On the Incentives to Shift to Low-Carbon Freight Transport

The transport sector accounts for approximately 20% of EU-27 greenhouse gas (GHG) emissions, and 27% of U.S. GHG emissions. With the Kyoto Protocol, Sweden and several other nations have agreed to reduce these emissions. Often, solutions that involve consolidating freight and moving it to more carbon-efficient transport technologies are advocated as the most advantageous. For such initiatives the technology already exists, so change is only a matter of implementation. But when aggregate data is examined, very little change for the better is seen. This thesis explores why this may be the case, with the purpose being to increase the understanding of the incentives to shift to low-carbon freight transport. This is explored in a three-phase research structure where, first, macro-data is analyzed, after which theory is built using two multiple case studies, which serve as input to three mathematical modeling studies of different parts of the operator-service provider/forwarder-shipper chain of actors. By considering the chain of actors on the freight transport market as a service supply chain, the research in this thesis is able to use methods from, and make contributions to, the sustainable supply chain management literature as well as the literature on transport contracting. With this literature as the point of departure, the studies show that there is a matching problem associated with the implementation of low-carbon transports: with the currently used contracts it is usually not rational for the actors on the market to shift to low-carbon transports, even though the total cost on the market, on aggregate, may be reduced from shifting. Nevertheless, there are situations where shifting is rational for all actors. Creating such situations normally requires implementing long-term contracts. The models in this thesis show how such contracts can be designed. However, the models also show that situations where implementation is rational are very sensitive to changes in external parameters such as demand volatility, making implementation high risk in many cases. Another downside is that the environmental improvement is not always as large as one would expect due to inventory build-up and extra truck transports. For low-carbon transports to be implemented in large scale, their costs need to be more in line with conventional transports, and contracts that allocate risks and profits better need to be implemented. Not until these issues are better understood, and contracts and regulation implemented, can a large scale shift to low-carbon transports be expected

Green Logistics through Modal Shift - exploring the role of the transport capacity contract

Among policy-makers in Europe the modal shift - a shift från polluting modes of freight transport to less polluting modes - has been a popular suggestion for reducing CO2-emissions of transportation. In particular, intermodal road-rail solutions, where a combination of road and rail transport is utilized to move trailers and containers, have been stressed as an important measure to reach de desired reduction in emissions. However, looking back at the development over the last twenty years, no shift to rail-bound transport can be seen. for example, the share of rail-bound transport has decreased. There are several potential explanations to the absence of modal shift. Often, the supply-side is held responsible, with rail operators offering too low quality due to lack of standards, lack of proactivity, and general infrastructure and transport system deficiencies. Others claim the non-existent shift dependson inertia on the demand-side. Innovations on the transport market are driven by the demand-side customers and as long as the demand-side is not willing to make any adjustments to better fit the supply-side's offers, no shift will occur. Arguably, both underdeveloped service production and demand side inertia create barriers to realize the political ambitions of the EU. But supply- and demand-side problems cannot be discussed in isolation: low service quality leads to low demand and with low demand there are little incentives to invest in quality. On the intermodal transport market (and much of the trucking market as well), supply and demand is matched in contractual relations. These contracts affect the incentives of the players, and from the economics and supply chain management literature it is well known that badly designed contracts and incentives may lead to sub-optimization and double-marginalization effects, including lower production levels and less total profit than what would have been optimal. Therefore, instead of focusing on aggregate behaviour, this research approaches the modal shift by investigating t he contract that governs the sale and purchase of these services. The purpose, is to build a model to explore the currently used contracts on the intermodal market, explain how these contracts may have affected the modal shift, and explore how changes in the contracts and market conditions could increase the share of intermodal transport. The purpose is approached through a research process in which the findings from two company cases, Bring Frigo and Volvo Logistics, are used to model the system. We consider a situation in which a Service Provider approaches an Intermodal Operator to build the service capacity that the service provider can use to satisfy demand created by the upstream Shippers. The system is then modeled as a one-period, continuous, newsvendor modal with fixed costs associated with each train put into operation. Any demand which cannot be satisfied by the intermodal operator is handled by a truck carrier. Contrary to the trucking market, the Operator is the leader in our Stackelberg game, in which the Service Provider decides upon the final modal mix. It is found in the cases that the operators tend to have a strict production focus, preferring to transfer the responsibility of filling the train to the service provider. Since the service providers are used to having very low fixed costs (no own assets), they claim that this way of selling the capacity inhibits the possibilities to increase the rail-share of their modal mix. In the model, we therefore investigate two possible ways to contract the capacity: 1) through a unit price per trailer, in which an arbitrary number of trailers is sold to the service provider at a unit price per trailer, and 2) with a service charge per train, in which the operator charges a fixed rate for operating each train, leaving the responsibility to fill the train to the service provider. The research characterizes these contracts and show that the operator prefers a per-train charge in most instances: the production focus in inherent with the current market structure. It is also shown that the per-train type of payment coordinates the system in several instances and thus outperforms the unit price preferred by the operator. In that, the production focus has no negative impact in the modal mix in these instances. However, none of the contract types can guarantee coordination, leading to lower total profits than optimal. We therefore show how a three-part tariff, in which the operator charges a unit cost per trailer, a service charge per train, and a wealth-transferring component, can achieve full coordination. Such a contract may however be difficult to implement due to its complexity. Analysis with the model shows that policy measures such as a general carbon tax under some circumstances may increase the amount of intermodal capacity although this may not always be the case due to decentralized decision-making. Measures aiming at reducing the financial risks of the markets, such as allowing longer trains, reducing slot-fees, or introducing a well-functioning spor-market may more easily achieve a higher intermodal share. In that, the research provides insight on the mechanisms on the micro-level that may affect the realization of the political visions, with implications for operators and service providers as well as policy-makers. In particular, the semi-fixed cost structure of the intermodal investment has been poorly addressed in the past, and by analyzing the impact this has on the capacity investment, the study builds on previos research on green logistics, as well as mode choice, capacity management, and supply chain contracting. Finally suggestions for future research along the four potential paths are discussed: empirical research to understand the actual rather complex market; relax model assumptions regarding number of time periods, compliance regime, private information, hidden actions and risk aversion; include more players as shippers and infra structure owners; and compare results with other service markets very capacity is "lumpy"

