UNDERSTANDING THE SHIPPER’S BUSINESS CASE FOR URBAN CONSOLIDATION CENTERS

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FOR URBAN CONSOLIDATION CENTERS

Master’s Thesis

Master of Science in Supply Chain Management University of Groningen, Faculty of Economics and Business

First Supervisor: dr. ir. P. Buijs Second Supervisor: dr. ir. S. Fazi

Date of submission: July 8, 2019 Place of submission: Groningen (Netherlands)

Personal data:

Vincent Nieuwland

Student number: S3523209

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ABSTRACT

Urban consolidation center (UCC) initiatives have gained increasing popularity in literature but many of them are unsuccessful in practice. One major reason for this is the lack of volume that is transshipped by the UCC, which can be ascribed to the lack of shippers joining the UCC initiative. So far, shippers have not been eager to participate because they associate the UCC with higher distribution costs originating from an extra step in their delivery process. Hence, this thesis takes a shipper’s perspective and examines how the UCC impacts the shipper’s distribution network and the shipper’s distribution costs. An embedded multiple case study based on interviews, document analyses and quantitative data was conducted. A key finding from this thesis is that each shipper’s distribution network is unique, and that this uniqueness impacts the possible costs and benefits the shipper will experience when using UCC delivery. In addition to the common consolidation benefit stressed in literature, this thesis revealed that the shipper’s benefits can come from UCC extra service offerings and the combination of service offerings and consolidation. The shipper’s benefits are dependent on the UCC business model design which can influence the shipper’s considerations of scaling up UCC delivery to more receivers.

Acknowledgement: I specifically want to thank P. Buijs for sharing his expertise and

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1. INTRODUCTION

An Urban Consolidation Center (UCC) is a city logistics initiative that aims to increase freight transportation efficiency and thereby diminish negative traffic related effects such as congestion, emissions, safety issues and noise (Allen, Browne, Woodburn, & Leonardi, 2014). A UCC is used to consolidate goods at the edge of a city center and transship them onto vehicles that are (nearly) fully loaded (Browne, Woodburn, & Allen, 2007). UCC initiatives have gained increasing popularity in literature but many of them are unsuccessful in practice (Björklund & Johansson, 2018). One of the key reasons for failure is the lack of volume that is transshipped by the UCC (Lin, Chen, & Kawamura, 2014; van Rooijen & Quak, 2010). With insufficient volume, the UCC is incapable of lowering the service unit costs to a level that competes with the conventional delivery options (Allen et al., 2014). More volume will be achieved by attracting more receivers and shippers to the operation (Clausen, Geiger, & Pöting, 2016).

Remarkably, the shipper’s perspective is often neglected in literature, even though the shipper has a major influence on the delivery process (Björklund & Johansson, 2018). The rarely investigated shipper’s perspective can be considered a paradox due to a combination of three aspects: Former studies stressed the need for stakeholder involvement (Allen, Browne, Leonardi, & Woodburn, 2012; Borghesi, 2017). The shipper is essential in the UCC system1

as it is responsible for delivering the goods to the receiver 2_{(Tamagawa, Taniguchi, & Yamada,}

2010) and the shipper determines the transportation terms (Verlinde, Macharis, & Witlox, 2012).

One driver for the shipper’s willingness to use UCC delivery3_{is the possible cost}

reduction further down the chain (Allen et al., 2012). Prior studies have shown that, given certain conditions, the UCC can lead to cost reductions for the UCC system (Chen, Lin, & Kawamura, 2012; Estrada & Roca-Riu, 2017; Janjevic & Ndiaye, 2017; van Duin, van Kolck, Anand, Tavasszy, & Taniguchi, 2012). Chen et al. (2012) compared total logistics cost between direct delivery4_{and UCC delivery, and found that long haul distance, the number of shippers,}

and UCC service costs play a major role in the UCC system’s profitability. Roca-Riu and Estrada (2012) indicated that local- and line haul distance, time and costs are crucial factors.

1_{The UCC system includes parties that are directly involved in the UCC delivery process, namely shippers, the} UCC operator, receivers, and possible third-party logistics providers

2_{A receiver is in this thesis referred to as the shipper’s customer and as the organization that receives the goods} 3_{UCC delivery means that goods are delivered via the UCC}

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Janjevic and Ndiaye (2017) concluded that the decision for one distribution strategy depends on time-, and distance related costs. Despite these economically related studies, shippers perceive the UCC to be cost increasing as they associate it with an extra supply chain step, leading to extra handling and administration (de Oliveira, da Silva Dutra, de Assis Correia, Neto, & Guerra, 2012; Marcucci & Danielis, 2008).

Among the scarce economically related UCC research, none of the academics focused explicitly on the effects for the shipper by comparing the shipper’s direct delivery costs with its UCC delivery costs. Rather, they took an overarching view on the UCC system’s profitability without considering the impact for each individual UCC participant5_{. The few}

economically related studies predominantly took a theoretical approach; they first developed a literature based mathematical model for assessing costs and benefits, and subsequently tested this in one real-life case. Still, academics continuously emphasize the need for further research on UCC viability for the UCC participants. Kin, Verlinde, van Lier, and Macharis (2016) highlighted that future research should be directed towards the comparison between direct- and UCC delivery, and towards the UCC’s operational impact on the transport operator’s6

distribution network. In contrast to former theoretically initiated studies, this thesis will take the reverse perspective by empirically investigating the UCC’s impact on both the shipper’s distribution network and on its distribution costs. It addresses the following research question:

“How does the UCC impact the shipper’s distribution network and its distribution costs?” We attempt to understand the shipper’s viewpoint and thereby aim to help receivers and UCC operators to explain the UCC’s impact to the shipper. Moreover, we contribute by broadening the economically related UCC literature and focus on the scarcely investigated shipper’s perspective, which is deemed pivotal to the UCC’s successfulness. To do so, an embedded multiple case study is performed in which each case represents a distinctive UCC business model: one in which the shipper pays for the UCC service (BM1), one where the receiver pays for the UCC service (BM2), and one where the receiver is the UCC operator and performs the last mile itself (BM3). Involved participants in this research included eight shippers, three receivers and one third-party UCC operator. Among these participants, multiple data collection methods were used for data triangulation purposes. Firstly, ten interviews were held with shippers, receivers, and the UCC operator to avoid bias and gain a broader

5_{A UCC participant is a party that is directly involved in the UCC delivery process, namely shippers, the UCC} operator, receivers, and possible third-party logistics providers

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2. THEORETICAL BACKGROUND

City logistics has gained growing attention due to global urbanization. The term city logistics is defined as “the process for totally optimizing the logistics and transport activities by private companies in urban areas while considering the traffic environment, the traffic congestion and energy consumption within the framework of a market economy” (Taniguchi, Thompson, & Yamada, 1999, p. vii). City logistics touches upon several manners of dealing with issues related to global urbanization. Challenges such as ecological-, space-, and safety issues, noise, or economic matters are addressed (Dolati Neghabadi, Evrard Samuel, & Espinouse, 2018; Roca-Riu & Estrada, 2012; Wolpert & Reuter, 2012).

