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Transportation strategy in international supply chains - The case of Russia

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  • Metso Outotec, Lappeenranta

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The purpose of the study is to provide knowledge on the transportation strategies employed in international lean oriented supply chains involving developing economies. In this research work we are interested about the situation in Russia. Five enterprises examined represent mostly international Finnish metal industry companies, having significant global presence and operations. According to the literature review, the functionality of transportation systems can in effect limit supply chain management principles available. International supply chains may be particularly vulnerable. In practice international supply chains in Russia need to compromise both in terms of leanness and agility. Currently, road transport seems to be a better choice to serve the requirements of customers in terms of frequency and speed as railways are considered reliable but slow. On railways, there seems to be room for enhancing efficiency by changing communication procedures. On road, custom procedures reduce efficiency, however, special permits needed for oversized loads increase transportation cost and reduce flexibility. In some products (e.g., after sales, spare parts) country level dedicated warehouses are needed to serve customer demands.
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168 Int. J. Shipping and Transport Logistics, Vol. 2, No. 2, 2010
Copyright © 2010 Inderscience Enterprises Ltd.
Transportation strategy in international supply chains
– the case of Russia
Juha Saranen, Bulcsu Szekely,
Olli-Pekka Hilmola* and Tero Toikka
Lappeenranta University of Technology,
Kouvola Research Unit,
Prikaatintie 9, FIN-45100 Kouvola, Finland
Fax: +358 5 344 4009
E-mail: juha.saranen@lut.fi E-mail: bulcsu.szekely@lut.fi
E-mail: olli-pekka.hilmola@lut.fi E-mail: tero.toikka@lut.fi
*Corresponding author
Abstract: The purpose of the study is to provide knowledge on the
transportation strategies employed in international lean oriented supply chains
involving developing economies. In this research work we are interested about
the situation in Russia. Five enterprises examined represent mostly
international Finnish metal industry companies, having significant global
presence and operations. According to the literature review, the functionality of
transportation systems can in effect limit supply chain management principles
available. International supply chains may be particularly vulnerable. In
practice international supply chains in Russia need to compromise both in
terms of leanness and agility. Currently, road transport seems to be a better
choice to serve the requirements of customers in terms of frequency and speed
as railways are considered reliable but slow. On railways, there seems to be
room for enhancing efficiency by changing communication procedures. On
road, custom procedures reduce efficiency, however, special permits needed for
oversized loads increase transportation cost and reduce flexibility. In some
products (e.g., after sales, spare parts) country level dedicated warehouses are
needed to serve customer demands.
Keywords: emerging economies; transportation; production networks; lean;
Russia; Finland.
Reference to this paper should be made as follows: Saranen, J., Szekely, B.,
Hilmola, O-P. and Toikka, T. (2010) ‘Transportation strategy in international
supply chains – the case of Russia’, Int. J. Shipping and Transport Logistics,
Vol. 2, No. 2, pp.168–186.
Biographical notes: Juha Saranen is a PhD student at the Lappeenranta
University of Technology (LUT) in Lappeenranta, Finland. His research
interests are concentrated on using mathematical modelling on logistical
problems, especially transportation networks. He has published some number
of journal articles and international conference papers. He has worked for the
last five years as a Simulation Consultant in various manufacturing and
logistics projects.
Bulcsu Szekely is currently working as a Project Researcher at the
Lappeenranta University of Technology (LUT) in Kouvola, Finland. His
research interests are concentrated on the effects of railway logistics
privatisation and deregulation, supply chain management and logistics
IT-systems. He has been a co-writer to a couple of journal articles and in
international conference papers.
Transportation strategy in international supply chains – the case of Russia 169
Olli-Pekka Hilmola is an Acting Professor of Logistics at the Lappeenranta
University of Technology (LUT), in Kouvola, Finland. Concurrently, he serves
as a Visiting Professor of Logistics at the University of Skövde, Sweden as well
as a Docent at the Turku School of Econ. (Turku, Finland) and Univ. of Oulu
(Oulu, Finland). His research interests include supply chain management,
theory of constraints, system dynamics, simulation and total productivity
management.
Tero Toikka is currently working as a Project Manager in international
manufacturing company, having significant presence in CEEC countries.
