Larsson & Norrman 2014). Bruijne from Transfollow approves this and he thinks that shippers have the power to transform logistics. According to Rodrigues et al. (2015), the use of power towards a partner does not just influence the direct relationship, but the whole supply chains surrounding. PI literature does not talk about the handling of power, but the network is described by its transparent, shared and open character. Through optimization of transports within the network, demand is divided among certified service providers based on real-time decisions. Direct relationships between provider and client would decrease and therewith also the power of power.

Contract/ payment power – In current logistics, the responsibility towards the own customer may be the reason why decisions about the transport are not given away. Everyone wants to be in time for his own customer and therefore, unnecessary slack is built in the supply chain – Akerboom, EGS. Nijdam states, that “who you have the contract with and who is paying you, determines who you listen to”. Large companies give out time slots for their suppliers and as reaction to that, suppliers build a time slot in to be on time – Bruijne, Transfollow. Prices in a PI would be very transparent and balanced out, which could shift the attention to other performance metrics such as CO² emissions or reduced lead times.

Relational factors: The direct contact between client and provider decreases and forces such as trust and power may change. Parties that currently have more power in the supply chain would have to give a bit of their power away to get closer to the PI. To build trust in new concepts and business models, the customers should be convinced of the functionality and benefits of such new

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15 4.4 Findings regarding new players

Role of orchestrator – Rodrigues et al. (2015) argue, that 4PL orchestrators are one of the main elements necessary for an effective commercial model for horizontal collaboration. The orchestrator should manage the collaboration as a neutral party. TriVizor is a trustee that plays a neutral role in the legal structure between companies (Cruijssen 2012). The trustee mediates the relationship between parties regarding payments. Information is not shared directly, but via the trustee (Cruijssen 2012). This is especially interesting between competing parties. Bruijne mentioned control towers and 5PL as business models that will arise in the future to mediate the relationships between partners in logistics. Montreuil et al. (2012) name TriVizor as an example for a new business model in the PI, which enables real-time optimization. Orchestrators take over a decentral role in organizing and managing logistics partners.

Firms such as Amazon.com, Uber and Flexport provide optimization of transports via their network, but their business models are centralized. They have their own centralized network which they optimize and parties can integrate in their system, to make better use of their services. They try to grow and open their backend structure for companies in order to integrate and connect to their system – V. Rijckesvorsel, Just Cargo. These are business models, which connect systems and integrate them

into their structure. These companies are centralized and optimize transports within their network. But such a business model is not able to grow until a certain point and because of their focus to grow their own network, this contradicts the ideas of an open and shared worldwide network.

New players: Because of the increasing horizontal collaboration among companies, there is a need of mediating actors that manage these relationships. This is especially interesting for parties

that compete in the same market. Parties that grow globally by increasing their own network contradicts with the sharing character the PI has.

4.5 Findings regarding performance metrics

Mutual benefits/costs – Many researchers show, that the sharing of benefits and risks constitute the basis for an effective horizontal collaboration (Rodrigues et al. 2015; Selviaridis & Norman 2015; Schmoltzi & Wallenburg 2011). Because of the integration and collaborations between firms, shared earnings, costs and responsibilities need to be developed – Smit, GS. Kache & Seuring (2014) also state, that cooperation should give mutual sharing rewards along the chain. The benefits and responsibilities in transports have to be clearly defined and models need to be developed that handle revenues and costs with actors in the actors in the supply chain.

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16 clear measurement needs to be in place (Kache & Seuring 2014). This attributability of performance may have a positive effect on fairness in contracting (Selviaridis & Norman 2015). In order to measure performance across organizations, certain standards and definitions for metrics need to be in place (Forslund 2012). The clear definition of such metrics is challenging, since they need to be universal and understandable for every party involved. In the PI, a clear definition of each metric is necessary for different modes and services. Right now, the definitions of metrics diverge between companies and systems and therefore it is difficult to compare performance. Through GPS data and RFID* tags that are attached to every container and mean of transport, cargo can be monitored and performance can be measured through the data collected. If clear performance metrics are defined, transports are easily comparable along the network.