Regarding the economic challenge, a paradox appears to be present: even though many initiatives seem to be economically viable in theory, the majority of initiatives fail to be profitable in practice and are therefore terminated (Dolati Neghabadi et al., 2018; van Rooijen & Quak, 2010). In order to mitigate the risk of failure, stakeholders must feel committed to a city logistics initiative (Borghesi, 2017). When a shipper voluntarily participates in a city logistics initiative, it is only committed if its delivery costs are lower or its delivery time is shorter than the costs or time in the direct delivery alternative (Borghesi, 2017). Additionally, Cardenas et al. (2017) add that stakeholders’ experiences should be used to guide future initiatives.

2.1 Urban Consolidation Center

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2.2 UCC Stakeholders

A strong foundation of stakeholders that experience benefits when participating in the UCC system is a prerequisite of UCC successfulness (Allen et al., 2012). A UCC involves multiple stakeholders, including shippers, receivers, end consumers, 3PLs, and public administrators (Awasthi & Chauhan, 2012). Public administrators focus on the livability and safety of residents, which also matters for the end consumers (Paddeu, 2017). Shippers opt for time and cost reductions, while receivers value added services like flexible delivery times (Paddeu, 2017). Transport operators benefit from a UCC because of small, multi-drop deliveries (Paddeu, 2017). UCC initiatives are often obstructed by stakeholders showing resistance (Stathopoulos, Valeri, & Marcucci, 2012). This resistance can be ascribed to their lack of awareness and acceptance regarding sustainable urban freight management (Stathopoulos et al., 2012). Receivers refuse to change their delivery method, particularly when it is associated with higher costs (Dell’Olio, Moura, Ibeas, Cordera, & Holguin-Veras, 2017). Given that costs remain equal or decrease, shippers still rank punctuality and delivery time over cost benefits as receivers demand shippers to be on time (Olsson & Woxenius, 2014). Shippers ensure punctuality by e.g. just-in-time (JIT) deliveries (Olsson & Woxenius, 2014). Receivers benefit from JIT constructions because it allows them to keep inventories low and consequently gain freed-up space for their product presentation (Browne et al., 2007).

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& Danielis, 2008). Shippers are confronted with complexity when changing their distribution process because they often include distribution costs in the product price (Balm, Ploos van Amstel, Habers, Aditjandra, & Zunder, 2016). Moreover, since shippers no longer physically appear at the receiver’s delivery location(s), they fear to lose contact with their receivers, potentially resulting in losing these receivers to a competitor (Holguín-Veras & Sánchez-Díaz, 2016). Additionally, the shipper experiences a lack of control over its goods when delivering them to the UCC because the goods are neither physically delivered to the receiver nor in the shipper’s possession (Browne et al., 2007; Holguín-Veras & Sánchez-Díaz, 2016). Shippers are concerned that the UCC affects their service level because shippers depend on a third party in their last mile delivery (Kin et al., 2016). Lastly, shippers do not have the chance to promote their brand via their own trucks as they do no longer drive into urban areas (Holguín-Veras & Sánchez-Díaz, 2016).

2.3 Costs and Benefits Associated with UCC Delivery

Economic considerations are one essential part of UCC related literature (Björklund & Johansson, 2018). Considering the costs and benefits associated with UCC delivery, the UCC is justified when its service costs are lower than the urban delivery costs in direct delivery (Marcucci & Danielis, 2008). UCC related economic considerations can be categorized into three literature streams: (1) the UCC as a cost driver or -reducer, (2) the achievement of economies of scale, and (3) the allocation of costs and benefits among UCC participants (Björklund & Johansson, 2018). While multiple economic related studies have evaluated the UCC system’s profitability, the allocation of costs and benefits among participants has not been addressed. Even if the UCC system is profitable, this does not imply that each participant has a positive business case as well. Consequently, academics have emphasized the need for a fair allocation of costs and benefits among the participants in order to increase the UCC initiative’s likelihood of success (Allen et al., 2014; Browne, Sweet, Woodburn, & Allen, 2005; Estrada & Roca-Riu, 2017; van Duin, Quak, & Muñuzuri, 2010). This fair allocation is crucial because the participants’ choice to use the UCC is usually a voluntary one (Allen et al., 2014). Thus, participants such as shippers will only decide to use UCC delivery when they receive a fair share of the costs and benefits.

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2008). Second, the UCC’s variety of settings and forms of organization (Allen et al., 2012). A UCC fits in a number of settings, where it serves (1) an urban area, (2) one large site like a shopping mall, or (3) a construction area (Allen et al., 2012). For settings (2) and (3), fewer financial issues were reported than for setting (1) because the receiver is usually one party, such as an airport or a construction company, that demands UCC delivery in the contracts (Allen et al., 2012). However, as roughly 85% of the UCC initiatives represent setting (1) (Allen et al., 2012), generalizing UCC cost attractiveness remains an issue. Concerning the forms of organization, including the different UCC business models, van Duin et al. (2010) emphasized in their evaluation of six UCCs that the factors of success and failure depend on the UCC’s organization. A UCC can be privately initiated by e.g. the carrier [3PL] or receiver (Estrada & Roca-Riu, 2017; Holguín-Veras & Sánchez-Díaz, 2016; Kin et al., 2016; van Duin et al., 2010) or publicly initiated by local governments (van Duin et al., 2010; Verlinde et al., 2012). Dependent on the initiator, the UCC’s objective diverges. Public initiatives focus on the quality of life in the urban area, whereas private initiatives primarily focus on the success of the initiating organization (Verlinde et al., 2012). Given these hurdles in generalizing UCCs’ cost attractiveness, Marcucci and Danielis (2008) stressed that UCCs’ economic viability needs to be examined for every case individually.

