CC BY
36Russian Journal of Logistics and Transport Management, Vol.3, No.2, 2016
© Yulia Panova , Natalia Isaeva and Umer Mukhtar
1,2Emperor Alexander I St. Petersburg State Transport University
3GIFT University
FORMATION OF THE CARGO BASE OF UST-LUGA PORT WITH ALLOWANCE OF THE PRINCIPLES OF INTEGRATED LOGISTICS
Abstract
The article unfolds from the analysis of current stance of the container market, which indicates the sharp decrease of import cargo processed within the main container seaports of Russia. For mitigation of the situation, the third generation seaports will be developed, implying the necessity of the industrial zones allocation at the vicinity of the seaport. By doing so, the traffic flows will be counterbalanced by the growth of the export cargo base, which will be provided with the products of higher technological conversion. In this regard, the conditions facilitating the manufacturing development beside the seaports with the allowance of principles of integrated logistics are presented. The production processes that provides cargo base for export from Ust-Luga port are described with the help of computer simulation.
Keywords: industrial zones, governmental policy, seaports, integrated logistics. 1. Introduction
At the end of the XX century, the principles of logistics were actively applied in the transport sector (Anikin and Puzanova, 2016; Bowersox et al., 2002; Lukinskiy et al., 2016; Sergeev, 2013). Their implementation was facilitated by the development of the required infrastructure. First and foremost, transport nodes such as seaports, which provide logistics services to producers, transporters and cargo owners within one interface (Kuznetsov, 2011). Previously, until 1960, the seaports mainly served as a place of collection and handling of cargo between land and sea transportation (i.e., first generation seaport). The port businesses were at that time mainly related to the loading and unloading of goods, storage of goods as well as maintenance of ships (Sherbakova-Slyusarenko, 2016). Investments have been mostly provided for the infrastructure development from the seaside (Shevchenko, 2016; Valerov, 2016).
Later on, the scale of seaport operations has expanded to the commercial operations and other activities, e.g. cargo packing, storage and primary processing of freight. As a result, second-generation seaport started to appear. They became not only transportation hubs, but the industrial and commercial centres, maintaining a close relationship with the municipal authorities, since
depending on the support of the city (i.e. energy, water, human resources, and communications).
Today, the executives, managers and operators are oriented on the creation of the third generation seaports (Shevchenko, 2016; Valerov, 2016). This type of port is seen as a dynamic centre of a complex international network of production and distribution. The activities and services at the seaports are specialised and can be divided into several main categories:
a) Traditional port services, related to cargo handling with the use of
modern equipment and electronic information technologies.
b) Industrial services, such as maintenance of the rolling stock (e.g.
repair of ships, containers), as well processing of goods based on the
established industries in the vicinity of port areas.
c) The administrative and commercial services.
d) Warehousing and inventory management.
Therefore, modern seaports resemble large distribution centres that provide a range of services, especially industrial processing of cargo. Examples of the third generation seaports would be Antwerp, Rotterdam, Hamburg. In such types of seaports, particular attention is paid to the development of production facilities for processing of cargo at the port territory or at the hinterland sites. In Russia, similar principles of port development are slowly spreading. That is why this article considers the current stance of the seaport business in Russia, as well as sheds light on preconditions for the development of industrial zones in the vicinity of Ust-Luga port. The manufacturing zone beside the seaport can provide cargo base for export flows. In order for the cargo can be manufactured more efficiently and then shipped to the potential clients abroad at the reasonable price, the processes should be streamlined. In this regard, the study analyses related operations and supply chain design as an integrated system based on the simulation modelling. With the help of computer simulation, the parameters of the model were optimised, which allowed to reduce the expenses within the whole supply chain.
2. The analysis of the current stance of the maritime container market
According to the statistics of 2015, port of Ust-Luga has become the second largest port in Russia after Novorossiysk seaport (Russia's Merchant Seaports Association, 2016). As a result, the St. Petersburg seaport has moved to the fifth place in the list of Russia's largest seaports (after Novorossiysk, Ust-Luga, Primorsk, and Vostochny). At the same time, St. Petersburg maintained a leading position among Russian container seaports (Table 1).