Price sensitivity/ added value – Current logistics service clients are very price sensitive and choose operators based on the minimal price they offer – Akerboom, EGS. Nevertheless, the focus on a minimal price makes a system very inflexible – Bruijne, Transfollow. EGS offers transparent prices to all their customers. By reducing their standard prices and increasing the price for advanced services they try to shift the focus from price to lead time. With increasing transparency in prices, this focus may shift and costs that cannot be allocated to value are being questioned. One example would be the demurrage* and detention* charges that ocean carriers have in place with their customers. Shipping lines earn more money with less optimal hinterland transport and the charges mentioned do not bring value to any supply chain actor – Akerboom, EGS. If suppliers cannot offer value to the customer, they will disappear – Bertholet, GS. With increasing transparency, costs that do not bring value can easily be located

and will have a reaction from the market. The more transparent prices are, the more they will get balanced out between different providers. In the PI, prices would be transparent and providers would get rewarded for value that they bring based on defined metrics.

Performance metrics: A clear definition of performance metrics are the basis for enhancing the visibility in the supply chain. Definition of metrics and parameters is a main factor in the

structured development process towards a shared and open network.

4.6 Overall findings

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17 Finally, this research found that companies are aware of changes that need to happen in current logistics. The terms standardization, transparency, openness and mind-shift were mentioned most often by the interview partners. Some may be reached only with help from the outside, but others can already be changed now in companies or in the minds of managers and employees.

5. CONCLUSIONS

The Physical Internet (PI) is defined as a global open system of interconnected logistics. The concept makes use of the newest technologies in order to enable real-time decisions about the best possible transportation modes, routes and locations. The concept has to evolve over time and will not come as a surprise. To develop a structured process which leads towards this concept, the collaboration of many parties is needed. Research needs to be conducted on how to guide companies into that new world of logistics. Contracts form the legal basis for relationships between partners in supply chains. Therefore, we are looking for factors around contracting in logistics that may enhance the transformation towards the PI. This research proposes five categories of factors around current logistics contracting that might enhance the transformation towards the PI. These being legal, framing and relational factors, new players and performance metrics.

The actors in the supply chain play a central role in the transformation, but also external organizations need to get involved to support them along the way. Agreements around transports will still have to be based on a legal relationship, but circumstances around these relationships may be changed. This research proposes a set of factors in current logistics contracting that might enhance the transformation towards the PI. Through the explorative approach of this research, a variety of factors could be identified. In addition to a literature review, interviews with company representatives were conducted and practical insights could be gathered. From the interviews, it is quite clear, that companies know that a change will happen. Changes can already be made by companies and in the minds of managers and employees, while factors of external nature need to be adressed by governing parties.

There is no research existing about contracting in the PI and therefore, the factors identified in this research may constitute as a basis for further research. The PI is a promising concept, which gets more and more attention from academia and the business world. The technological features of the concept are already much elaborated thanks to Ballot et al. (2014) and other researchers. But the path to follow for current actors in logistics and future users of the PI must be designed further.

5.1 Limitations

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18 from companies gave insights and ideas in many different directions. All interviews were full of rich information, but some information did not lead to findings answering the research question. The factors around contracting that were identified in this research could not be investigated in more detail, since the contact with companies was limited to one interview. Another limitation was the short timeframe for conducting this research. The factors that were found in this study can be some of many factors and since this study was done by only one researcher, the outcomes could be biased. Therefore, the outcomes should be tested further.

5.2 Further research

This thesis shows opportunities for further research towards a world in the PI. For the factors identified in this thesis, a longitudinal study with companies would enable to study factors in more detail. The inclusion of more companies with the same role in the supply chain would enable a cross-case analysis of information gathered. The relationship between a company that works with an innovative logistics concept and its client could be observed to have more insights in factors that influence contracting in their relationship. The outsourcing of a decision regarding a transport may also effect the client of the client and therefore, it would be interesting to study the chain of effects of factors.