From the UCC system’s perspective, the addition of a UCC to the distribution process yields three cost components: (1) line haul delivery costs to bring the products to the UCC, carried by the shipper or 3PL, (2) UCC operation costs including the handling of goods and the investment costs for building and maintaining the consolidation facility, and (3) last mile delivery costs demanded by a 3PL (Estrada & Roca-Riu, 2017).

2.3.1 Line Haul Delivery Costs

In former literature, line haul delivery costs are either solely based on distance (Chen et al., 2012) or on distance and time (Estrada & Roca-Riu, 2017; Janjevic & Ndiaye, 2017). Line haul delivery costs cover a significant proportion of the total distribution costs, and line haul savings in UCC delivery can reach up to 20% compared to direct delivery (Roca-Riu, Estrada, & Fernández, 2016). Chen et al. (2012) compared direct- with UCC delivery and found that unit logistics costs decrease significantly when using UCC delivery for a line haul distance of 50 to 500 miles.

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Given that goods are delivered at the edge of a city, possibilities for capacity enlargement (i.e. using larger trucks for the line haul) are opened up (Clausen et al., 2016; Johansson & Björklund, 2017; Roca-Riu et al., 2016). Consequently, trucks can transport more goods and need less trips for the same volume. Additionally, the UCC allows for night deliveries which diminish the negative effects related to congestion (Allen et al., 2012). As a result of this broader delivery time frame, the agility of the planning process is amplified which contributes to more efficient planning.

2.3.2 UCC Operation Costs

UCC related costs include (1) operational costs that originate from the service performed by the UCC (Janjevic & Ndiaye, 2017) and (2) investment costs to set up a UCC. The (1) UCC’s operational costs consist of land and real estate rent, mobile material maintenance, staff costs including staff training, depreciation of buildings and equipment, warehousing and handling, insurances, energy, management, and fuel (Björklund, Abrahamsson, & Johansson, 2017; Gogas & Nathanail, 2017; van Duin et al., 2010). The (2) UCC investment costs consist of land and real estate in m², mobile material and distribution vehicles in units (van Duin et al., 2010). Financial support for the UCC set up and -operation is often provided via public or commercial funding (Kin et al., 2016; Marcucci & Danielis, 2008; Verlinde et al., 2012).

Besides the usual last mile delivery, the UCC can offer some optional services for its users during the operation. These services imply higher UCC service fees, which users must be willing to pay for (Marcucci & Danielis, 2008). Optional services include stocking, pre-retailing, collecting waste, recycling, providing delivery point facilities, and conducting return flows, JIT- and home deliveries (Allen et al., 2012; Marcucci & Danielis, 2008; Paddeu, 2017). If users choose these service(s), they experience cost savings because they do no longer have to perform the service(s) themselves.

2.3.3 Last Mile Delivery Costs

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UCC delivery diminishes last mile delivery costs because the number of stops for trucks decrease significantly (Janjevic & Ndiaye, 2017; Trailblazer, 2010) and trucks do not have to drive into the urban area (van Duin et al., 2010). The studies of Janjevic and Ndiaye (2017) and Trailblazer (2010) revealed that UCC benefits are related to the number of stops in the direct delivery route. Janjevic and Ndiaye (2017) found that 20% costs savings are achieved when the route has one stop, whereas they decrease to 11% and 3% with five and seven stops respectively. Trailblazer (2010) discovered that a UCC can reduce the total number of stops by 50% to 75%. Van Duin et al. (2010) added that a UCC saves 0,7 hours per roundtrip because trucks do not have to drive into the city center.

Against these obtained savings there are costs that consist of the UCC service fee for the last mile delivery which is performed by either the UCC operator or its hired 3PL. This fee can comprise a fixed price per cargo unit, a fixed price per delivery or a price based on weight (Janjevic & Ndiaye, 2017). The last mile costs are solely based on distance (Chen et al., 2012) or based on distance and time (Estrada & Roca-Riu, 2017; Janjevic & Ndiaye, 2017).

2.3.4 Conclusions for UCC Related Costs and Benefits

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3. METHODOLOGY

3.1 Research Design

Questions regarding the shipper’s business case when using UCC delivery remain unanswered in literature. Therefore, this thesis aims at gaining a deeper understanding of the novel shipper’s viewpoint, which fits an exploratory research approach by employing a case study (Meredith, 1998). A case study approach is suitable to this study because of the complexity of UCC systems and the uniqueness of shippers (Yin, 2003). The unit of analysis is the shipper’s business case and its distribution network.

Due to the uniqueness of each business model (Björklund et al., 2017), an embedded multiple case study was executed in which three cases represent UCCs with unique business models. This allowed us to compare the cases to each other, leading to a deeper understanding of their similarities and differences (Baxter & Jack, 2008; Stake, 1995). Within each business model, multiple shippers were investigated. This enabled us to perform both a within-case analysis, in which shipper’s within the same business models were compared, and a cross-case analysis, in which the cases were compared (Yin, 2003). Herewith, we attempted to maximize the study’s generalizability.

3.2 Research Setting

To investigate the different business models, this research focused on UCCs in two cities: Groningen and Amsterdam. Both cities acknowledge the challenges associated with urbanization and advocate for zero emission city logistics in 2025; Amsterdam signed the Green Deal Amsterdam7_{agreement with the national government in 2011, and Groningen}

signed the Green Deal Zero Emission Stadslogistiek8_{in 2014. The UCC Amsterdam consists}

of BM1 and BM2. Moreover, at the time of this research, the UCC Amsterdam was already successfully operative for some years, so experienced participants were interviewed. The UCC Groningen represents BM3 and was only operative for a few months when this study was executed.

The UCC delivery systems were in all business models initiated by the receiver. The receivers were public organizations, which are among the largest employers of the city (Balm et al., 2016). As a result, they have the ability to use purchasing power and force their shippers

7_{‘Green Deal’, Gemeente Amsterdam & Rijksoverheid, September 2011}

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to use the UCC. The shippers under investigation performed both direct as well as UCC delivery. This was beneficial because it allowed us to not only reflect on both delivery methods individually but to also compare them.