It is expected that Ust-Luga will be the largest seaport in the Baltic region and Russia by the volume of container handling (2.6 Ml TEU per year).
Mainly, the positions will be obtained due to the development of Ust-Luga Container Terminal (ULCT), the first phase of which was put into operation in 2011 (with a total area of 140 ha, the length of berths of 1700 meters, and storage capacity of 75 000 TEU; Ust-Luga-mmc, 2016).
Table 1
Share of containerized cargo from the total turnover of ports, in 2015.
Rank Seaport The volume of cargo handling, million tonnes The volume of cargo handling in containers,tonnes The share of containerized cargo in the total cargo
(TEU) turnover,%
1 St. Petersburg 51,5 19 842,2 (1 715 139) 39%
2 Novorossiysk 127,1 6 162,0 (583 602) 5%
3 Vladivostok 12,9 4 523,7 (619 393) 35%
4 Vostochny 65,2 3 774,5 (353 171) 6%
5 Kaliningrad 12,7 933,7 (179 378) 7%
6 Ust-Luga 87,9 811,1 (89 820) 1%
7 Dudinka 1,2 740,6 (55 832) 62%
8 Korsakov 1,6 630, 62 (82 800) 39%
9 Petropavlovsk-Kamchtsky 1,3 615,6 (70 572) 47%
10 Murmansk 22,0 560,2 (37 381) 3%
11 Magadan 1,2 432,4 (44 840) 36%
12 Arhangelsk 1,599 357,7 (30 789) 22%
13 Bronka 0,096* 0,096* (13,8)* 100%
Note: * The amount of processing for the first half 2016, the rest of figures are for 2015
Source: Russia's Merchant Seaports Association (2016).
However, in light of recent changes in political priorities, there is a general economic downturn, which affects the volume of processed containerized cargo in the port of Ust-Luga and other seaports-hubs of Russia and Europe. For example, a decrease of the amount of container via Hamburg reached 35.9% in Q1 2015 compared to the same period of 2014 (Worldcargonews.com, 2015). For this reason, the number of transhipment operations decreased, which, in turn, led to a reduction in total volume of exports of transport and logistics services from Germany to Russia, in 2015, by 34%, from $ 469.7 million to $ 309.5 million. Herewith, there is a cumulative reduction of the transport and logistics services market by 9.5% (for all modes of transport; International Trade Center, 2016).
Because of the introduction of government regulations related to food 'blockade', the decrease of import freight traffic entering through the ports of Russia reached 25-40% (depending on the category of goods; Vedomosti, 2015). At the same time, the negative dynamics in container traffic in the ports of the North-West sea basin of Russia was observed already in 2014 (Administration of Seaports of the Baltic Sea, 2015). As a result of general negative dynamics in the container market, for eight months in 2016, the port of Ust-Luga has moved from 6th to 7th place among Russian container seaports (Table 1). The rate of
container growth was higher in the Sakhalin port of Korsakov, where 53.66 thousand TEU was processed or 36% more than in the same period of 2015 (Gudok, 2016).
Despite the unstable situation in the shipping market, the decrease in exports of transport and logistics services of Russia's maritime market has not been observed. Contrary to the situation in Germany, where the export of maritime services has decreased considerably, in Russia, the volume of such services has grown by 4.9% despite the fact that overall volume of transport and logistics services of all markets have declined by 18.1% (International Trade Center, 2016). The further revitalization of the domestic maritime market will depend on the development of centres of production in Russia, especially in the vicinity of the seaports of the third generation, taking into account the integrated principles of logistics.