Before this, he has worked within Russian market nearly one decade time and
holds considerable knowledge from real-life supply chain solutions. His
research interests are concentrated mostly on Finnish-Russian trade, Greenfield
manufacturing establishment and transportation.
1 Introduction
Globalisation has made it increasingly difficult for companies to set out the tradeoffs
inherent in their objectives; optimising simultaneously productivity, profitability and cost
efficiency in an effort to increase quality of operations and customer satisfaction
(Agarwal et al., 2006; Helo et al., 2006; Mahidhar, 2005; Berg and Ohlsson, 2005; Prater
et al., 2001). Introducing liberalising policies by governments enhance further the
mobility of capital and the state of competition that in turn create higher level of
uncertainty and risks involved in global manufacturing (von Heynitz and Gross, 2006;
Helo et al., 2006). The essence and consequences of globalisation on the international
division of work within the context of production network has been investigated by
Szekely et al. (2008). Our study concentrates on transport system selection in
international supply chains involving developing economies – in our case, Russia.
Generally this country is actively participating in international trade through raw material
exports of crude oil, oil products and natural gas (are currently approx. 60% from
country’s export value, see Bank of Russia, 2009). However, in supply chain
management research, Russia has been examined most often as a raw materials base for
wood products concerning North European pulp and paper industry (e.g., Carlsson and
Rönnqvist, 2005) and value-added production in the country is taking only early steps,
although identified as very important by politicians (Toppinen et al., 2007). Earlier
research has revealed that supply chain success in Russia is not dependent that much on
experience, but on volumes, transportation frequency and leveraged resources do give
some support for success (Lorentz, 2008).
In this research work, analysis is focused on several companies through a descriptive
case study approach. Five enterprises examined represent different industry sectors all
operating internationally and mostly supplying metal related products. The aim is to gain
insight in choosing transportation systems and the way they evolve in an international
context. The empirical data needed is gathered from multiple sources, however, the
greatest emphasis being on in-depth interviews in which a key person is involved from
senior management at the firms included in this study. Research approach is mostly
qualitative, while some key quantitative measures are included in the case descriptions.
We follow in this research work inductive research process – supply chain management
170 J. Saranen et al.
research is currently well-established discipline (e.g., with regard to case studies, see
Seuring, 2008), but needs modification with respect to emerging markets and particularly
Russia (e.g., Lorentz et al., 2007; Prater et al., 2001; Lorentz and Hilmola, 2008;
Mesquita et al., 2007).
This research is structured as follows. In Section 2 we review literature from lean
production and the role of transportation in a networked global environment; our
literature survey is also extended into developing economies to highlight problems faced
by production networks in this context. Following Section 3 introduces the research
methodology employed and the five studies investigated in this study. Thereafter, in
Section 4 five cases are examined where first case represents Russian company operating
in subcontracting industry followed by end product manufacturers from Finland. Results
are discussed in Section 5, where all five cases are compared in between and general
guidelines from all observations regarding to transportation strategy are being proposed.
Conclusions on managerial and policy level are given in Section 6 and further research
avenues are addressed in Section 7.
2 Literature review on globalised production networks
One of the main themes of industrial manufacturing today is supply chain integration
(Christopher et al., 2006; Gulledge, 2006; Rantala and Hilmola, 2005; Baker, 2007;
Gunasekaran et al., 2008). Lean thinking is arguably the dominant paradigm through
which competitiveness is being achieved. Originally, the concept was invented by
Toyoda family within Toyota car manufacturing process, when internationalisation and
cash flow were the main themes during 60s – often the father of this system and thinking
is argued to be Toyota car manufacturing executive during that period of time, Taichi
Ohno. The primary goal for firms is to create lean enterprise organisational structure by
eliminating all kinds of waste in the value chains (Papadopoulou and Özbayrak, 2005;
Berg and Ohlsson, 2005). This management approach is used also in the service sector
for example by banks, insurance companies, etc. The implementation requires a long
period of time as the fundamental principles have to be absorbed by everyone in a firm
from the operational level to the strategic one. The idea is to set up a close, but flexible
integration layer between these two levels in an enterprise so that continuous
improvements would be possible in business processes.
