MGT300 Directional Imbalance Assignment Sample

Logistics Management

Contents

Executive Summary.

Introduction.

Body.

Conclusion.

References.

Executive Summary of Directional Imbalance

The report deals with the directional imbalance which has been in the logistics and supply chain management. The report majorly covers the part that what is directional balance and what are the factors which are to be considered in the directional imbalance and as per different authors what does it mean considering the logics and the supply chain management.

Introduction to Directional Imbalance

Directional imbalances in trade activities result in a surplus or shortage of empty containers in ports and depots. Freight rates differ from freight transportation. The deviation between the front and backhaul freight rates depends on the density economies and the directional imbalances in the transport flow. Some factors determine a directional imbalance in freight rates. The directional imbalance in transport flows is positively related to the relative front haul freight rates. As per Tanaka and Tsubota (2016), the growth of any production in one area increases the demand for transport services in that area so that delivery can take place in other areas also. However, this increase in transport flows will affect freight rates. The density economies in the front haul transport flows have a dominant positive effect in shaping the directional imbalance in freight rates. There is a relationship between trade, specific trade cost, and the trade prices and the aggregate income. The results show that a 1% increase of the freight rates will results in 0.06% long-run equilibrium decline in the volume of the international trade, however, the effect of changes in the trade imbalance will vary across transport market and on 1% increase in the trade imbalance will result in the 0.35%long run equilibrium rise and 0.45% decline in the freight rates which are charged in the exporting front haul importing backhaul transport markets.

Body of Directional Imbalance

As per Takahashi (2009), the transport prices will always become imbalance due to the directions of the shipments and the directional imbalances of the transport prices makes the symmetric pattern to be stable while core-periphery patterns lees likely to be sustainable. Hence imbalance acts as a centripetal force. The report of the freight rates on three major liner trade routes by UNCTAD (2008), refers to the marked difference between the pairwise direction of the shipments along with this the freight rates of Maritime transport between Europe and the Far east adjusting BAF( bunker adjusting factor) and that show the important directional imbalance between the period of 2000-2004.

The important reason for the directional imbalance is that it is a difference in volumes of the trade-in in each direction. The inland waterways in Europe found that the freight rates of the shipments in a particular direction positively depends upon the total amount of the shipments going in that particular direction. The demand curve of the front haul will always lie above the backhaul. The equilibrium will reach at that point where the curve derived by adding the two demand curves vertically cuts the curve and figures out the cost per round trip then the total cost of round trip is divided among the front haul and the backhaul according to their demand prices, what the demand prices are they were divided in that ratio. At the equilibrium level, the front haul will be more expensive than the backhaul. The directional imbalance of transport prices especially of the long run and steady imbalances as discussed above will result in an influence on the geographic economy.

 As per Behrens and Picard(2008), Competitive carriers offer transport services for shipping manufactured goods in the different regions and freight rates are determined to clear transport markets. In equilibrium, manufacturing firms in big areas face higher freight rates that reduce the incentives for the stay in that particular area. Competitive pricing and logistic issues in transportation decline the agglomeration forces in the economy.

It is important to stress over that investigation the imbalances in shipping goods and the significant impact on the freights rates and the prices. There are growing imbalances in shipping goods between the US and China and has become a real issue in the transport sector and has created logistics problems. There is the issue of trade imbalances and their negative effect on logistics globally. Global brands are majorly based in the developed countries of the world. As volumes are much high in the direction, freight rates for the full container loads are twice as much from Asia to Europe and this is because volumes are lower. As per Tanaka and Tsubota (2016), In case of truck freights there is a large directional imbalance in both transport flows and freight rates which implies that directional imbalance is the significant feature of the freight services and they also throw light on the asymmetric transportation cost and gone through the little analysis to examine the factors of directional imbalance in freight rates. Here we use the components of directional imbalance in freight rates using freight transportation in Japan, so we take an empirical framework in which the front and backhaul freight rates depend on both density economies and directional imbalances in transport flows.

It shows that the density economies in front haul transportation flow have a negative impact on the front haul freight rates rather than backhaul freight rates. Whereas the density economies on the backhaul freight rates are having a positive impact. Transport flows directional imbalance is positively related to the front haul freight rates. There is a relationship between freight rates and transport flows. An increase in the labor demand results in the growth of employment opportunities and hence increases the production of the industry. An increase in transportation flows from one area to another may affect the freight rates. It was found that the ratio of front and back end haul rates is negatively correlated with the front and backhaul transport flows.