3. Governmental policy for the manufacturing zones development
The disregard of the logistics principles in Russia during previous years has led to an inefficient formation of the transportation system, distanced location of industries from the main export seaports. Such situation was deteriorated by the genuine reasons (e.g. the orientation of the economy on the export of raw materials). As a result, less leverage has been available to minimise logistics costs, which in Russia by nowadays has reached 19% of GDP. In this context, the employment of logistics principles in the current conditions becomes timeless, particularly concerning the development of the manufacturing production of higher value-added goods within the port and industrial clusters.
The favourable conditions for the manufacturing development are facilitated by governmental policy. The improvement of the economic situation is directed to the attraction of the investment in manufacturing. Previously, the investments were mainly provided in the economic sectors related to the extraction and processing of oil. These spheres consumed approximately 67% of all investments. Nowadays, the government tries to diversify the investments, by improving the investment climate, which already brought positive seeds that can be seen from different rankings. According to the Ease of Doing Business Index (EDBI), annually published by the World Bank, Russia was ranked as 40thamong 190 countries (World Bank, 2016).
Essential changes that allowed to improve the EDBI are related to the area of business registration and customs regulation. Russian relatively high position in the ranking of Doing Business is one of the tasks prescribed in the May Presidential Decree of 2012, according to which country should rise from 120th position in 2011 to 50th in 2015 and 20thin 2018 (The Ministry of Economic Development of the Russian Federation, 2016).
In 2016, Russia also was regarded as one of the top innovative economies, according to the rankings of Bloomberg (2016) occupying the 14th
place in the ranking (two positions higher from the previous year). It results in overpassing of countries as, for example, China, Britain, Belgium, and the Netherlands. In addition to improving Russia's position in the several global rankings, the capital of country alone contributes significantly to the positive changes. In particular, by the number of foreign direct investment in greenfield projects (investment projects 'from scratch', within which capital and new jobs are created), Moscow was ranked eighth in the world among urban agglomerations. The city has opened 422 innovative companies. They all show annual revenue growth of more than 20 percent and have applications for international patents (Pravda, 2016).
In this regard, terms and conditions for the development of enterprises can be beneficial not only for the country's residents, but also for foreign investors. The current practice of India and China of being industrial outsourcing suppliers becomes unprofitable for the majority of the developed countries because of the growth of wages, inflation, the exchange rate of national currency against the US dollar and other factors (Panova and Hilletofth, 2016). As a matter of fact, already nowadays, large retail chains such as IKEA, Zara, H&M and Decathlon plan to move production to Russia. Chinese manufacturing also will be probably transferred to Russia (e.g. shipbuilding, chemical, and metallurgical). Part of the manufactories is expected to be placed in special economic zones (SEZ).
The first development of industrial SEZ appeared in Russia in 2005. In 2006, they were added by tourist-recreational zones. In 2008, the first competition for the creation of port SEZ was held. Since the idea of SEZ development appeared in Russia quite late, compared with the global arena, on which operates several thousand SEZ, the number of SEZ in Russia reached only 29 in 2016 with a high share of tourism and a low proportion of industrial zones. That is why currently more attention is paid to the development of port and industrial areas. In 2015, the Federal Law 'On Free Port of Vladivostok' was signed by President of Russia (Regnum, 2016). The establishment of SEZ in Vladivostok seaport has been focused on the development of the auto industry. The beginning of this process was set by the refurbishment of the ship repair infrastructure in the plant 'Sollers' (Russian automotive company working in partnership with the leaders of the world automotive industry, such as Ford, SsangYong, Toyota, Mazda, and Isuzu). On the whole, similar zones are widely popular and sold in Luxembourg, Switzerland and Singapore. The state grants residents a free road and engineering infrastructure, besides the provided preferences and privileges on tax rates (Ministry of Economic Development of the RF, 2015).
