TOWARDS SUSTAINABLE BUSINESS MODELS FOR
SUSTAINABLE CITY LOGISTICS
Master thesis Supply Chain Management
University of Groningen, Faculty of Economics and Business
June 22, 2018
M. Kuiper
Student number: S3198804
E-mail: m.kuiper.18@student.rug.nl
Supervisor university:
Dr. ir. P. Buijs
Co-assessor university:
C. Xiao
Second examiner university
Prof. dr. D.P. van Donk
2
ABSTRACT
To deal with the challenges that cities face as a result of increasing freight transportation, urban consolidation centers (UCCs) are identified as an important direction for solution. However, UCC business models are often not financially viable and therefore, scholars argue that value-added logistics services should be performed by UCCs besides consolidation and distribution activities. The main goal of this study is to investigate whether e-commerce enabling logistics services can create value for UCC customers and in turn contribute to the creation of viable business models for UCCs in general. By investigating the underlying business model of a successful initiative and conducting interviews with the various stakeholders that make up the supply chain of e-commerce distribution, we find that a lack of willingness to collaborate with UCCs is the main obstacle for targeting the e-commerce mass-market. Nevertheless, opportunities can be found in local and niche markets in case value is created for UCC customers.
3 TABLE OF CONTENTS ABSTRACT ... 2 1. INTRODUCTION ... 4 2. THEORETCIAL BACKGROUND ... 5 2.1 City logistics ... 5
2.2 Urban consolidation centres ... 6
2.2.1 Defining UCCs ... 6
2.2.2 UCC business models ... 7
2.3 Value-added logistics services ... 9
2.4 E-commerce enabling logistics services ... 10
2.5 Conceptual framework ... 11 3. METHODOLOGY ... 12 3.1 Research design ... 12 3.2 Research setting ... 12 3.3 Data collection ... 13 3.4 Data analysis... 14 4. FINDINGS ... 16
4.1 UCC business model ... 16
4.2 E-commerce enabling logistics services ... 19
4.2.1 Collaboration with stakeholders ... 19
4.2.2 Differentiation focus ... 21
4.2.3 Potential UCC services ... 22
4.3 E-commerce enabling logistics services and business model impact ... 24
5. DISCUSSION AND CONCLUSION ... 25
5.1 Collaboration and integration ... 25
5.2 UCCs and e-commerce logistics ... 27
5.3 Financially viable business models for UCCs ... 29
5.4 Limitations and future research ... 30
REFERENCES ... 31
APPENDIX A – Interview guides ... 35
APPENDIX B – Code tree ... 56
4
1. INTRODUCTION
Many cities are facing significant challenges such as polluted air, traffic congestions and accidents on a regular basis due to the high number of vehicles that are travelling within the city centre. The main cause for this is urban freight transport, which for example in terms of pollution is responsible for up to 50% of the total traffic emissions (Dablanc, 2007). Increasing online sales and trends such as same-day delivery, both leading to more, smaller, and more fragmented deliveries, will result in an even higher complexity of logistics distribution in urban areas in the near future. Therefore, countermeasures to enhance freight transportation are needed and to date, one of the most important is the use of urban consolidation centres (UCCs) since they ensure a high load factor of delivery vehicles (Bektas, Crainic, & Woensel, 2017; Benjelloun, Crainic, & Bigras, 2010; Browne, Sweet, Woodburn, & Allen, 2005). From various studies it becomes clear that using UCCs can lead to multiple benefits, such as increased supply chain performance, higher efficiency in freight transport and reduced environmental problems (Allen, Browne, Woodburn, & Leonardi, 2012; Duin, Quak, & Muñuzuri, 2010). Based on these findings we would expect UCCs in every city. However, when looking for them, one will soon notice that this is not the case. In fact, only a few successful initiatives can be identified.
UCCs are logistics facilities, often located at the edge of a city, that consolidate freight in order to achieve efficient and coordinated deliveries within urban areas (Bektas et al., 2017; Rooijen & Quak, 2010). Despite the identified advantages that UCC initiatives entail, many studies mention that they often fail in reality. One of the most important reasons for this is the underlying business model (Bektas et al., 2017; Duin, Kolck, Anand, & Tavasszy, 2012; Malhene, Trentini, Marques, & Burlat, 2012). The main cause stems from the nature of the business models used, which are often technologically and environmentally instead of financially driven (Allen et al., 2012; Björklund, Abrahamsson, & Johansson, 2017). This is evidenced by the fact that in order to generate benefits for society, most UCCs are initiated with use of a temporary funding by public authorities. However, when this funding is stopped, the majority of the UCC initiatives prove to be unviable and are terminated (Rooijen & Quak, 2010). The question thus becomes: how to increase viability of UCCs to make them more successful in practice?
5 inclusion of services that enable e-commerce. The rise of e-commerce and accompanying logistics pressure on city centres creates opportunities for UCCs and consequently, e-commerce customers are important to consider as financiers of the activities performed by UCCs (Johansson & Björklund, 2017) and in this way generate extra flows of income. Johansson & Björklund (2017) therefore call to investigate the role UCCs can play in this development.
To date, academic literature does not provide in-depth insights on how value-added logistics services can help to strengthen UCC business models. Consequently, knowledge about viable UCC business models remains scarce (Björklund et al., 2017). Since scholars agree that UCCs lie at the heart of future improvements regarding city logistics, different components of the overall business model should be examined. In the light of this gap, the main goal of this study is to investigate whether e-commerce enabling logistics services can create value for UCC customers and in turn can contribute to the creation of financially sustainable business models for UCCs in general. Furthermore, outcomes of this study are relevant for UCC operators since results can be used to increase knowledge about the financial sustainabilty of UCCs which in turn can help to reduce, or at least to deal with, the challenges that result from current business models. In order to realize these contributions, the following research question is central to this thesis: Can e-commerce enabling logistics services contribute to the creation of financially sustainable business models for urban consolidation centres? And if so, how?