There is always the issue that a 10% increase in front haul transportation flow will result in a decrease of 1.3% of front haul freight rates, this shows that front haul transportation flows have a positive impact on the shaping of directional imbalance in the freight rates. The large volume of shipments will occur then there is a decrement in the unit freight rates of the given transport of Airways and Railways. In northern Europe inland waterway shipment, it saw that the impact of the directional imbalance on the one-way freight rates. Hence in the transport flows, directional imbalance causes the backhaul issues with transport companies. The large quantity of the shipment in one direction can result in insufficient demand in another direction. It is well known that transportation will always increase the freight rates of the products which are shipped.

Freight rates depend on the directional imbalance of transport flows which takes place from the different levels of the demand for transportation services in each direction. The companies make profits from the round trip transportation, as they charge higher prices for the front haul shipments than they do for the backhaul shipments. As a consequence, the directional imbalance of transport flows affects freight rates. The trade imbalances imply that freight rates are determined in part by the transport volume of products in one direction in relation to that in the opposite direction. Freight rates per unit of the goods shipped are dependent upon the transport density and the directional balance of the transport flows. Along with these factors, it is assumed that freight rates also depend upon the unobserved product-level heterogeneity, unobserved origin and destination heterogeneity, and a variety of input costs such as labor costs and fuel for transport services.

There is the equation through which it is clear that the net effect of the density economies and the directional imbalance in the transportation flows. The directional imbalance in freight rates is related to the directional imbalance in transport flows via a composite parameter of the effects of transport density and trade imbalances. The impact of the directional trade imbalance on one-way freight rates for inland waterway transportation after controlling for load factors and the vessel size as a proxy for economies of shipment size. Consistent with their findings, our specification shows that trade imbalances generate a possible deviation between front- and back-haul freight rates.

Transport prices become imbalanced with respect to the direction of shipments and how this affects the economy is a major concern. Directional imbalances make the core-periphery patterns less sustainable. IMF draws attention to the risk that arises from the increasing disequilibria of the balance of payments. These disequilibria is a source of risk for world economic stability. Imbalance means a lack of stability and in relation to the supply chain management, it is the type of instability that if occurs would have a significant cost on the organization. There are several outcomes from the foregone revenue to price changes in between transportation. Let's take the example of Oil, the oil tankers are made especially for the transportation of oil and these cannot be refilled with any other type of goods. The shipping industry having containerized goods deals with the various types of cargo that deal with imbalances and makes out the ways from the imbalances.

Oil containers go one way full and come from another empty. So shipping companies have to make out of these kinds of imbalances and the solution arrives from the fact that they deal with the several parts and in more than one industry goods. The prices will be adjusted which makes the exports from the surplus ports less costly than imports to the same ports and vice –versa. The example is creating a collapsible shipping container, these have solved lots of problems and which renders the issue with the transportation and the handling aspects. This means that it is inevitable to have some ships leave ports empty and is a concern of reducing the number. Differences in the volume of trade are the major reason for the directional imbalance in global freight. There is a need for the carriers for the appraisal of the container inventory management strategies and reduce the cost which is incurred on the empty containers.

As per Edirisinghe, Jin, and Wijeratne (2016), the CII (container inventory imbalance) is a global issue. There are rarely shipping lines which have the container inventory well balanced due to varied reasons such as international trading patterns and the results of imbalances in the worldwide trade distribution. The containers help increase the utilization rate of containerships. Hence the correct balances of the container inventory at a particular location is an important factor in the liner shipping. The equilibrium imbalance surcharge has been introduced due to increased equipment imbalances which leads to highly empty repositioning costs.

 As per Edirisinghe, Jin, and Wijeratne (2016), Improving logistics performance has nowadays become an important development policy. It is estimated that 22% of container cost originates from the container inventory imbalances. There is a serious gap between the comprehensive research and developments in effective container inventory management. The companies focus nowadays on the logistics and the supply chain cost reduction. Imbalances in the supply and demand patterns for the containers which are empty have created certain logistics challenges in the container transportation services. The decline in the movement of empty containers will reduce fuel consumption and reduces emissions. Those factors include trade imbalances between particular markets in determining liner service; the type of container equipment available in determining container capacities based on the ratio between the number of a carrier's containers and those to be leased; the optimal leasing arrangement category if containers are leased; the availability of new containers for purchase; optimal repositioning routes; and special empty-container repositioning tariffs and storage tariffs imposed by container terminals and depots.