4. Allowance for the principles of integrated supply chain development
In Russia, the conditions for the implementation of the principles of the third generation ports are gradually developing (Shevchenko, 2016). Those principles are fully used overseas and provide a major share of exports of transport and logistics services to European and Asian countries. For example, the French Le Havre processes Swedish production, while in the port area many of operations with coal, metallurgy, and other goods are carried out. Similarly, the large port of Marseille, Barcelona, Singapore, Shenzhen are developed. In Russia, a likewise example could be the port of Ust-Luga, where manufacturing facilities will be created in the harbour area (i.e. petrochemical, metal, pharmaceutical cluster; Panova and Isaeva, 2016).
Step by step, Ust-Luga will become one of the largest industrial zones of the country. Several industries are already developed there. That is gas liquefaction plant (capacity of 15 million tonnes/year), fertiliser plant with the capacity of 350 thousand tonnes of carbamide. According to the proposed program until to 2030, about a hundred companies will be developed in the vicinity to the seaport that creates up to 17,000 jobs. Thus, the contribution of Ust-Luga to the national economy can be comparable with the most emblematic projects in Russia, such as the construction of infrastructure for the World Cup of 2018 or the Sochi Olympics in 2014. The development of different industrial clusters close to the seaport is determined by the expected savings in logistics costs along with an increase in sales of finished products with value-added cost abroad. By doing so, the decrease in container traffic in import flows will be mitigated by planned growth of the export flow of goods from the hinterland industrial sectors.
In this regard, the development of Ust-Luga persecutes the seaport supply chain integration, which is an essential concept that can guide the design of systems and processes within seaport to become a fundamental part of supply chain (Panayides and Song, 2008). The application of this concept allows providing the competitiveness of the seaport. Assuming the fact that, in maritime industry networks, ports play a strategic role, the ports' competitiveness causes the whole logistics integration competitiveness. Port competitiveness is one of the important strategic intent employed by the ports to deliver superior value to customers and stakeholders. The pillars of ports' competitiveness can suggest valuable strategies for Ust-Luga seaport to obtain an extended role instead of the traditional role of remote node functioning the basic transhipment and shore operations. These pillars are the hinterland proximity and it's the connection with the ports, the strategic location of the harbour, the infrastructure, and the efficiency of port operations.
So, based on the supply chain theoretical underpinnings it is necessary for Ust-Luga as a port to be actively involved in the processes beyond its operational boundaries to have better coordination, collaboration and integration
with other partners. The value in addition to traditional services of seaports can create extra services for cargoes like procurement, pre-assembly, distribution services, continuous replenishment, and cross-docking facilities.
The establishment of industries close to the seaport allows to reduce logistics cost on transportation of final product to the seaports for its further export. This part of logistics chain is naturally omitted, since the products are manufactured directly or close to the seaport. For the rational location of the manufactories and consideration of the smooth supply chain development, the principles of integrated logistics became a topical theme. These principles are described in detail in the works of Anikin and Pusanova (2016), Bowersox et al. (2002), Lukinsky et al. (2016), Sergeev et al. (2013). Integrated supply chain practices, herewith, include alternative cost effective route evaluations for transportation, collaborations for channel optimisation, and the competing channel evaluations. The focus of this logistic approach is on the management of integrated materials, information and service flow, uniting the entire product life cycle. It encapsulates all stages, from the idea to the design, the production, distribution, sales, and after-sales service. Then, the cycle repeats to meet changing demands of customers, which allows reduce costs throughout the supply chain.
One of the most prominent methods of solving problems of integrated logistics can be simulation modelling. Such research methods are based on the construction of a generalised computer model with the algorithmic description of the basic rules of its behaviour. The most common simulation systems developed in Russia and spread abroad is AnyLogic software. It is one of the programs that was created in Russia and received a broad application across 60 countries. The popularity of AnyLogic is due to the possibility of combining several approaches to modelling (e.g. system dynamics, discrete event and agent-based; AnyLogic, 2016).
The developed model in the program with sufficient accuracy allows to describe the systems under study, providing the simulation of the behaviour of the objects, real experiments with which is impossible or dangerous. Therefore, this environment for the simulation of complex systems was used to describe the production and transport processes, concerning the formation of cargo base for Ust-Luga port.