To answer this question, a qualitative in-depth field study is performed that focuses on the various stakeholders that together make up the supply chain of the e-commerce distribution market: shippers, carriers, UCC operators and receivers. To date, research aiming to obtain more insight into UCCs and their financial viability, mainly focuses on one of the stakeholders involved such as UCCs themselves (Björklund et al., 2017) or receivers (Gammelgaard et al., 2016). By performing a business case analysis and conducting 17 interviews with both UCC stakeholders and experts, this study does not only provide in-depths insights in the business model that underlies UCCs, but also into the context UCCs operate in.
2. THEORETCIAL BACKGROUND
2.1 City logistics
6 can contribute to a better environment and Muñuzuri, Cortés, Onieva, & Guadix (2010) who built a model to estimate the flow of urban transport vehicles, which can be used to analyse and decrease pollution levels. More related to the specific topic of this thesis, Roca-riu & Estrada (2012) analysed the initiation of a UCC in Barcelona and identified potential cost savings of approximately 14%.
Despite all these studies and their hopeful outcomes, many cities still faces challenges in terms of noise, pollution, congestion and accidents (Abbasi & Nilsson, 2016; Correia, Oliveira, & Leite, 2012; Visser, Nemoto, & Browne, 2014). Apparently, there are difficulties in translating these theoretical initiatives into practice, which need to be identified. While conducting a literature review on city logistics, Wolpert & Reuter (2012) and Cardenas et al. (2017) both found that indeed only a small proportion of existing literature conducted empirical research. Given this, this study will use an empirical approach while focussing on UCCs, an initiative that lies at the heart of city logistics improvements.
2.2 Urban consolidation centres
UCCs are not a new concept. During the 70’s of the previous century, the first studies were conducted to identify benefits and disadvantages of the consolidation of freight in order to deal with the increased congestion of city centres and rising costs of shipments (e.g. McDermott, 1975). Even though focus shifted towards other solutions, the idea has never disappeared and in the previous decade scholars revived the UCC concept.
2.2.1 Defining UCCs
7 Figure 2.1. Urban consolidation centre
Different reasons may underlie the decision to establish a UCC. These may be economical, social or environmental in nature and are often connected to the type of initiator s (i.e. public or private parties) of the UCC (BESTUFS, 2007; Browne et al., 2005). Looking at various initiatives, it ben be said that most of the UCCs are initiated by municipality (e.g. Björklund et al., 2017). To date, UCCs have been implemented in different cities, especially in Europe, such as Nijmegen, La Rochelle, and Monaco (Allen et al., 2012; Marcucci & Danielis, 2008; Rooijen & Quak, 2010). From studying these and other UCC schemes, many and often huge benefits can be identified as a result of consolidated freight that enters the city centre. Based on an evaluation of various UCC schemes, Browne et al. (2005) for example found reductions between 30 and 80 percent in the number of freight vehicle trips, increased load factors up to 100 percent and emission reductions between 25 and 60 percent, compared with situations before implementation of these schemes.
2.2.2 UCC business models
8 rather general and mainly focus on the external influences that enable successful UCC initiatives. However, what does become clear from these reviews is that most of these initiatives have not been granted a long life.
Financial sustainability
Looking at the wide range of UCCs that were initiated, it can be concluded that most initiatives failed. Therefore, many concerns exist about the financial viability of UCCs (Quak & Tavasszy, 2011). In literature various causes of these failures are highlighted. According to Rooijen and Quak (2010), one of the factors is the lack of analysis of retailer’s potential demand with respect to this concept before initiating the consolidation centre. As a result, many UCC schemes fail because the throughput of goods that flow through the consolidation centre is lower than expected (Allen et al., 2012; Duin et al., 2010). In these cases, the start-up costs and operational costs cannot be justified by consolidation and distribution activities (Wolpert & Reuter, 2012). Furthermore, UCCs are often designed in close collaboration with or even in totality by municipality. As municipality oftentimes choose the creation of value for society over profitability (Björklund et al., 2017), specific business needs of UCC customers are not always carefully considered, resulting in unattractive initiatives from a customer perspective. Moreover, one of the most important reasons for failure comes from the fact that UCCs are often seen as an additional stage in the supply chain which will lead to higher costs and as a result, many potential customers are not willing to cooperate (Oliveira, Dutra, Correia, & Guerra, 2012). Due to the involvement of multiple stakeholders, the environment of city logistics can be determined as complex (Harrington, Srai, Kumar, & Wohlrab, 2016). Stakeholders that are most often mentioned are shippers, carriers, receivers and public authorities (Bektas et al., 2017; Björklund et al., 2017; Turblog, 2011). The fact that these stakeholders all have their own systems, processes, resources and goals impacts the creation of a successful UCC initiative (Harrington et al., 2016; Wolpert & Reuter, 2012).
As a result, research indicates that the successful implementation of a UCC is to a large extent dependent on public funding (Allen et al., 2012; Browne et al., 2005; Duin et al., 2010; Rooijen & Quak, 2010). Since municipalities often obtain benefits of UCCs from an environmental and social perspective, (temporary) grants are given to UCC operators to financially support these initiatives during the first year(s) of existence. In these cases, it is expected that UCCs will become profitable after the start-up phase (Browne et al., 2005). However, when municipalities find out that this is not the case, they terminate their financial support and this often results in the end of the UCC (Browne et al., 2005; Duin et al., 2010; Johansson & Björklund, 2017).