Modal Shift for Greener Logistics - Exploring the Role of the Contract

Purpose This paper investigates contracts of the intermodal transport market and the incentives they create for a modal shift and thus the financial and environmental efficiency of freight transport. Design/methodology/approach The research used a mixed-methods approach where qualitative case interviews and quantitative modeling was combined. Two cases of contractual relationships between a service provider and its intermodal train operator on a specific lane were investigated. The case findings were then consolidated and used as input for a model of the contractual relation. Findings were sought through an extensive numerical study. Findings The cases reported that intermodal rail operators had a strong production focus, transferring the capacity risk (i.e. the risk of unused capacity) to the service provider, which the service providers argued limited the shift from truck to intermodal transportation. We show that, due to the market structure, it is rational for the operator to transfer the capacity risk but not the profit. Consequently, a modal shift is only likely to occur when there is strong shipper pressure or low capacity risk. We present a risk-sharing contract that could potentially release this dead lock. Research limitations/implications (if applicable) The conclusions are modelling outcomes subject to assumptions based on the cases. For further validation, large-scale quantitative studies are necessary. Practical Implications (if applicable) We show that a three-part tariff in which the capacity risk is shared may lead to increased modal shift and hence assumed improved environmental performance. Social implications (if applicable) Instead of arguing for operators to be more customer-focused, policy-makers and other stakeholders may have more to gain by having both actors being more cooperation-focused. Original/value The paper is the first attempt to quantify how the contractual relations on the freight transport market affect the modal mix and thus the financial and environmental efficiency of freight transport

Environmental implications of transport contract choice - capacity investment and pricing under volume and capacity contracts

Inspired by the observation that capacity contracts are used by some retailers to increase their transport provider's investments in green transport solutions, we investigate and compare a service provider's optimal investment, and its environmental implications under a volume and a capacity contract respectively. We solve the service provider's investment problem under the assumption that the retailer uses the service to replenish a warehouse with storable goods. We then show that a capacity contract leads to more green transports, but not necessarily a larger investment in green transport solutions. At the same time, the optimal solution involves heavy investment in inventory at the retailer. The investment in inventory is non-decreasing in the cost benefit of the green transports, which may have a significant negative environmental impact. The implication is that a capacity contract will lead to better environmental performance than a volume contract only when the green transports' cost benefit is within a given interval. Whether the capacity contract is the more profitable option for the service provider within this interval depends on inventory related costs and the relative environmental costs from transportation and inventory. Interestingly, owing to this, regulation that target the price of the conventional vehicles, such as a carbon tax, may lead to both an increase or a decrease in environmental performance

Pricing and timing of consolidated deliveries in the presence of an express alternative: Financial and environmental analysis

Shipment consolidation has been advocated by researchers and politicians as a means to reduce cost and improve environmental performance of logistics activities. This paper investigates consolidated transport solutions with a common shipment frequency. When a service provider designs such a solution for its customers, she faces a trade-off: to have the most time-sensitive customers join the consolidated solution, the frequency must be high, which makes it difficult to gather enough demand to reach the scale economies of the solution; but by not having the most time-sensitive customers join, there will be less demand per time unit, which also makes it difficult to reach the scale economies. In this paper we investigate the service provider's pricing and timing problem and the environmental implications of the optimal policy. The service provider is responsible for multiple customers' transports, and offers all customers two long-term contracts at two different prices: direct express delivery with immediate dispatch at full cost, or consolidated delivery at a given frequency at a reduced cost. It is shown that the optimal policy is largely driven by customer heterogeneity: limited heterogeneity in customers' costs leads to very different optimal policies compared to large heterogeneity. We argue that the reason so many consolidation projects fail may be due to a strategic mismatch between heterogeneity and consolidation policy. We also show that even if the consolidated solution is implemented, it may lead to a larger environmental impact than direct deliveries due to inventory build-up or a higher-than-optimal frequency of the consolidated transport. (C) 2015 Elsevier B.V. and Association of European Operational Research Societies (EURO) within the International Federation of Operational Research Societies (IFORS). All rights reserved