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

Abstract: 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".

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