9 only offering pure consolidation and distribution activities is not enough and approaches that go beyond this service offering are needed to increase attractiveness and become financially viable (Wolpert & Reuter, 2012). The question then becomes, how to create such business models? Recently, Duin, Dam, Wiegmans, & Tavasszy (2016) and Björklund et al. (2017) have provided some more insights into this topic. Björklund et al. (2017) found for example various internal related factors that help to increase viability of UCCs. Examples are ‘an ability to innovate new services for customers that generate revenue’ and ‘logistics and supply chain competence’. Although these are important aspects to keep in mind while initiating and operating a UCC, they reveal little about the underlying business model. Therefore, by looking at available literature, it can be argued that knowledge regarding this topic remains scarce.
Nevertheless, from practice it becomes clear that performing value-added logistics services is an important aspect in creating sustainable business models (Allen et al., 2014; Björklund et al., 2017; Duin et al., 2010; Johansson & Björklund, 2017; Malhene et al., 2012). Different studies show that long-lasting UCCs all focus on offering value-adding services. Rooijen and Quak (2010), for example investigate the successful case of “Binnenstadservice” in Nijmegen. They mention that the business activities consist out of a combination of standard consolidation and distribution activities, as well as a portfolio of value-added services.
2.3 Value-added logistics services
Value-added logistics services are activities whereby perceived sacrifices (e.g. costs) are outweighed by perceived benefits (e.g. service) and can be defined as “logistics capabilities that can be a source of competitive advantages [for customers] (Morash et al., 1996; Lynch et al., 2000)” (Yazdanparast, Manuj, & Swartz, 2010: 382). Extracted from the literature, various value-added logistics services are identified and summarized (Table 2.1). This table shows a clear overview of what activities can be performed by UCCs to increase their business model’s viability.
10 Despite the various value-added services described in literature, little is known about how these activities can create value for users (Gammelgaard et al., 2016) and how offering such services help to strengthen the business model of UCCs. Although most of the mentioned value-added logistics services are under-examined, e-commerce customers are identified as important potential financiers of UCCs that should receive attention (Johansson & Björklund, 2017). These scholars therefore call to perform more research towards the role of UCCs in dealing with increased city logistics activities that go hand in hand with increased online sales.
Table 2.1. Potential value-added logistics services performed by UCCs
2.4 E-commerce enabling logistics services
11 product deliveries is so strong, that the latter has become an integral part of the service and shopping experience (Lin, Zhou, & Du, 2017). As a result, e-tailers are striving to continually improve their responsiveness in deliveries, which has a substantial impact on the efficiency and the number of freight transportations (Allen et al., 2017; Visser et al., 2014). Beside the fact that these trends cause that cities face increased problems that stem from logistics activities (Morganti, Dablanc, & Fortin, 2014), it also results in increased transportation costs (Allen et al., 2017). Consequently, scholars argue that UCCs provide a good opportunity to deal with the challenges that arise from the logistics fulfilment process of e-commerce orders (Cherrett et al., 2017; Visser et al., 2014). Specific examples of services are the consolidation of parcels that are delivered by different carriers and providing services for the collection and transportation of returns and web orders to the edge of the city, from where these products can be picked up and transported towards their destination (Browne et al., 2005). Next to this, one of the main difficulties online retailers face is fluctuation in the number of orders received. Seasonality can cause big differences in demand over time (CBRE, 2013). UCCs that provide temporary warehousing possibilities, also known as ‘on-demand warehousing’, can help shop owners out in these situations (Browne et al., 2011). These various services can be grouped under two main services that need to be considered when talking about e-commerce and the logistics fulfilment process: warehousing and distribution (Croom, 2005). However, from literature becomes clear that to date hardly any city logistics concept provides activities that enable e-commerce (Visser et al., 2014).
2.5 Conceptual framework
To answer the research question: “Can e-commerce enabling logistics services contribute to the creation of financially sustainable business models for urban consolidation centres? And if so, how?”, a conceptual framework is created (Figure 2.2). By identifying the needs and requirements of potential stakeholders that operate in the e-commerce market on the one hand and the opportunities for the UCC that result from this on the other hand, this thesis investigates whether e-commerce enabling logistics services offered by UCCs can create value for shippers, carriers, and receivers, while at the same time contribute to a financially sustainable business model for UCCs.
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3. METHODOLOGY
3.1 Research design
Research does rarely describe components of business models that underlie city logistics initiatives, and consequently it can be concluded that knowledge about this topic remains scarce (Björklund et al., 2017). Although scholars advocate that offering value-added activities can help UCCs to become more successful, little is revealed in academic literature about how such services can impact and strengthen the business model of a UCC. Therefore, more exploratory research is needed. Because of this need, an in-depth field study that follows the theory building approach is performed (Karlsson, 2016; Voss, Tsikriktsis, & Frohlich, 2002). Qualitative research with an inductive approach is used to obtain a large amount of diverse information, which resulted in an in-depth understanding of the complex phenomenon under investigation (Eisenhardt, 1989). Qualitative research is most suitable in this situation, as it can produce knowledge that enables to bridge the gap between theory and practice (Ven & Johnson, 2006), something which is needed to increase knowledge on how e-commerce enabling activities can contribute in creating sustainable business models for UCCs. The unit of analysis is the UCC business model.
Business model analysis
To answer the research question, in-depth knowledge about the UCC business model is required. A business model can be described as “ a conceptual tool that contains a set of elements and their relationship and allows expressing the business logic of a specific firm” (Osterwalder, Pigneur, & Tucci, 2005: 17). To fulfil this intention, the business model canvas (BMC) of Osterwalder & Pigneur (2010) is used to provide a complete overview of the underlying business model of UCCs. The BMC is a commonly used tool to describe business models in an understandable way through nine building blocks that together cover the four areas that are considered as most important for doing business: customer, infrastructure, financial structure and the offer (Osterwalder & Pigneur, 2010). Because the BMC mainly focuses on an organization’s internal business model (Reuver, Bouwman, & Haaker, 2013), we argue that it is a suitable tool to evaluate the business model of a UCC. By making use of available literature, introduced in chapter 2, and complementing it with qualitative and quantitative data obtained from Goederenhubs Nederland (GHNL), a holistic overview of the UCC business model is outlined.