3.3 Data Collection

The main data was collected by means of semi-structured interviews that took place between April and June 2019. Semi-structured interviews allow to steer the interviewing process by setting pre-determined questions but still leave the opportunity to guide the interview into a specific direction based on the respondent’s answer (Myers & Newman, 2007). Multiple interviews per business model were held with shippers (8x), receivers (2x), and UCC operators (1x) in order to increase data reliability and prevent bias. An overview of the business models and interviewees is depicted in Table 3.1. Even though this thesis was directed towards the shipper’s perspective, we deliberately chose to incorporate the receivers and UCC operator in the interview process. Receivers required or encouraged shippers to participate and were therefore aware of the shippers’ initial reactions and their perceptions towards UCC delivery. Moreover, receivers of BM2 and BM3 incurred the UCC costs and could consequently share their knowledge on the allocation of costs and benefits among the participants, including the shipper’s share. The UCC operator offered his opinion on the shipper’s perception towards UCC delivery and provided information on how business cases were calculated, and how business models were organized. Furthermore, the UCC operator provided us with UCC standard rate sheets that we used to compare direct- with UCC delivery. In summary, interviewees were selected based on their experiences and knowledge about both delivery methods.

Prior to the interviews, multiple extensive interview guides were created for the shippers and receivers (Appendix A), which increases the validity and reliability of the outcomes (Karlsson, 2016; Yin, 2003). The interviewees were granted anonymity which allowed them to answer without influencing their organization’s image. Interviews were all taken in person and, to avoid bias or misinterpretation, interviews were conducted in the Dutch language which was in all cases the native language of both the interviewers and the interviewees. A summary of the interview topics in the English language is enclosed in Appendix B.

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to understand the interviewee’s role in the organization. We continued with more specific questions about the direct and UCC delivery process and their associated costs and benefits. To get more insights into the delivery procedure, we used questions such as “Which steps are taken when an order arrives until it is delivered to the end receiver?”. The interview concluded with some general insights on UCCs in which the interviewee answered e.g. the question “What do you deem necessary to change in the future in order to increase the economic attractiveness of UCCs for shippers?” During the interview, we avoided misinterpretation by summarizing the interviewees’ answers and asked them to confirm the content. The interviews were recorded and subsequently transcribed. For coding and analyzation purposes, the quotes used for this thesis were translated from Dutch to English.

Business

model Inter-view Abbre-viation participant Type of Branch

Uses UCC for delivery? Direct last mile delivery

BM1 1 S1 Shipper Office supplies Yes 3PL

2 S2 Shipper Print facilities Yes 3PL

3 S3 Shipper Office furniture Yes 3PL

4 R1 Receiver Education Yes N/A

BM2 5 S4 Shipper Hygiene products Yes Own/ 3PL

6 S5 Shipper Disposables Yes 3PL

7 S6 Shipper Office supplies Yes Own

8 R2 Receiver Public

organization Yes N/A

H1 UCC

operator Transportation sector N/A N/A

BM3 9 S7 Shipper Printing company No Own/ 3PL

10 S8 Shipper Office and

warehouse supplies

Yes 3PL

Table 3.1 Overview of Business Models and Interviewees

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3.4 Data Analysis

Interview recordings were transcribed at the same day or latest within a few days after the interview. Transcribing the interviews was a deliberate choice because it prevents observer bias (Voss et al., 2002). After transcribing the interviews, the transcripts were uploaded into ATLAS.ti for the first qualitative analysis. Subsequently, an inductive coding approach was executed in line with the method of Strauss and Corbin (Karlsson, 2016). At first, a rough coding process was conducted yielding a large amount of first-order codes. One shipper e.g. said: “If the UCC brings advantages for the environment and for the company’s sustainability, then you should do it. Sustainability outweighs costs in my eyes. Of course, costs have to be in balance with sustainability advantages, but if it is sustainable against slightly higher cost, we would do it” (S7). For this explanation, we created the following first-order code: ‘When considering UCC delivery, sustainability is more important than costs, but costs must be in balance’. Then, second-order codes were created based on a combination of first-order codes that addressed the same subject. To illustrate, we grouped the first-order codes ‘To transport goods directly to the receiver takes equal effort. Why would I then bring them to a UCC?’ and ‘We need to use the UCC's IT system for ordering goods, not our own system’ into the second-order code ‘Perceived extra workload’. Next, we formed aggregate dimensions by seeking for a connection between the second-order codes. The objective of this step was to find relationships between the second-order codes. We grouped e.g. the second-order codes ‘UCC potential new receivers’ and ‘Time gains and accessibility’ under the aggregate dimension ‘Shippers' perceived potential for UCC delivery’. Lastly, a code tree was created (see Appendix C) which was used as one component to structure the findings.

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4. FINDINGS

4.1 Shippers’ Comparison

The interviews revealed insights into the shippers’ characteristics, distribution network, -process, -costs and the shipper’s business case. The UCC’s impact on shippers’ distribution network is firstly presented. Then, the shippers’ economic and non-economic benefits and disadvantages associated with UCC delivery are presented.

4.1.1 UCC’s Impact on Shipper’s Distribution Network

First and foremost, the findings reveal that the distribution network of each shipper is unique and consequently, the UCC fit is unique for each shipper. The analysis of all shippers is depicted in tables 4.1a, 4.1b and 4.1c, where the tables’ first column depicts the shipper’s distribution network in both direct- and UCC delivery. For all shippers, the distribution process starts at a warehouse and is triggered by an order placement. When an order is released, it is delivered to the receiver location(s) either via a 3PL or own transportation. In direct delivery, the shipper’s products are either transported from the warehouse directly to the receiver location(s) [S1, S3, S5] or via a depot to the receiver location(s) [S1, S2, S4, S5, S6]. Adding a UCC to the distribution network can imply an extra step in the supply chain [S1, S3, S6]. For instance, when delivering via a 3PL, “the 3PL collects packages and delivers them via its own distribution network to the receiver” (S1). As soon as the UCC is added to the distribution network, “the 3PL transports a pallet load to the UCC. The UCC unstacks packages from the pallet, sorts them and distributes the packages among the locations” (S1). However, the UCC can also result in one step less [S2] in the supply chain: “One full truckload of our product is delivered to and stored at the UCC and is distributed within 2,5 to three months to the receiver locations. We skip our own distribution center and 3PL process when delivering via the UCC and therefore do not extend our supply chain” (S2). Lastly, the UCC can replace one step in the direct delivery supply chain, thereby neither extending nor reducing the number of steps [S4, S5]: “For UCC deliveries, we deliver from our production location directly to the UCC instead of first delivering to our own depots. Products are stored at the UCC and someone there picks the orders and a 3PL performs the last mile delivery” (S4). In summary, the UCC fit is unique for every shipper and is entirely dependent on its conventional delivery network. 4.1.2 Shippers’ Economic Benefits related to UCC Delivery