According to Szekely et al. (2008) there seems to be some confusion on how lean
thinking is to be applied. These facts come through even research initiatives that have
been carried out and the core issues are the lean and agile characteristics of supply chains
(see Hines et al., 2006; Christopher et al., 2006; Papadopoulou and Özbayrak, 2005;
Krishnamurathy and Yauch, 2007). At the conceptual level characteristics of lean against
agile supply chain are seemingly clear, but at the same time in practice empirical studies
illustrate a mixed picture (see Yusuf et al., 2004; Gunasekaran, 1998; Taj, 2008): Lean
supply chain models at some point lead to greater flexibility and less cost savings than
the ones of agility oriented. It seems that the concepts of leanness and agility are of same
cradle, but these theories are constantly under pressure of globalisation and that is the
path how the term ‘leagile’ was born. As nowadays products and services merge in a
growing extent and hybridisation with mass customisation are commonplace, production
networks will become even more dynamic and flexible. Intelligent business process
software engines such as ARIS Platform by IDS Scheer AG1 will streamline and
Transportation strategy in international supply chains – the case of Russia 171
automate the lean enterprise so that with fewer resources one could achieve more output
within a virtual environment setting (Gunasekaran et al., 2008; Saad and Gindy, 2007). In
so inter-functional multi-skilled teams take a central role in production networks, as
business processes are managed by the individuals performing the actual processes
(Davenport and Short, 1990; Hammer, 1990).
Table 1 Summary of articles dealing with lean strategy and transport
Author Findings
Vieillescazes (2007) A critical component in implementing lean production structures is
an adequate transportation and logistics infrastructure. The degree of
flexibility will be dependent on the environment in which the carrier
finds itself in and is primarily based on the degree of uncertainties
relating to customer demand, supplier performance, the carrier’s own
internal processes and the transport infrastructure.
Wilson (2007) In the modelled five-echelon supply chain, the effect of interruptions
depended on the location of the interruption and the ordering policy
applied. Shipping across international borders increases the risk of
disruptions. Strategies for protecting against disruptions include
holding additional inventory, finding alternative suppliers or routes
and applying vendor managed inventories.
Fearne and Fowler
(2006)
Lean measures performance generally at the task level. In most large
construction projects, measures that improve efficiencies in specific
functions may compromise the ability of the project to be delivered
effectively. In construction (in)efficiency of transportation is
measured in terms of the amount of lorry movements that involve
part loads, the distance travelled and the amount of time spent
waiting on-site. In some cases, however, e.g., waiting on site might
be advantageous, if rush-hours in traffic can be avoided.
Wu (2003) Lean suppliers are not only able to reduce their inventory level
significantly, but they also spend much less in emergency shipping
and no more on routine shipping. In the US, lean suppliers with an
average distance of over 400 miles can still achieve competitive
logistics advantages.
Gulyani (2001) Poor transportation system affects total logistics cost in a supply
chain not only directly through higher transportation cost, but more
importantly via high inventory levels, which are needed to overcome
the unreliability and inefficiency in supply. Furthermore, a poor
transportation system might lead to geographical clustering of
manufacturing industries.
Towill (2005) Bullwhip affects transportation capacity need more than the actual
demand amplification is. The ideal solution from a lean perspective
would be to stabilise demand and right size the assets accordingly.
However, transport provision often has to be reactive to fluctuating
demand and hence it makes sense to pursue horizontally
collaborative solutions.
Baker (2007) Inventory is a common risk mitigation strategy against the possibility
of random demand variability and transportation delays. If
transportation distances are longer, the typical transportation batch is
increased. International supply chains may be particularly vulnerable
owing to such factors as the geographic area covered, the transport
modes used, political/border factors and environmental issues.
172 J. Saranen et al.
According to Naim et al. (2006) transport is a key function in the supply chain as it acts
as a physical link between customers and suppliers, enabling the flow of materials and
resource. Table 1 provides a summary of selected articles on lean strategy and the quality
of transportation systems.