3.2 Research setting
13 UCC stakeholders (i.e. shippers, carriers, and receivers) and experts. Due to the fact that the decision to make use of a UCC mainly lays at the beginning or end of the distribution chain (Hendriks, 2018), the main focus of this study lies on shippers and receivers instead of carriers. One type of receivers, who are shippers at the same time, are shop owners that operate a web shop. They play an important role in this study due to the following reasons:
• They are considered as one of the most important stakeholders due to the amount of products they sent and receive and the fact that they can choose whether they make use of the UCC services or not, and thus can make or break a UCC initiative (Rooijen & Quak, 2010)
• They probably obtain the highest benefits from implementing a UCC, due to the fact that UCC services can be performed that are designed to meet the specific needs of this stakeholder (Johansson & Björklund, 2017)
Furthermore, although from research becomes clear that large retail chains can gain the least advantages from freight consolidation because they already make use of their own efficient replenishment methods (Marcucci & Danielis, 2008), in the e-commerce environment these organizations are dependent on external parcel delivery services. This might change the situation and because of this, multiple large retailers, a wholesaler, and a logistics service provider operating in the parcel delivery market (hereafter referred to as “LSP”) are included in this research to obtain a holistic view on the opportunities for UCCs that stem from e-commerce logistics.
3.3 Data collection
The main data collection method used in this study are semi-structured interviews. This type of interview enables to find answers to specific and pre-determined questions, while at the same time leaving room for additional information that might be provided by the interviewee (Myers & Newman, 2007). The rich data, gathered from 17 interviews with different shop owners within the city centre of Groningen, UCC initiators and operators, logistics professionals, a carrier and UCC experts (Table 3.1), is used to gain in-depth understanding about opportunities related to e-commerce logistics and their impact on the financial viability of UCCs. The fact that all stakeholders that make up the supply chain of the e-commerce distribution market participated in this research, resulted in holistic view of the context UCCs operate in.
14 the openness of the interview (Myers and Newman, 2007). In order to reproduce what has been said during the interviews and to reduce observer bias, interviews were be recorded and transcribed (Voss et al., 2002). Although after every interview it was asked whether interviewees wanted to receive a summary of the outcomes to validate findings, most interviewees were not interested in having such a summary. Together with the fact that most interviews were conducted by a single investigator, this may impact the reliability of outcomes obtained.
Beside interviews, data obtained from the business case of GHNL (i.e. excel documents), a ‘supply profile’ report of Groningen, various informal conversations with the UCC franchiser of Groningen, participation in the conference ‘growing green city routes’, and various articles and reports published on ‘logistiek.nl’ are used as input for this study and therefore act as means for triangulation, in order to increase validity (Eisenhardt, 1989; Voss et al., 2002). These secondary sources of data can therefore be marked as crucial in this research, as without this data it was not possible to gain the in-depth insights into the identified costs structure and revenue streams of UCCs. Due to confidentiality of data obtained from the GHNL business case, these data will not be displayed in this thesis. However, one can take in mind that outcomes of calculations are therefore not based on fictional data, and as a result sketch a situation that is in line with reality.
3.4 Data analysis
16
4. FINDINGS
4.1 UCC business model
From literature reviewed and data obtained from GHNL, it becomes clear that there does not exist ‘one’ specific business model for UCCs. Consequently, the BMC provided in Figure 4.1 provides a ‘basic’ overview of a UCC business model. The right side of the BMC focuses on ‘customers’ (Osterwalder & Pigneur, 2010). Currently, most UCC initiatives mainly focus on business customers, such as shop owners and retail chains (Bektas et al., 2017; Duin et al., 2016). However, from interviews with the initiators of GHNL, it becomes clear that the focus of their services is also extending to end-consumers (B2C). Furthermore, customer relationships and the way in which value proposition(s) are delivered to the customers (i.e. channels) are described. UCCs perform last-mile distribution in a consolidated way and as a result, personally deliver the freight (Bektas et al., 2017; Rooijen & Quak, 2010). Next to this, online systems are important means for communication. UCC customers increasingly want a ‘proof of delivery’ to make sure the products are delivered at the right time and under right circumstances [UCC owner A]. Together, these three ‘blocks’ result in the revenues obtained by the UCC (Quak et al., 2014). Important revenue streams are governmental funding and payments by customers for services performed by UCCs (Björklund et al., 2017; Duin et al., 2016).
The left side of the BMC examines which assets are required to offer the value proposition(s) (i.e. key resources), which activities are needed to make the business model work (i.e. key activities) and finally which partners are needed to keep up the promises made to the customers (i.e. key partners) (Osterwalder & Pigneur, 2010). Besides standard resources such as a distribution centre with equipment and personnel (Kin, Verlinde, Lier, & Macharis, 2016), interviews show that local and logistics expertise of UCC operators and well-functioning IT systems are crucial. Looking at the most important partners, literature and interviews both show the large number of different stakeholders involved. Stakeholders that are most often mentioned are shippers, carriers, receivers and public authorities (Bektas et al., 2017; Turblog, 2011; UCC owners A and B). Public authorities are not only important for their funding, but also for implementing rules and regulations with respect to city logistics that make UCC initiatives more attractive [UCC owner A]. Furthermore, different shippers, carriers and receivers are involved in a UCC initiative. Since these parties can decide whether they make use of the UCC, they all impact the successfulness of a UCC initiative. Therefore, besides being customers, these stakeholders can also be seen as key partners. Eventually, ‘infrastructure’ blocks result in a cost structure. This structure differs per initiative as some UCCs for example make use of own property, while others rent it and some have their own means of transportation while others hire local carriers, as is the case with GHNL (Duin et al., 2016; UCC owner A).