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need for consolidation of goods, where S6 stressed: “We need economies of scale for the UCC to be beneficial for us”, and R1 noted: “Shippers that transship high volumes are appropriate for UCC delivery”. Shippers using a 3PL experience a consolidation advantage through the use of transportation rates. One stated e.g.: “Our benefit is the consolidation of goods and the possibility to deliver twice per week instead of daily. We pay a pallet price to our 3PL, which is cheaper than the price for sending multiple boxes” (S1). As a result of the aforementioned shippers’ uniqueness, the economic benefits associated with UCC delivery diverge as well. One shipper saw the UCC’s economic benefit in the absence of need for investments because facilities and services are provided by the UCC. S4 mentioned that “the UCC’s advantage is the sustainable manner of delivery. Our benefit is that we do not have to invest in sustainable vehicles”. The same shipper, that rents external warehouse space for existing customers [receivers], stated: “New customers [receivers] have more potential for UCC delivery because then I can decide to either rent more space at my current warehouse or rent UCC space” (S4). By renting UCC warehouse space, this shipper indicated that it will be able to transport sufficient volume to obtain a positive business case. Some shippers benefit from the UCC’s extra service offerings [S1, S2, S5]: “The UCC takes care of the unstacking of our pallets, the sorting of packages and the urban distribution. Our 3PL does not offer this service” (S5); or “the UCC’s benefit is the flexibility. I ordered two FTLs [full truckloads] in December due to a large price increase that was coming up and was able to store these goods it at the UCC” (S2). S2 was hereby able to temporarily rent more warehouse space at the UCC and could send an FTL from the international production location directly to the UCC. Lastly, an indirect economic benefit that shippers experienced was the time gain arising from less loading and unloading time [S4, S8], or facilitated accessibility, which was noted by S3: “The UCC employees know the route and have all benefits of frequently being at a location. A UCC employee does not have to search for the correct delivery location within a building”.

4.1.3 Shippers’ Non-Economic Benefits related to UCC Delivery

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noted by R1: “Shippers use the UCC’s sustainable contribution in their marketing campaign”. This was confirmed by both S2 and S6.

4.1.4 Shippers’ Economic Disadvantages related to UCC Delivery

Shippers were hesitant to use UCC delivery for multiple reasons, especially with their existing customer [receiver] base. First, investments in own warehouses restrained a shipper to make use of the UCC. S4 indicated: “If I rent space at the UCC, I only have savings in theory because I still have my own warehouses. I cannot diminish the space there”. S8 experienced another space related economic disadvantage and noted: “We have no cost benefits when making use of the UCC because we store the goods for a longer time and therefore need to reserve more warehouse space”. Second, one shipper mentioned that high volumes transported to one receiver location were inappropriate for UCC delivery: “We usually have projects in which at least half a truckload is transported to one receiver. It is inefficient to transship these volumes at a UCC” (S3). Third, shippers only used UCC delivery for receivers that required or motivated them to do so. Thus, all shippers still served other receivers via direct delivery. From the receivers’ perspective, this was also acknowledged; receivers stated that given direct delivery was performed anyhow, “the UCC does not lead to benefits” (R1). One reason for this was the inappropriateness of certain products for UCC delivery [S1, S4, S8]. S4 indicated: ”Only a proportion of our total product portfolio is appropriate for hub delivery. Our waste products are inappropriate because we need permits to transport them”. Another point why shippers hesitated to use UCC delivery was their perception that the UCC caused extra workload, including “extra administration” (S6), the need to use an “extra system” (S2), or “extra handling” (R2) for the shipper. Lastly, a number of shippers that either had own vehicles or used a 3PL that was solely committed to them, perceived that their vehicles were already optimally loaded: “With the direct delivery process, we fill our trucks in a highly efficient manner” (S3). Thus, those shippers did not see the need for UCC delivery [S3, S4] which was also confirmed by one receiver [R1].

4.1.5 Shippers’ Non-Economic Disadvantages related to UCC Delivery

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Shipper S1 S2 S3 Network diagram (flows of direct delivery and UCC delivery) Process direct

delivery (1) One receiver that is located in the same city is delivered by own cargo bike. (2) Daily package delivery to receiver locations by 3PL, S1 picks up the goods and delivers it to receivers.

Products are transported from foreign production location to national warehouse. Then, 3PL is responsible for national distribution of products.

(1) If large order is not in stock at 2nd warehouse, committed 3PL delivers products from 1st_{warehouse directly to receivers.} (2) In all other cases, committed 3PL picks up order from 1st_{warehouse to 2}nd_{warehouse and} then delivers to receiver.

Process UCC

delivery 3PL picks up UCC orders and delivers via own distribution network to UCC, UCC is responsible for urban distribution.

Products are transported from foreign production location directly to UCC. UCC is responsible for warehousing and urban distribution.

Backorders (hence small deliveries) are consolidated by S3 and then delivered to UCC. UCC is responsible for urban distribution.

Economic

benefits UCC (1) 3PL delivers goods on pallets to UCC instead of single boxes. Hence, transportation rate is lower. (2) UCC delivers twice per week instead of daily. Hence, more consolidated deliveries.

(3) Extra services such as unstacking.

(1) FTLs are transported directly from foreign production location to UCC.

(2) Flexible storage capacity at UCC.

Because of consolidating multiple backorders, S3 can almost deliver an FTL to UCC and does not have to pay an expensive rate per hour driven to 3PL for urban delivery.

Economic disadvantages UCC

(1) UCC leads to extra workload.

(2) Part of the product portfolio is inappropriate for UCC delivery.

Extra workload because of having to use the

UCC’s IT system for ordering goods. (1) Usually, at least ½ FTL is transported. It is not advantageous to transship these volumes. (2) Own trucks are already optimally loaded.