Even though some of the interview partners could not imagine decentralized logistics for the future, the general mind-set of companies in the sector is open and they are interested in new developments. They are aware of the traditional character of current logistics and that things need to change and adapt to its surrounding. The interview partners shared ideas about future logistics, but not all could be used in this thesis. Because of the valuable character of these ideas, some are presented in this chapter.

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19 network does have many different owners and is compatible with other systems, in other countries. There are different voltages and different ways to connect to the network. The power supply networks are partly financed by the government and partly by private organizations. Research is needed to identify how the structure of other networks could be applied to the PI.

Another point of further research is the prioritization of certain flows in the future. According to Nijdam, larger vessels that come into the port have priority and inland vessels need to wait. This problem would increase within the PI and would not just hold for the waterway, but also for the hinterland. Since in the PI, the price for smaller and larger cargo should be quite balanced, there must be a rule of how this decision is made. Companies that send lots of transports via the PI, will request increased priority of their goods compared to their competitors. Because of this, a power imbalance could emerge if there is no regulation developed for it.

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20

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22

APPENDIX

Appendix A: Interview protocol

Preparation

The Nederlandse Organisation for Scientific Research and the Dutch Institution of Advanced Logistics Dinalog awarded funding for the Groninger research project “Towards virtual ports in a physical internet”. Multiple researchers of the University of Groningen and TU Delft are involved in a research project together with the corporate partners Groningen Seaports and the Port of Rotterdam. From this opportunistic starting point, this research was chosen to focus on what can already be done now to change towards a world in the PI. Additional companies are chosen based on the representation of a different role along the value chain of transportation logistics, but also on their availability for cooperation. Members of the Operations faculty of the University of Goningen that had contact to firm representatives were a good basis to approach interview partners.

Interview Questions

All interviews were held in English and he interview protocol was used throughout the interviews to provide structure. The protocol consists of the introduction to my research by e-mail and of the invitation to an interview. If the person was interested the organization of the place and time for the interview were scheduled. The main part of the protocol are the questions for the interview partners. Every interview question had a certain time window within the total scheduled one-hour interview with each company representative. Lasting from one minute per short questions to 15 minutes per open ended questions with room for discussion and additional questions. Four interviews were held in person at the office of the interview partners, whereas the other four interviews were held via video call. The respondents were asked for their permission in advance, whether the interview could be recorded. All interview partner agreed and the recordings were transcribed immediately after the interview.

“Thank you in advance for you time and for your help.

I am a student at the University of Groningen and I am currently writing my master thesis about the Physical Internet. I am focussing on the contracting factors that may pave the way for a transition toward a world in a Physical Internet.

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23 best possible choice of transport, routes and content of containers is made. In addition to that, objects are stored where they are needed.

We have an hour of time and I will divide the interview in 3 phases: - The current situation

- General thinking

- Introduction to the Physical Internet and specific questions

If you have any question, please feel free to ask them. Before we start, I would like to ask you for your permission to record the interview in order to ease the note-taking.”

Phase I

Transfollow Dear Mr. Bruijne,

you are one of the initiators of Transfollow, which moved from paper to digital, by offering a platform that enables tracking, data exchange and a digital signature. This does not just save a lot of money by eliminating delivery discrepancies, but also looks after the environment. How many customers do you have now within the Netherlands and how do you expect to grow in the coming years?

- How do companies have to change in order to join Transfollow? - What information do they have to provide you with?

- And what do they have to change in their contracts?

- What do your customers think about the transparent data exchange within the network?

Just Cargo Dear Mr. Van Rijckevorsel,

You work for the start-up Just Cargo, which offers same day delivery services by mix and matching customers with chauffeurs via your app. What is your position at the company and how do you describe your job?

- What type of contracts does your company have with customers and chauffeurs?

- Your customers give you control of coordination of the delivery process, what are the possible doubts that new customer may have regarding such a shared, open network based on crowdsourcing?

- There are many trends going towards a sharing economy. How would you classify your planning horizon regarding investment decisions?

Groningen Seaports

Dear Mr. Smit, Dear Mr. Bertholet,

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24 - What kind of contracts do you have now and what role do they play in the

supply chain?