17 that they are located close to receivers, while at the same time more flexible deliveries are possible (Browne et al., 2005; UCC owner A). Furthermore, by enabling direct deliveries of products from local shops to local customers, delivery speed is increased [UCC owner B]. Lastly, using a UCC, carriers can save time since they do not need to enter cities anymore. As a result they can perform more deliveries per day, which decreases the total transportation costs due to the fact that less trucks are needed (in case of less than full truckloads) (Quak & Tavasszy, 2011; UCC owners A and B). Turblog (2011) proposed a tenth building block that focusses on the value proposition towards society: ‘externalities’. This subdivision is used in Figure 4.1 to differentiate between societal and logistical value propositions (Duin et al., 2016).
Figure 4.1. Business model canvas UCC
Towards financially sustainable business models
18 that delivers the products to the shop [O1,O2,O3,O5]. Due to their role in the supply chain, shop owners are therefore not the most important stakeholder to focus on for consolidation. GHNL faced the same challenge and consequently changed its business model from focusing on contracts with downstream partners (receivers) towards upstream partners (shippers) for consolidation of freight, because a shipper determines whether carriers should drop their freight at the UCC or not: “Our experience shows that, surprisingly, the shipper is in the lead and not the carrier.” (UCC owner A).
However, interviews with multiple large shippers and experts show that these organizations are sceptical about UCCs [RC1,RC2,RC3]. Shippers mention that ‘case-by-case’ calculations are needed to find out whether benefits outweigh the disadvantages of UCCs, but they expect that this is not the case. In the opinion of shippers, UCCs will create an additional step in the supply chain, which has a negative impact on delivery speed [O7,RC2], increases the chance of missing and damaged products and result in increased costs due to extra handling [RC1,RC2]:“I do not believe in consolidation centres. Why? There are two reasons for that. On the one hand, who is going to pay for it? Because there is a consolidation stage involved and someone must pay for it. And secondly, it slows down your deliveries and the chance of mistakes will increase since there is an extra consolidation.” (RC2).
19 The second aspect that is mentioned as crucial to create a viable business model, is the creation of value for customers by offering valued-added logistics services in addition to standard consolidation initiatives [E1,E2,UCC owner A and B]. The role of these value-added services is also crucial in the business model of GHNL: “In Nijmegen it [percentage of revenue generated by consolidation activities and value-added logistics services respectively] is 50/50” (UCC owner A) and “Here [Maastricht] the consolidation part accounts for approximately 40%, while value added services are responsible for 60% [of the revenue]” (UCC owner B). Examples of services offered by GHNL are waste collection, collection of returns, storage and unpacking and repacking. What value-added services should be offered by UCCs depends on what is needed to strengthen the business of the (local) customers and therefore differ from situation to situation [E2,UCC owner A].
The third aspect is flexibility. Being flexible in terms of performing all kind of activities and focus on local opportunities is seen as an important prerequisite for a UCC to create a sustainable business model [UCC owner A and B]. Furthermore, to deal with the unpredictable demand for UCC services, flexibility in terms of upscaling and downscaling operations is mentioned as crucial: “You have to align your costs and revenue in a smart way” (UCC owner A). To do so, initiators of GHNL argue that overhead costs should be reduced to a minimum.
4.2 E-commerce enabling logistics services
4.2.1 Collaboration with stakeholders
Multiple stakeholders have an impact on the potential of performing e-commerce enabling logistics services performed by UCCs. The next paragraphs provide an overview of the identified challenges related to this collaboration.
Carriers
When focussing on distribution of e-commerce parcels, integration of processes and systems is crucial to avoid that UCCs become an additional, non-value adding, player in the distribution process [E1]. However, LSPs all have their own policies, processes and systems and focus on ‘beating’ competition to obtain increased economies of scale [RC1,E2]. As a result, these LSPs do not allow other parties, such as UCCs, to take over some of their business: “LSPs and that kind of parties want to put their names on the logistics activities. That means that parties like DHL and UPS want to be recognised in the market and they will not tolerate other parties to do the same.” (E1).
20 unwillingness to collaborate with UCCs becomes clear: the fear of losing customers. When another party takes over the delivery process, there is no contact anymore with the end-customers and as a result, carriers are afraid of losing their business [C1]. The interviewed LSP states on the other hand that it’s not all about unwillingness, but that loss of efficiency is another important factor for not collaborating with UCCs. Including an extra sorting process at a UCC is not possible due to the low margins obtained: “It’s not only about willingness. Internally we are also willing to cooperate. We tried to do so, but it failed completely due to decreased efficiency and increased costs. Our divisions consist of networks that do not seamlessly complement each other and if you try to merge them at one point, you will lose so much efficiency that offering these services is no longer profitable.” (C1).
Shippers and receivers
The shipper is in charge of the distribution process and therefore it is important that this stakeholder is convinced of the benefits obtained from UCCs [UCC owner A]. However, besides mentioning that UCCs will result in additional step in the supply chain, security of data and a lack of trust seem to play an important role in the reluctant attitude of large shippers towards UCCs. With respect to data security, one shipper mentioned for example that a UCC should be able to strictly separate documents and that privacy should be safeguarded before they will be trusted as a partner [RC1]. In line with this, an expert argued that this is maybe the biggest problem of all because many organizations are very reluctant to share their confidential data [E1]. Next to this, large shippers [RC1,RC2] are not convinced of the ability of UCCs to meet the value propositions towards their customers: “And what happens when a UCC becomes overloaded? Currently, PostNL is investing millions and millions of euros to expand their network… How will the UCCs manage that my products will reach the customers in time? How are they going to compensate us for the extra costs we make in such a situation of congestion? Do you understand my scepticism towards hubs?” (RC2). Because of this, large shippers rather do business with the established logistics service providers that operate in the parcel distribution market.