Non-economic benefits UCC

(1) Sustainable manner of delivery. (1) UCC leads to positive publicity. (2) Excellent express delivery performance.

Routes and buildings are usually known by UCC employees.

Non-economic disadvantages UCC

Perceived lack of control due to goods being temporarily present at the UCC and not yet delivered to receiver.

N/A N/A

Perception towards UCC suitability

Highly suitable for UCC delivery, except for ‘uglies’ (large products), but as S1 uses 3PL, benefits of UCC are not visible.

Products must be transported under dry circumstances. If UCC can meet this requirement, it is appropriate.

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Shipper S4 S5 S6 Network diagram (flows of direct delivery and UCC delivery) Process direct

delivery Products are delivered by 3PL from national production location to one of the depots. From there, either (1) own vehicles or (2) committed 3PL distribute the goods to receiver location(s).

Products are consolidated in own warehouse and delivered by 3PL on pallets, (1) either directly to receivers or (2) to intermediate organization that is responsible for delivery per receiver location.

Products are sent daily from international warehouse to national depots. From there, products are distributed nationwide with either (1) own vehicles or (2) committed 3PL.

Process UCC

delivery Products are directly delivered from production location to UCC. UCC ensures warehousing and distribution.

Products are consolidated in own warehouse and delivered by 3PL to UCC. UCC is responsible for urban delivery.

Products are distributed from warehouse to depot, and then with own vehicles to UCC. UCC distributes goods to receiver locations.

Economic

benefits UCC UCC delivers disposables and S4 can focus on low frequency products. This increases the load factor of S4’s vehicles. S4’s vehicles have less stop time leading to time benefits.

(1) UCC offers extra service by storing and unstacking pallets. If S5 had to do this, it would lead to higher costs. (2) FTL can be sent to UCC, which decreases distribution costs per pallet.

Multiple orders can be delivered at once. S6 has a pre-set distribution price per order and by sending a large amount of orders at once, S6’s distribution costs decrease.

(1) Insufficiently occupied own workforce. (2) Part of the product portfolio is inappropriate for UCC delivery. (3) Extra renting space at the UCC. (4) Own vehicles are optimally loaded.

N/A (1) As other receivers are still served via direct delivery, same number of kilometers is driven with own vehicles.

(2) UCC leads to extra administrative work.

Non-economic

benefits UCC (1) Sustainable manner of delivery. (2) Less loading and unloading time. N/A Sustainable contribution of UCC can be used as unique selling point to acquire new receivers.

Lower service level (the placement of goods

into the cabinets is not included) Perceived lack of control due to goods being temporarily present at the UCC and not yet delivered to receiver.

(1) Lower service level (desktop delivery is not included, and employees do not wear company clothes). (2) perceived lack of control as likelihood of losing packages increases.

40% of products are suitable for UCC delivery. S4 also delivers waste products for which specific permits are needed.

Products are suitable for UCC delivery but as S5 consolidates goods itself, added value of UCC is not experienced.

Products are suitable for UCC delivery but as S6 has many receivers outside the city borders, it is seen as a hurdle.

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Shipper S7 S8 Network diagram (flows of direct delivery and UCC delivery) Process direct

delivery Products are delivered from two warehouses, either via (1) a 3PL to a warehouse and then to receiver location(s), or (2) with own E-vehicles directly to receiver location(s).

Products are delivered from international production location to two large warehouses. From there, goods are transported by a committed 3PL to two depots, optionally transshipped and then delivered to receiver location(s).

Process UCC

delivery N/A Goods are delivered to UCC instead of to multiple receiver locations. Receiver performs the last mile and serves locations with own vehicles.

Economic

benefits UCC N/A Less loading/ unloading time for the 3PL (only becomes shipper’s benefit if 3PL passes on financial benefits on to the shipper).

Own warehouse is already located in the city. Hence, it takes less effort

to bring the goods directly to the receiver. (1) Goods must be stored for longer period in own warehouses due to consolidated deliveries to the UCC, and warehouse space is costly. (2) As other receivers are still served via direct delivery, same number of kilometers is driven (3) Part of the product portfolio is inappropriate for UCC delivery.

Non-economic

benefits UCC Sustainable manner of delivery. N/A

3PL picks up the goods at S7’s place every day. When S7 would make use of UCC delivery, it would have to bring the goods to UCC. N/A

Products are suitable for UCC delivery but S7 is hesitant as (1) warehouse is already located in the city where majority of receiver locations are served and (2) the majority of these receiver locations are delivered via own E-vehicles.

Only beneficial if all receivers are served via UCC. However, market is not ready for UCC delivery as participants have to pay more for sustainable delivery, which they do not want yet.

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4.2 UCC Business Model Comparison

Not only the shippers are unique but also the different UCC business model designs. In this research, three different business models are distinguished. Depending on the business model, the participants’ costs and benefits either change or remain the same (see Table 4.2). Next to the costs and benefits, every business model has other implications for the shipper, which are described in the upcoming sections.

4.2.1 BM1: Shipper Pays for UCC Service

In BM1, the shipper faces extra costs as a result of paying for the UCC service. This service might comprise the following activities: (un)stacking, storing, distributing or order picking, with the main task of delivering the products to the receiver in the last mile. Provided that the UCC performs these activities, neither the shipper nor its 3PL will perform them. Consequently, the shipper or 3PL experiences cost reductions in the last mile delivery, while the 3PL may pass these reductionson to the shipper. Usually, receivers are not financially involved in this business model. In this research however, receivers were public organizations that provided financial support to shippers if their business case did not pay off. S1 e.g. indicated: “We increased the prices of products delivered via the UCC in accordance with the receiver, because they wanted us to use UCC delivery”. The receivers allowed shippers to increase profit margins on products. One shipper noted: “The buyer asked us to deliver via the UCC. We had to pay the UCC costs ourselves, so we made the business case. Sending a pallet is cheaper than a package with our 3PL, so that is our benefit. But as this was not enough, we agreed to increase the profit margin on our products” (S1).

BM1 has a number of implications for the shipper. As the shipper has insights into the UCC costs, it is able to evaluate its own business case [S2, S3]. S3 denoted: “When I receive the first invoice, I can compare the UCC costs to the costs I pay to my 3PL”. S2 concluded to have a viable business case: “We are now evaluating whether we might deliver our products countrywide via the UCC”, which was confirmed by H1 who emphasized that BM1 “increases the shipper’s likelihood of including its other receivers into this system”.