- How would you classify your planning horizon regarding investment decisions?

Port of

Rotterdam

Dear Mr. Nijdam,

you work at Port of Rotterdam, a very important port authority for the whole world. What is your position at the company and how do you describe your job?

- What kind of contracts do you have now with your customers and what role do they play in the supply chain?

EGS Dear Ms. Akerboom,

you work at the European Gateway services, Europe’s synchro modal service provider. Could you tell me what position you have in the company?

- What type of contracts do you have in your company?

- When you think about you and your customers, is a decision about transport mode, route, intermediate location, etc. made by you or by them and is that fixed through contract details?

- Under which conditions would it be acceptable for them to give the decision about the routes and transfer points away?

Shipper XY* is one of the worlds’ biggest multinational consumer goods company. What is your position within the organization and how do you describe your job?

- What type of contracts do you have in your company?

- Do you actually decide which routes, transport modes and intermediate stores are used for your transports?

- Under which conditions would it be acceptable to give the decision about the routes and transfer points away?

Phase II

Transfollow - What do you think that Transfollow can do for logistics and what impact will it have?

- How should contracts on data exchange look like?

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25 - Which factors do you have in mind that are different in logistics contracts that

exist now, from the ones that existed 5-10 years ago?

- What contracting factors do have in mind that are inflexible or that you would like to get loose of?

- Do you have parties in mind, that would never agree on changing those factors?

Just Cargo - I believe that your contracts have to be very flexible, since the service you offer is very dynamic: Are there current contracting factors customers would like to hold on to, which you want to get loose of (or the other way around)? - Do you have other current or future parties in mind, that would never agree on

changing those factors?

- This flexible and dynamic network brings many advantages for chauffeurs regarding their freedom, but are there also challenges and concerns of the drivers? Groningen Seaports & Port of Rotterdam

- The port itself does not have logistics contracts right now, but how do you think that will change within the future?

- Maybe thinking about your customers and the parties renting infrastructure at the port: Which factors do you have in mind, that are different in the contracts that exist now in your company from the ones that existed 5-10 years ago? EGS - Do you have some factors in mind, that are different in contracts that exist now in your company and with customers from the ones that existed 5-10 years ago? How do you think they will change within the next 5-10 years? - What are current contracting factors that are inflexible or that you want to get

loose of?

Shipper - Which factors do you have in mind, that are different in the contracts that exist now in your company from the ones that existed 10 years ago?

- What are current contracting factors that are inflexible or that you want to get loose of?

Phase III

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26 transparent and shared network. Imagine such network for cargo, that mix and matches shippers or sender with receiver on a real-time best decision.

Imagine we will have the PI concept in 2050, but until then we have many years of new technological innovation and other people in leading positions.

- Which would be the new parties entering the market and which new services have to be offered?

- How do you think your customers will change within the next years? - What would you do within the next years in order to prepare for that

concept?

- What would be the challenges in the organization between departments and the general company culture when thinking of such a shared, open and connected network?

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27 Appendix B: Glossary

Term Definition and description

Balanced scorecard Decision-making tool that allows performance management according performance indicators to track organizational actions in line with strategy; for more information see Rajesh et al. (2012) CRM (=Customer Relationship Management) The analysis of customer data from many

different sources to then enable the customer better services and an improved business relationship

Demurrage This charge will be levied when the Customer

holds the equipment inside the terminal for longer than the agreed free days and is applicable to all containers that remain at the terminal longer than the agreed free time – Akerboom, EGS

Detention Detention charges will be levied when the

Customer holds the equipment outside the terminal longer than the agreed free time : it is applicable throughout the duration of Customer’s possession of the container(s) in his custody, and until its safe return to a depot – Akerboom, EGS EDI (=Electronic Data Interchange) Digital exchange of data by using standardized

networks

ERP (=Enterprise Resource Planning) Integrated management system that enables companies to manage their resources and automate back-office functions via a centralized database

Protocol (in the PI) A set of rules that constitute a working plan for the handover and delivery of containers in the PI (Ballot et al. 2014)

Important factors that influence contracting to pave the way for the Physical Internet