21
Public authority
Interviews with various stakeholders show that the role of the (local) government is seen as important for increased consolidation opportunities of e-commerce parcels. Currently, most large LSPs are allowed to deliver their goods outside the delivery windows in the city centre [O6]. This does not create an incentive to change city logistics, while increased regulations in city centres can result in more consolidation opportunities: “Look for example at London. When regulations and enforcement become stricter, more consolidation opportunities arise and volumes will increase” (E1).
Overall, results show that there is currently limited or even no willingness from the most important stakeholders to collaborate with UCCs for the distribution of (e-commerce) freight. Since shippers and carriers do not perceive value of services provided by UCCs, they are not willing to pay. Therefore, findings indicate that focus on the e-commerce mass-market by UCCs will not contribute to the creation of viable business models.
4.2.2 Differentiation focus
Business models of the large LSPs are based on high throughput and low margins and as a result the focus is on high efficiency [E2,C1]. Consequently, the distribution market of e-commerce parcels is highly cost oriented. Both large shippers as well as local shop owners are used to these low prices and are not willing to pay more for receiving and sending their parcels. Shippers mention that the choice for the current distribution process is a trade-off between service and costs, but they will only switch to another distribution process when increased service levels are guaranteed for the same price or when the same service levels can be offered for a lower price [RC1,RC3,O7]. At the same time, shippers admit that environmental considerations are becoming more important, however these are outweighed by cost considerations: “It is all about costs. Of course, the environmental issues are important, but these are subordinate to costs” (RC1). Because of this, no added value can be provided by UCCs when focussing on customers that are used to the low prices [E2].
22 is possible and as a result, the organization faces a continuous trade-off between costs and service levels [W1]. UCCs can therefore help to increase service levels towards customers by being able to meet specific delivery requirements. Lastly, an expert mentioned that local initiatives based on just-in-time (JIT) deliveries (i.e. deliveries at the right time at the right place) are becoming more common in the near future. Using a UCC for these deliveries offers opportunities to shippers and carriers to meet these requirements in an efficient way [E2].
4.2.3 Potential UCC services
This study identified three, mainly local, e-commerce enabling logistics services that can be offered by a UCC based on the needs and requirements of shippers and receivers identified.
Web order collection service
Despite the low amount of web orders that the interviewed shop owners receive on a daily basis (between 1 and 10), most of them find it convenient when web orders are collected from their shop. Currently, half of the shop owners bring their orders to the PostNL collection point [O4,O5,O6,O8]. This impacts the service levels provided to customers, since they are not always able to send these parcels on time. Shop owners argue that their volume is currently too small for a ‘collection’ subscription at one of the large LSPs, but they see a collective ‘pick-up service’ as a chance [O4,O5,O6]: “I would like it when my parcels are collected from the shop. Now it happens a lot that parcels are not send on the day they are ordered” (O4). This creates the opportunity for a ‘web order collection service’ performed by a UCC. Although this initiative will not be easy to initiate in practice due to the fact that the UCC becomes a competitor of LSPs that currently collect these parcels on the one hand, while on the other hand collaboration with the same LSPs is needed to ship these products to their final destination, such a service may also create openings for further collaboration between these parties.
Same day delivery to local customers
23
Warehousing services
A third e-commerce enabling logistics service to offer by UCCs is warehousing. On the one hand, holding stock at the UCC can be used for local deliveries of (web) orders. This offers the opportunity to meet more specific delivery wishes of consumers, something that is becoming increasingly important nowadays [E2]. Consumers increasingly demand their products JIT, and this is only possible when products are shipped from a location that is located closely to the end-customer [E2]. Furthermore, storing products can result in extra shopping space in stores which in turn enables an increased product range in shops, and also results in reduced collection activities of web orders in shops [UCC owner A]. Interviews show that local shop owners are not willing to store their products at another location due to three main reasons. First, local shops want to have all their stock in the shop since keeping it somewhere else can result in missed sales [O1,O5,O7,O8]. Most of them use their own shop as their warehouse and pick the products that were ordered online from the shelves. Consequently, shop owners are afraid that having not all their products in the shop anymore impacts their service levels. Secondly, shop owners argue that storing their products somewhere else will result in additional costs due to extra investments in stock [O1,O2,O3,O6]: “I don’t know which products I should store at the consolidation centre, since I don’t know what will be ordered... I cannot just duplicate my shop and store that volume at the consolidation centre while waiting for what is ordered. That will cost money.” (O6). Lastly, shop owners argue that they want to have control over their own processes [O1,O4,O8]. Because of this, they are not willing to outsource core activities.
Like local shop owners, retail chains do not see value in storing their products at UCCs for a longer period. All large shippers mention the importance of becoming more flexible due to more demanding customers. However, they argue that storing products at a UCC becomes too costly due to the increased amount of stock, since products are not only stored in shops anymore but also at the UCC [RC1,RC2,RC3]. Furthermore, they argue that products that are stored in a warehouse cannot be sold and consequently, these organizations increasingly focus on the integration of ‘online’ and ‘offline’ stocks in their shops from where online orders are picked, packed, and delivered [RC2,RC3].
24
4.3 E-commerce enabling logistics services and business model impact
In order to contribute to the financial viability of the UCC business model, revenues obtained from services offered should exceed costs. In order to provide some more insights, the potential services discussed in section 4.2.3 will be subject to analysis to determine their impact on the value propositions and financial structure of the BMC set out in Figure 4.1. Numbers are used to refer to the specific service:
1. Web order collection service;
2. Same day delivery to local customers; 3. Warehousing services
Value proposition(s)
Interviews show that customers are mainly willing to make use of UCC services when costs are reduced without resulting in a negative impact on service levels or when service levels increase and can be offered against initial prices. Service 1 and 2 offer increased service levels for local shops in terms of convenience and reliability [UCC owner B]. Shop owners do not have to bring their web orders towards a collection point anymore and have the reliability that orders are collected the same day. As a result, service 1 and 2 enable increased reliability and delivery speed towards the end-customer. Furthermore, service 2 and 3 may result in decreased distribution costs for the shipper. For local shops (2), delivery costs may decrease by using bike couriers, which can operate at lower costs than traditional LSPs [UCC owner A]. For a national shipper (3), outsourcing the last-mile may enable increased efficiency in distribution [E2].