The nature of imbalances is linked to the quality of the chain relationships. Several relationship measures like trust, reputation, and discriminative power between the clusters. The growth in global trade and the distribution of freight has led to a demand for new containers in the depot. Majorly China is taking the significant advantage of the containerized export surplus. China has taken a share of about 90% of the global production of the containers, as a result, it is the export-oriented country and is having lower labor costs. China has a positive trade balance, notably in the manufacturing sector which highly depends on containerization, it is a logical strategy to have containers manufactured at that location. The majority of the containers are either owned by shipping companies or container leasing companies. The ownership of the shipping companies in the year 2008 was about 59.8%. The area which imports more than exports will have to face the systematic accumulation of empty containers while the area which exports more than imports has to face a shortage of containers. In such a situation, a large number of containers will be required by the trading partners and involving higher transportation costs and tying up existing distribution capacities.

Conclusion on Directional Imbalance

Freights rates differ between front haul and backhaul directions. While the directional imbalances in the freight rates yield implication on the location of industrial activities, there has been little analysis on the determinants of asymmetric freight rates. Some factors determine a directional imbalance in freight rates. The density economies in the front haul transport flows have a dominant positive effect in shaping the directional imbalance in freight rates. The important reason for the directional imbalance is that it is a difference in volumes of the trade-in in each direction. The directional imbalance of transport prices especially of the long run and steady imbalances as discussed above will result in an influence on the geographic economy. Competitive pricing and logistic issues in transportation decline the agglomeration forces in the economy. There is the issue of trade imbalances and their negative effect on logistics globally. There is a large directional imbalance in both transport flows and freight rates which implies that directional imbalance is the significant feature of the freight services and they also throw light on the asymmetric transportation cost and gone through the little analysis to examine the factors of directional imbalance in freight rates.

The large quantity of the shipment in one direction can result in insufficient demand in another direction. As volumes are much high in the direction, freight rates for the full container loads are twice as much from Asia to Europe and this is because volumes are lower. Transport prices become imbalanced with respect to the direction of shipments and how this affects the economy is a major concern. Directional imbalances make the core-periphery patterns less sustainable. Improving logistics performance has nowadays become an important development policy. It is estimated that 22% of container cost originates from the container inventory imbalances and the companies focus nowadays on the logistics and the supply chain cost reduction. Imbalances in the supply and demand patterns for the containers which are empty have created certain logistics challenges in the container transportation services. As a consequence, the directional imbalance of transport flows affects freight rates. The trade imbalances imply that freight rates are determined in part by the transport volume of products in one direction in relation to that in the opposite direction. Hence in such a way trade activities result in a surplus or shortage of empty containers in ports and depots.

References for Directional Imbalance

Alderton, P. M. (2004). Reeds Sea Transport Operation and Economics (Fifth ed.). London: Adlard Coles Nautical

 Behrens. K and Picard .P.M. (2008). Transportation, freight rates, and economic geography. Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.594.1087&rep=rep1&type=pdf

Dong, J.-X., Xu, J., & Song, D.-P. (2013). Assessment of empty container repositioning policies in maritime transport. The International Journal of Logistics Management, 24(1), 49-72.

Edirisinghe, L., & Zhihong, J. (2016 a). The Benefits of Container Exchange between Carriers: A Case Study. Moratuwa: Sri Lanka Society for Transport and Logistics.

Edirisinghe, L., Jin, Z., & Wijeratne, A. (2016 b)). Container Inventory Management: Factors influencing Container Interchange. 13th International Conference on Business Management (pp. 652-668). Sri Jayawardanepura: University of Sri Jayawardanepura

Edirisinghe.L, Jin .Z., and Wijeratne. A. (2016). The Global Impact of Container Inventory Imbalance and the Factors that Influence Container Inventory Management Strategies. SSRN Electronic Journal. DOI: 10.2139/ssrn.2910273

Takahashi. T. (2009). Directional imbalance of transport prices and economic geography. Journal of Urban economics. 69(1).92-102. Retrieved from http://www.csis.u-tokyo.ac.jp/dp/100.pdf

Tanaka. K. and Tsubota. K. (2016). Directional imbalance in freight rates: Evidence from Japanese inter-prefectural data. Journal of Economic Geography. DOI: 10.1093/jeg/lbw005

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