5. Coordination of supply chain with the help of Any Logic
Given the emerging trends in the market of transport services, the prospects for the formation of the cargo base of Ust-Luga port on the basis of the development of production centres in the interior regions can be discussed. Attractive sectors for investors, including potential parties from abroad, can be industries, where the structure of costs contains a high proportion of labour costs. Examples would be light industry, chemical fibre, rubber, instruments production.
Similarly, labour intensive industries may be assigned to a plant for the manufacture of concrete products (wall sandwich panels). The technological functioning of the plant is provided by a considerable number of skilled professionals, which likewise corresponds to the idea of using the industrial nearshoring to Russia (Panova and Hilletofth, 2016).
In this regard, in the current study, the example of the coordination of supply chain with the wall sandwich panels plant is considered. The supply chain is related to the proposed development of a plant in the vicinity of the Ust-Luga seaport. The development of the plant can increase the cargo base of the port. Presumably, the plant manufactures concrete and metal products (wall construction sandwich panels), which can be exported to the international markets, for example to Sweden. For the supply chain coordination, which includes the plant, three suppliers and customers orders formation section (Figure 1), the principles of 'just in time' delivery were taken into consideration.
Fig. 1. Scheme of supply chain with sandwich panel plant.
In the scheme, the area P1 denotes mould production. Supplier (S1) delivers rebar, wire mesh, which are assembled in the area P2. Supplier (S2) provides with a concrete mix, which is used at the site P3 and P4 (for re-concreting of the mould). To the section P4, concrete mix from the supplier S2 is delivered. Additionally, this section utilises the fittings from supplier S1 and insulation materials from supplier S3 (Figure 2). P4 is the final assembly site. Further on, products are sent to the curing chamber, after with the finished products undergo loading and unloading operations, associated with the withdrawing of the product from the mould and moving it to the departure area, where batches of 5 panels are forwarded to the storage area. For the analysis of the production system, the simulation model was built in the AnyLogic program (Figure 2).
Fig.2. Coordination of supply chain with simulation modelling.
The total duration of the planning period was assumed to equal 552 hours, which corresponds to one month. The triangular distribution described the time for manufacturing processes (for most areas, such as the assembly of moulds and their cleaning, fixing wire mesh, the time of 3, 6, 9 minutes were installed). On the P3 site - concreting of the prepared mould, the time of 6, 12, 15 minutes were prescribed; at the next, P4 site - installing insulation and repeated concreting, the delay of 12, 24 and 30 minutes was used. The longest delay was allocated to a site with vulcanised chamber (8, 9, 10 hours). Presuming that the average daily performance is five items of sandwich walls, the number of vulcanised chambers was set to two. The exponential distribution was employed to described the average time of moulds and auxiliary production materials arrival (e.g. for moulds arrival is 0.25 products per unit of model time, i.e., one mould every 4 hours).
With the assigned parameters of the production process, the initial conditions of the supply of materials were taken arbitrarily. In particular, the frequency of raw materials deliveries was approximately synchronised with the provision of moulds. After the simulation, the output of model showed the problem of imbalanced flows as a result of which significant amounts of work in progress products appeared (showed with the dots on Figure 2).
To reduce the amount of work in progress products and streamline the whole process, the experiments with the model were used. The model helped to find out bottlenecks based on the explicit description of the complicated system. With the aid of the model, a compromise between the time of operation of the assembly line and the frequency of supply of raw materials, as well as transportation duration, the size of the batches, and required resources have been found.
For the search of stable conditions of delivery of supporting materials, further on financial indicators (operating costs, the cost of transportation,
storage, loss of profits associated with the level of service) were assigned. With the help of defined parameters the efficiency of the supply chain was controlled (e.g. revenue, the unit cost of production of sandwich panels, profit per unit and total profit, Figure 3).
Fig. 3. Coordination of supply chain with simulation modelling (improved scenario).