Costs structure
25
Revenue streams
Service 1 can result in additional revenue streams for the UCC due to the fact that shop owners do not pay shipping costs to the LSPs anymore, but to the UCC. When shop owners drop their parcel at the PostNL point, they pay €6,95 per parcel in the Netherlands (PostNL, 2018). By collecting web orders from shops against these ‘standard’ tariffs and sending these parcels collaboratively against lower prices through economies of scale, profits can be generated by a UCC. By providing a higher service level against the same costs, it is likely that shop owners are willing to collaborate with the UCC. Service 2 may result in extra revenues for the UCC by asking an allowance for every parcel that is delivered locally by making use of the ‘coordination’ service of the UCC. Service 3 can result in additional revenue due to the fact that customers pay a fee to the UCC for the temporary use of space.
5. DISCUSSION AND CONCLUSION
Scholars agree that UCCs lie at the heart of city logistics. Nevertheless, from practice it becomes clear that many of these initiatives have never reached the point of being financially viable, something what is needed to keep the business up and running without being dependent on public funding. Looking at research into the UCC business model, it can be concluded that most studies focus on describing one or multiple initiatives from a UCC perspective, not incorporating the view of the various stakeholders that impact the successful initiation of this solution to a large extent. By gaining in-depth knowledge about the underlying business model of a successful UCC initiative in the Netherlands, as well as the motivations of stakeholders that impact their decisions to collaborate with a UCC initiative, this study contributes to both UCC research and practice by providing insights that increases knowledge about financially sustainable business models for UCCs. As argued by Allen et al. (2012), this is extremely important in order to move to a situation in which UCCs can be made affordable. Furthermore, by responding to the call of Johansson & Björklund (2017), we examine the potential impact of e-commerce enabling logistics services on the UCC business model. In doing so, we find that e-commerce enabling logistics services might be beneficial to offer and can positively impact financial sustainabilty of UCCs. However, this is affected to a large extent by local needs.
5.1 Collaboration and integration
26 (Björklund et al., 2017). Taking an overarching point of view, most of these reasons relate to a lack of collaboration between UCC stakeholders. Various stakeholders are involved in city logistics, which makes it complex environment to operate in (Harrington et al., 2016). In line with what is known from literature, this study shows the importance of participation by stakeholders to initiate a successful and financially sustainable UCC initiative. Remarkably, this is where research most of the time stops, and consequently little is revealed about the motivations of the various stakeholders that influence their decision to participate in a UCC initiative. Here, this thesis adds to literature by providing some new insights.
Findings from this study suggest that when looking at e-commerce logistics services that potentially can be performed by UCCs, the exact same ‘collaboration challenge’ arises. Because of the fragmented nature of the e-commerce market and new trends that decrease efficiency, it was expected that consolidation of e-commerce freight delivered by LSPs is interesting (Allen et al., 2017). However, findings show that because of the fierce competition in the parcel delivery market, it is difficult to position UCC initiatives in the logistics process of these large LSPs. This is mainly caused by customer behaviour, since receivers see logistics as a non-value-added service that need to be carried out at the lowest price in a quick way, which is in line with findings of Abbasi & Nilsson (2016) who identified challenges that hinder the development of environmental sustainable logistics services from a LSP perspective. Together with the fact that a carriers’ main goal is to “provide the best possible service at the most competitive prices” (Wolpert & Reuter, 2012: 114), this characteristic causes that ‘unwillingness’ to collaborate with UCCs is only one part of the story. Findings suggest that currently ‘inability’ also plays an important role in the decision not to collaborate with UCCs. To stay competitive, LSPs are focused on increasing the efficiency of their own processes and are not open for collaboration. As a result, common processes, standards and applications are needed to integrate logistics flows in an efficient way (Triantafyllou, Cherrett, & Browne, 2014) and make UCC initiatives more attractive for these carriers. Here, the concept of physical internet, and more specific the use of л-containers (i.e. standard modular load carriers) can result in increased opportunities (see for example Crainic & Montreuil, 2016).
27 attitude from shippers towards UCCs, it is sparsely dealt with and should receive increased attention (Holguín-veras & Sánchez-díaz, 2016; Park, Park, & Jeong, 2016). We found multiple arguments that help to explain shipper’s attitudes.
First, shippers have the feeling that participating in such initiatives will have a negative impact on their organizational performance (i.e. cost, speed and quality of delivery processes). Shippers are afraid that they will not be able to meet their promises towards the ever more demanding final customers, as a result of the additional step in the supply chain which impacts the efficiency of the distribution process. Due to the greater competitive characteristic of the e-commerce market compared with traditional sales channels (Allen et al., 2017), this becomes an even more constraining factor in the situation where products are sold online. This is more or less in line with the theoretical assumption of Holguín-veras & Sánchez-díaz (2016) who mention the loss of control by shippers over their deliveries as a potential reason for not willing to collaborate. However, it also has to do with trust since shippers already outsource e-commerce distribution to LSPs. This reluctant attitude of shippers can at least be called notable, since literature argues that both shippers and carriers can (financially) benefit from UCCs (Browne et al., 2005). This is confirmed, although their focus was not on e-commerce logistics, by Quak & Tavasszy (2011). They examined the impact of using UCCs on for example distribution costs for a wholesaler and a transportation company. Various scenarios were analysed, and cost savings up to 25% were found. This implies that there is a mismatch between expected and real benefits that can be obtained from making use of UCCs and therefore close collaboration is needed to mitigate the concerns of shippers.