4.2.2 BM2: Receiver Pays for UCC Service

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the shipper and enables lower costs for the receiver, thereby justifying the occurring costs for using the UCC service. The receiver’s motivation for choosing BM2 was “to speed up the process” (R2). Faced with lower revenues, S6 still perceived BM2 as advantageous: “We don't have to worry about the invoices. How would we verify the administrative work associated with calculating the shipper’s business case of UCC delivery?”.

BM2’s implication is that it does not trigger shippers to scale up activities because they are not provided with UCC invoices [S5, S6]. S5 noted: “I don't know the UCC costs, because the receiver pays it” and S6 stressed: “I have no idea about the prices the UCC demands for its service”. R2 acknowledged the upscaling problem as well and stated that if the shipper pays for the UCC service, as in BM1, “the benefit is that the receiver will not receive an invoice. The costs are carried within the chain. The shipper can compare its costs and verify whether he made savings” (R2).

4.2.3 BM3: Receiver Operates as UCC

In BM3, the receiver performs the last mile delivery by setting up and operating its own UCC. In this study, this receiver owned multiple receiver locations which were geographically spread over the entire city. Under direct delivery, several shippers drive the same route and deliver their goods individually to the same receiver locations. To avoid these unnecessary freight movements, the receiver sets up its own UCC to which shippers have to deliver their goods. The receiver then consolidates the goods and serves its multiple locations in one ride.

Like in BM1 and BM2, the shipper faces economic benefits due to the consolidation of goods and the optional extra services the UCC performs. However, the shipper has neither higher costs resulting from the UCC service fee, nor lower revenue due to a reduced profit margin. The receiver on the other hand, does not make extra revenue or experiences cost reductions, and faces increasing costs as a result of performing the last mile delivery. Consequently, an economic imbalance between the shipper and the receiver is present.

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24 Table 4.1b Findings of business model analysis

Shi

ppe

r

Extra costs UCC service fees for activities such as

delivery, handling and warehousing N/A N/A

Reduced costs Consolidated delivery at UCC (must no longer serve x receiver locations directly), either via own transportation or via 3PL cost reduction

Consolidated delivery at UCC (must no longer serve x receiver locations directly), either via own transportation or via 3PL cost reduction

Extra revenue N/A N/A N/A

Lower revenue N/A Lower profit margins on products

demanded by receiver as UCC is paid by receiver N/A 3P L (if ap plic ab le

) Extra costs N/A N/A N/A

Reduced costs Consolidated delivery, less addresses to serve, so less time needed

Consolidated delivery, less addresses to serve, so less time needed

Lower revenue Less revenue due to pallet prices instead

of x times a package price Less revenue due to pallet prices instead of x times a package price Less revenue due to pallet prices instead of x times a package price

(P ub lic ) Re ce iv er

Extra costs In some cases: More expensive products due to stimulation of UCC delivery

UCC service fees for activities such as delivery, handling and warehousing

Costs for handling and urban distribution with own vehicles

Reduced costs N/A Reduced costs on bought products because

of lower product prices N/A

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5. CONCLUSIONS AND DISCUSSION

This thesis complements current literature by providing an in-depth empirical analysis on the impact of UCCs on both the shipper’s distribution network and its distribution costs. We have concluded that the impact on the distribution network diverges from shipper to shipper and may yield an extra step, one step less or an equal number of steps in the shipper’s distribution network. Regardless of the number of steps, the UCC can lead to economic benefits for the shipper originating from consolidation advantages, the UCC’s extra service offerings or a combination of the two. Moreover, the UCC business model design impacts the shipper’s consideration of scaling up UCC activities, while each business model has unique implications for the shipper. This research revealed that every shipper is unique and therefore, UCC operators and receivers should evaluate every shipper individually when assessing the shipper’s business case. The following sections reflect on the aforementioned conclusions from both a theoretical and practical viewpoint.

5.1 Theoretical Implications

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business case should be performed on a case by case basis, which is in line with the remarks from Marcucci and Danielis (2008).

Our results revealed that the shipper’s decision for UCC delivery is generally a cost related decision. For the shipper’s decision of scaling up UCC activities, a positive business case has to be present first. Only shippers that already had a positive experience with the UCC considered to scale up their UCC delivery, which corresponds to the statements of Nordtømme et al. (2015) and Allen et al. (2012). Shippers enjoy benefits from (1) the UCC’s extra services offerings, from (2) consolidation, or from a combination of the two. This study contributes to the literature by the finding that shippers’ economic benefits can be directly or indirectly obtained solely through (1) the UCC’s extra service offerings. In one shipper’s case e.g., the UCC offered flexible stocking possibilities which enabled the shipper to be capable of sending an FTL directly from the production location to the UCC, which was not possible when performing direct delivery. These consolidation benefits were only obtained due to the UCC’s extra service offering. In another case, the UCC took care of unstacking pallets with packages and the intricate distribution of goods, which would have been too expensive for the shipper to execute itself or via its 3PL. Both cases led to less handling for the shipper, which contradicts the statement of Marcucci and Danielis (2008) who discuss that a UCC increases logistics costs through, among others, more handling. Additionally, (2) consolidation was frequently mentioned by shippers which is also frequently addressed in literature (e.g. Allen et al., 2012; Clausen et al., 2016; Verlinde et al., 2012). This study’s shippers stressed that the transshipped volume represents a critical factor for their business case. They obtained consolidation benefits related to volume in the line haul by e.g. sending an FTL from a production location to the UCC, or by e.g. sending larger orders twice per week to the UCC instead of directly to the receiver on a daily basis. The necessity of sufficient volume is in correspondence with Lin et al.'s (2014) findings who concluded that a lack of volume is the main reason for UCC failure. As an addition to literature, we found that the consolidation benefits were mainly related to the 3PL’s transportation rates as the majority of shippers made use of a 3PL. One shipper e.g. mentioned that the 3PL’s transportation rate for sending one pallet with 25 boxes is lower than the rate of sending these 25 boxes individually.