The most rational parameters of the supply chain were found based on the optimisation experiment. It showed the right intensity of delivering raw materials from 3 suppliers, as well as optimised batch delivery volume for the rational work of the assembly line. In turn, the provided adjustments allowed to reduce the amount of work in process goods, decreasing the expenses through the whole supply chain.
In agreement with the optimisation experiment, the intensity of arrival metal structures can be reduced to 1.5 days (35.7 hours) by increasing the delivery volume from 12 to 18 items in the lot. The intensity of the arrival of concrete remained unchanged relative to the baseline scenario, i.e., one batch every 2 hours, while the frequency of the insulating material deliveries reduced, provided the increase of batches from 16 to 22 units, which should arrive every 25 hours instead of previous 22 hours. For the processing of the prescribed cargo flows, the number of required human resources decreased to 11 and 12 people instead of 15 at each of the assembling zones (P2 and P4). The optimisation of these parameters increased the profits by 40%.
Finally, it is safe to conclude that the produced in Russia wall sandwich panels can be supplied to export markets with the reasonable prices, if streamlined and smooth logistics processes are created. For the delivery of wall sandwich panels on the export market of Sweden different modes of transport can be used. Usually, marine transportation of goods in Sweden is carried out within 5 - 9 days. The time of goods delivery by road varies from 3 to 7 days, if shipped from St. Petersburg (Vincera, 2016). Based on the analysis of transport schemes, it was proposed that the delivery of panels in Stockholm is more rational, if shipped from the considered plant beside the port of Ust-Luga (Logist, 2016; Searates, 2016). Based on the analysis of transport schemes, it
was proposed that the delivery of panels in Stockholm is more rational, if shipped from the considered plant beside the port of Ust-Luga (Logist, 2016; Searates, 2016). This option can be more advantageous in terms of cost and transportation distance: the distance by sea from Ust-Luga is 100 km less than from the port of Saint-Petersburg (627 and 727 km, respectively) and 350 km less compared to a distance calculated via road routes.
6. Conclusions
Keeping in view the significance and criticality of seaports for the economy of Russia, especially when the focus is on the development of a national project of Ust-Luga port, the philosophy and conceptual underpinnings of supply chain management and integration are important. Undoubtedly, for the third generation seaports, the allowance for the principles of integrated supply chain design is acute, because of hidden potential for the reduction of overall costs and improvement of efficiencies across and within the supply chain. In the present day situations, the role of seaports has extended to be an important member of the supply chain with strong relationships with other organisations forming an integrated system to create value for ultimate customers. Therefore, seaports collaboration and coordination within their internal functions, operations (loading, unloading, and transshipments) is essential to the same extent as ports' visible role in connecting partners of the global supply chains.
Port related literature revealed that there could be many elements, components and dimensions of supply chain integration, which is grounded in the literature of value chain and value chain network. In the contemporary literature of value chain, in addition to internal cross-functional integration, the external integration between upper and lower value chains is integral. The key important dimensions supporting the seaport supply chain integration are information and communication system, the value-added services in addition to traditional transshipping services. These are some critical points, using which seaport management can organise the performance towards internal and external integration.
In the considered example, Ust-Luga port can play an important role in the growth of exports from Russia to counterbalance the decrease of import flows. The expected results can be feasible in a case of Ust-Luga further development to third generation seaport. For this to happen, there is a need of production facilities near of the port, while port itself requires the management based on supply chain integration principles and guidelines. The study showed that for the design and maritime supply chain coordination the computer simulation could provide optimal financial and technical parameters identification. Those parameters mainly concern managerial decisions for the manufacturing processes of cargo forwarded via Ust-Luga seaport. The port and manufacturing location is suitable for export of Russian wall panels to European
countries, such as Sweden. Supply chain integration practices can yield best outputs in this regard with better facilities for all the partners of the supply chain. Reducing costs by streamlining production processes of goods with an emphasis on value delivery to all supply chain partners can create a better environment for shippers and companies and ultimately provide higher exports.
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