Secondly, this research confirms and complements the study of Lindawati, Schagen, Goh, & Souza (2014). In their survey towards collaboration in urban logistics in Singapore, they found that the need to share information in urban logistics is an important barrier for collaborative initiatives. Our findings suggest that the fear of information leakage to other customers is indeed an important barrier, mainly due to the fact that confidential data may end up in the hands of competitive companies. Furthermore, Lindawati et al. (2014) did not find evidence for their hypothesis that a lack of trust acts as a barrier in logistics collaboration. However, this study suggest that trust does play a role in the reluctant attitude of shippers towards collaboration with UCCs.
5.2 UCCs and e-commerce logistics
28 UCCs work (Triantafyllou et al., 2014). Given this, in combination with the reluctant attitude of shippers and carriers, we find that currently most opportunities of UCCs for obtaining additional revenue streams via e-commerce enabling logistics services do not come from the e-commerce mass-market, but from opportunities in niche and local markets. Although this may sound disappointing, this can be still a lot of volume since for example 50-60 percent of all freight transportation kilometres in cities originate from local shippers and 25-40 percent of these kilometres are caused by freight that never leaves the city (Ploos van Amstel, 2018).
One finding that is of particular interest, is the potential of consolidation and distribution of e-commerce products that fall out of the scope of the large LSPs. Such products contradict to what is said in general about the products that should be handled by UCC’s. Cooper and Lybrand in van Duin (1997) for example argue that city distribution centres should not focus on products that are fresh, dirty, unpleasant to handle, valuable or voluminous. In line with these authors BESTUFS (2007) mentions ‘small and easy to handle products’, while UCC’s are not suited for perishable, products as well as products that call for specific handling of distribution requirements. The fresh and voluminous products mentioned in the interviews do not fit in this picture. The fact that these niche products are targeted as most interesting e-commerce products for standard consolidation and distribution activities indicates that using UCCs for e-commerce logistics is currently limited to situations and products that do not fit the mainstream distribution methods, and consequently the benefits of using a UCC outweigh the disadvantages due to the problems encountered in the logistics processes.
Next to this, findings show that most potential e-commerce enabling logistics services can be found locally. This is in line with literature, which mentions that city characteristics and interest from locals (e.g. retailers) are important prerequisites for initiating a UCC (Browne et al., 2005; Veličković, Stojanović, Nikoličić, & Maslarić, 2017). This can be explained by the fact that every city has different characteristics, problems and needs. Antwerp for example is one of the most congested cities in Europe, which makes that using a UCC becomes interesting (Kin et al., 2016). Another example is London, where retail property is very expensive and as a result, retailers save money by making use of certain UCC services (Duin et al., 2016).
29 Björklund (2017) and Gammelgaard et al. (2016), results show that shop owners fear the additional costs that might be involved in the procurement value-added logistics services. Therefore, close collaborating and offering ‘customized’ services against competitive prices is needed to obtain profits from local customers.
5.3 Financially sustainable business models for UCCs
This study suggests that a UCC business model cannot be seen in isolation and that, in order to create sustainable business models, UCC customers should be willing to participate. What makes it difficult is that optimal benefits can only be obtained if all parties in the supply chain collaborate, since UCCs incur costs and the financial benefits of consolidation fall somewhere else in the chain. Therefore, the ‘urban freight myopia’, where parties only consider their own aspects of the distribution process, has to be overcome to increase the number of successful UCC initiatives.
Due to a situation in which large shippers and carriers are reluctant to collaborate with UCCs, this research shows again that finding critical mass is the biggest challenge for UCC initiatives. Findings suggest that focusing on e-commerce distribution does not change this situation. Consequently, in line with the findings of Björklund et al. (2017) who investigated multiple UCC initiatives in Europe, ‘flexibility’ can be marked as one of the most important characteristics to create a viable business model. A UCC should not only be able to scale up or scale down its business to deal with the dynamic environment it operates in but should also be flexible in the type of services offered towards UCC customers.
30
5.4 Limitations and future research
Currently, there is no UCC in Groningen and as a result, the shop owners interviewed have no experience with consolidation schemes. Because of this, it is very hard for them to imagine how such a UCC can add value to their businesses. Although in most interviews the UCC concept was not mentioned to prevent biased answers and conversations focused mainly on identifying current needs with respect to e-commerce logistics, this might have had an impact on the results obtained. Therefore, it will be very interesting to conduct a second research in the start-up phase of the UCC to investigate whether experience with a UCC has changed the needs of shop owners.
Secondly, the focus was on a medium-sized city in the Netherlands, a relatively small country. Identical research conducted in other (larger) cities, with more logistics problems, may result in other findings. Due to local problems, the way in which UCCs can create value differs and in turn other e-commerce related services might be of value. Similarly, UCCs may play an important role for small retailers in larger countries, since delivery times may be longer than in the Netherlands, where currently every shop owner can make use of ‘next-day delivery’. Using UCCs can therefore become an important instrument to compete with the large shippers. Therefore, research towards the impact of e-commerce enabling logistics services on the revenue streams of UCC initiatives in other contexts is needed to elaborate on these findings.
Furthermore, findings highlight the importance of shipper participation in UCC initiatives to create a viable business model as well as their reluctance towards UCCs. During this research we found that in order to convince shippers to participate in UCC initiatives, more insights in the benefits that can result from collaborations with UCCs are needed. Currently, insight in such benefits is scarce and therefore, this study calls for more research towards the financial impact on shippers’ business cases that such collaborations entail, to disprove their biased view towards UCCs.
31
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APPENDIX A – Interview guides
Interview guide master thesis SCM
SHOP OWNERS
Theme: city logistics – e-commerce logistics activities
March/April/May 2018
M. Kuiper – student Supply Chain Management