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shippers to provide distribution data and costs for both direct- and UCC delivery, considering the variables and parameters used in the aforementioned scholars. This data revealed that, when comparing their direct delivery- with the UCC delivery process, shippers used very simplistic calculation methods. In direct delivery, calculations only considered a rate per package, per order, or per hour driven. In UCC delivery, the calculation was simply adjusted either by changing the sum of packages sent using the package rate to a pallet rate, or by diminishing the number of orders or hours driven. The herewith achieved savings were then valued against the UCC service fee. Hence, none of the shippers used the sophisticated mathematical models as proposed in literature. When asking why distribution costs were calculated in such a simple manner, shippers indicated that the necessary human capital for such a sophisticated approach would simply not pay off. Additionally, some shippers mentioned that distribution costs were not so specifically known because they were already included in the product price, which corresponds to Balm et al.'s (2016) findings. This lack of knowledge about the distribution costs intensified the shipper’s insecurity concerning their business case.

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UCC service (see BM2) or operates the UCC itself (see BM3), shippers are unable to calculate the business case for other potential receivers and thus, do not consider scaling up UCC activities.

5.2 Managerial Implications

First, this thesis has shown that the uniqueness of shippers is the crucial aspect to be considered when evaluating the shipper’s business case. During our research, we intensively examined the practical context of the shipper-UCC operator-receiver system. Multiple shippers indicated that the intense collaboration between them and the other participants has led to the successfulness of UCC deliveries. For future shippers’ business case evaluations, collaboration is essential to overcome the complexity of the UCC addition to the shipper’s distribution network. This leads to unique solutions for every shipper, based on the design of its distribution network, the UCC operator’s service offerings and in some cases, the receiver’s financial cooperation. We have e.g. seen cases where the receiver contributed to a positive shipper’s business case by agreeing on fewer and therefore more consolidated deliveries. The shipper should seek, in collaboration with the UCC operator, for the most optimal UCC fit in its conventional distribution network.

Second, the UCC initiator should evaluate the business model impact on the shipper when designing it because the design affects the shipper’s consideration of whether to scale up UCC deliveries to more receivers. Both former studies and this thesis’ participants have emphasized that UCC successfulness may be traced back to the fact that shippers no longer have to drive into the urban area. Therefore, all receivers should be served via the UCC, which makes scaling up shipper’s UCC activities a crucial aspect to consider. We have exposed that shippers still hesitated to scale up UCC activities and only considered doing so when they had experienced a positive business case before. Among the three investigated business models of this research, shippers only considered to scale up activities in BM1 where the shipper paid the UCC service costs. Thus, it is crucial that when the UCC initiator designs the business model, the shipper should pay for the UCC service.

5.3 Limitations and Future Research

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shippers with own transportation vehicles could have more extensive knowledge about distribution costs due to their own experiences with last mile logistics. Hence, future research should be directed towards shippers that perform direct delivery with own vehicles and therefore examine their business case by comparing distribution costs and -impact before and after using the UCC.

Secondly, all business models were initiated by the receivers, which were public organizations. These receivers enabled us to conduct ten interviews and obtain secondary data, and therefore facilitated the access to acquire a rich database which was used as input for this research. Though, given that all receivers either strongly encouraged or required the shippers use the UCC, none of the shippers voluntarily decided to use UCC delivery. Since public organizations have significant purchasing power (Balm et al., 2016), incorporating voluntarily participating shippers in this research could reveal other interesting insights. Future research should broaden the shipper’s business case by incorporating UCC initiatives where shippers voluntarily decide to participate.

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Appendix A – Interview guides

Interview Guide | Master’s Thesis SCM

SHIPPERS

Theme: City logistics – Shipper’s business case in UCC viability

April - May 2019

V. Nieuwland

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Introductie

• Bedanken voor meewerken aan het onderzoek • Voorstelronde

• Toestemming vragen om het gesprek op te nemen voor analyse doeleinden. • Vragen of anonimiteit persoon/organisatie gewenst is

• Duur van het gesprek: ~60 minuten

Achtergrond en doel van het onderzoek

• Door verstedelijking is de last mile distributie van goederen een ‘trending topic’. Onderzoek heeft aangetoond dat er op het gebied van stadslogistiek een efficiëntieslag behaald kan worden. Het gebruik van goederenhubs is een mogelijke oplossing die in de huidige literatuur wordt gezien als een efficiënte en economisch haalbare oplossing. Echter, in de praktijk merkt men dat veel initiatieven falen. Één van de hoofdredenen is onvoldoende volume.

• Wat we op dit moment zien, is dat leveranciers die momenteel via de hub leveren, dit niet op eigen initiatief doen. Ze worden gedwongen door klanten die hun inkoopkracht gebruiken om leveranciers ertoe te zetten te leveren via de hub. Doordat de leverancier verantwoordelijk is voor de keuze van transport, kan deze een belangrijke invloed uitoefenen op de volumes van hubs. Echter zijn leveranciers huiverig wat betreft het gebruik van hubs. De redenen hiervoor willen wij graag nader bekijken.

• We komen kijken wat de effecten zijn van het (potentieel) gebruik van de hub. We willen proberen een generiek beeld te creëren over impact van een goederenhub op zowel operationeel als economisch gebied.

• Door het distributieproces in kaart te brengen voor zowel zelf leveren als leveren via de hub, proberen we te achterhalen wat de impact van de goederenhub op het distributieproces en kosten/ baten voor de leverancier.

• Als we het over de dienstverlening hebben, dan kijken we vooral naar zaken als leverbetrouwbaarheid, leverfrequentie, relatie met de klant, opslag, et cetera.

• Door deze case study bij verschillende leveranciers uit te voeren, hopen we meer generieke inzichten te krijgen in factoren die een rol spelen bij de keuze om al dan niet te leveren via een stadshub.

• Doel van de case study: Inzichten krijgen in de processen, kosten en baten voor het zelfstandig (dan wel via vervoerder) leveren versus leveren via de hub

UNDERSTANDING THE SHIPPER’S BUSINESS CASE FOR URBAN CONSOLIDATION CENTERS

FOR URBAN CONSOLIDATION CENTERS

Master’s Thesis

ABSTRACT

TABLE OF CONTENTS

1. INTRODUCTION

2. THEORETICAL BACKGROUND

3. METHODOLOGY

4. FINDINGS

5. CONCLUSIONS AND DISCUSSION

REFERENCES

Appendix A – Interview guides

Interview Guide | Master’s Thesis SCM

SHIPPERS

Theme: City logistics – Shipper’s business case in UCC viability

April - May 2019

V. Nieuwland