As overall conclusion from the articles in Table 1, it can be argued that an adequate
transportation and logistics infrastructure is a critical component in implementing lean
production structures. Lean suppliers are not only able to reduce their inventory level
significantly, but they also spend much less in emergency shipping and no more on
routine shipping. However, shipping across international borders increases the risk of
disruptions. Required additional inventory is argued to affect total logistic cost even more
than the increased transportation cost involved. Transportation systems are vulnerable to
demand amplification; bullwhip affects transportation capacity need more than the actual
demand amplification is. Poor transportation system might even lead to geographical
clustering of manufacturing industries. A large number or research on the inventory
impacts due to uncertainty has been conducted. However, research about supply chain
uncertainty from a transportation perspective has been conducted with a confine to
conceptual level recently (see Rodrigues et al., 2008).
Currently hierarchical structured economical entities and extensive regulation by
governmental agencies inhibits the positive externalities emerging from effective
transformation of core industries of a society, such as transport and logistics management
(Hilmola et al., 2008; Saad and Bhaskar, 2006). In order to be able to utilise in a larger
extent with lean concepts, it would be essential to have more direct foreign manufacturer
or supplier relationships with local actors in a developing country. This might be realised
either through establishing foreign facilities in the regions targeted, or giving a chance for
a foreign operator to acquire a manufacturer (supplier)/a set of manufacturers (suppliers)
in a transitional economic area (Lorentz, 2008). At the same time it is important to have
more direct distribution channels and international supply chain partnership agreements
within a context of promoting more open market policies by governmental agencies
(Lorentz et al., 2007). The set up of further international scale investment research
projects along transportation corridors, while securing the finance for capacity
investments as needed are also a priority from the viewpoint of waste and delay
elimination (see Vieillescazes, 2007).
3 Research methodology and environment
Five cases represented in this research work are outcome from the research project
concerning intermodal transportation solutions within Southern Finland and larger
St. Petersburg region in Russia (Leningrad oblast). Case companies from Finland and
Russia were selected due to the reason that they have presence in target regions in sales,
distribution and manufacturing terms. For the reasons of financing body of the project, as
well as for the challenges in actual transportation process (price, lead time, quality and
flexibility), all cases were metal industry actors, producing all sorts of products (e.g., raw
materials, semi-finished parts and final consumer products). Most of the interviewed
companies had long history in the markets, while one of them was taking only its initial
first steps – this built needed heterogeneity perspective for research (discussed in Yin
1994; Eisenhardt, 1989; Ellram, 1996) and should affect transportation mode selection
and transportation strategy. Although Russia is a large country, its industrial base is
Transportation strategy in international supply chains – the case of Russia 173
narrow – most competitive sectors are raw material production of oil and gas. Russia has
long history from collaboration with Finland in manufacturing industries. Although
current practices could be analysed based on second hand statistics, direct contacts with
the companies are required in order to reveal future intentions and considerations on
alternative courses of action of the companies. Furthermore, case observation based on
interviews was chosen over questionnaires in order to get a more in-depth view on the
companies.
Finnish and Russian cases were completed with qualitative management interviews.
Interviews in these cases took 1.5–2 hours and were concentrated on transportation
strategy, transportation mode selection and distribution issues. Interviews were
completed mostly during year 2008 (one during 2009) and are the input for European
Union funded Tacis neighbourhood programme project. Four of the case companies in
our research work are medium sized (one of these being publicly listed), while one
represents an organisation being publicly listed and has several billion USD size in terms
of sales (increases once again the heterogeneity of responses). The cases reported in this
paper are verified by company management (all were typed after the interview and sent
over for check-up), in order that we have drawn correct conclusions from interviews.
This is standard practice in qualitative case research, which has been rather popular in
logistics management research during recent years (Häkkinen and Hilmola, 2005).
Figure 1 Comparison of main hinterland transportation mode infrastructure according to World
Economic Forum (2007)2 (see online version for colours)
1
2
3
4
5
6
7
Singapore USA Finlan d Russian
Federation
Ukraine China
Railroad (WEF)
Roads (WEF)
Russia and other emerging eastern economies of old members of Soviet Union hold
considerable difference in transportation modes and their infrastructural readiness, as
being compared to other countries. Generally it is argued that infrastructure readiness in
Russia is poor and transportation takes enormous share from overall end-product price
(e.g., see World Bank 2007). This is partly valid statement, but it should be remembered
that road transportation is in difficult situation, but railways e.g., in Russia and Ukraine
174 J. Saranen et al.
are in much better shape (see Figure 1). Still today, railways take significant part from
transportation volumes and are the main transportation mode in Russia (Federal State
Statistics Service, 2009). If pipeline transportation is taken into account, share is
approximately 40% and excluding pipelines railway’s share increases up to 90% (as
measured with tonne kms). Usage of railways is at very much higher level as compared to
Europe or even US (Vassallo, 2005). This has been identified in earlier supply chain
research too, where Prater et al. (2001) reported that metal industry transportation
between Russia and Ukraine was mostly completed with railway transportation mode,
having lengthy administrative procedures and forming major constraint on the flexibility
of the chain. Thus, it should be remembered that road transportation is taking increasing
share from shorter distance transportation in Russia (e.g., from harbour to terminal and
transportation to larger capitals, like St. Petersburg and Moscow) and during previous
years truck queues at the borders of Finland and Russia have been reported to be several
days and having lengths of 30–50 km in Finnish side (dealt also within Lorentz, 2008).
4 Case-study analyses
4.1 Subcontractor operating in Vyborg, Russia
Closed Joint Stock Company Trafo (ЗАО ТРАФО) was established in 1994. It is a
foreign-owned Russian manufacturer of customer designed transformers and chokes for
switching power supplies. It also subcontracts wire harnessing for numerous international
Original Equipment Manufacturers (OEMs).
Trafo manufactures inductive components and performs electro-mechanical
assembly. Company’s clients include Nokia, ABB, Ericsson, General Electric, Elcoteq,
Kone and Videoton (CJCS Trafo, 2008). The production facility is located in Vyborg,
Russia, close to the Finnish (EU) border and the Imatra warehouse (located in south-east
region of Finland). As presented in Figure 2, all raw materials travel through Imatra
warehouse. Trafo sells worldwide; also raw materials are bought globally. Production is
mostly exported to or via Finland, but some clients exist also in Russia. Sales
management is located in Helsinki, Finland.
The company employs 30 people in administration, three at the warehouse and from
150 to 200 people in production, depending on the amount of orders placed by their
customers. Distribution and tactical as well as strategic level decision-making of logistics
is completed in Finland, basically in Helsinki and Imatra premises. Reason to operate in
Vyborg is relatively simple – salary level of workers (mostly women – also the case in
electronics industry in general) in production unit is ranging from EUR 300 to EUR 500
per month. This is very low for example in Finland equivalent workers salary is 6–8
times higher.
Company uses an integrated enterprise resource planning (ERP) system supplied by
SCALA (the brand name for Epicor Software Corporation in CIS-countries), to control
activities, complete needed administrative tasks (purchase order, sales order and
manufacturing capacity management) and inventories across its operations. This system
can be accessed from Helsinki; Imatra and from the factory in Vyborg as well. The
official documents related to the business contracts that are needed by custom officials
are transferred to Kotka, Finland to DHL.
Transportation strategy in international supply chains – the case of Russia 175
Figure 2 Component, semi-finished and finished product flows of the CJSC Trafo
FIN
RUS
Vyborg
Production plant
Imatra
Warehouse
Suppliers
Clients
Russian
clients
Imatra/Svetogorsk b order crossing
point
The company uses its own transportation fleet for transports between the Imatra
warehouse and the production plant. In case of capacity shortage, additional
transportation services will be bought from Vyborg. Own fleet consists of two smaller
lorries with carrying capacity 1,300 kg, one larger lorry with carrying capacity of
4,300 kg, one 30 ton truck and four trailers. This enables that three trailers can be loaded
or unloaded, while one trailer is on the road. The smallest vehicles are used mainly for
transporting small size transformers and related items. For customer deliveries Trafo
employs different transport service providers depending on the situation. Case company
informed that during the last decade demands of Finnish and international clients have
changed in a way that more frequent deliveries are needed.
Trafo produces only to order. The monthly production volume does not change
considerably during the year. Typically 90% of the raw materials in Imatra warehouse
spend there less than a week. However, orders and deliveries in June, July and August are
affected by the summer holidays. The production in this period serves the longer, up to
one year orders, balancing out effect of the low demand during the period. In this case the
orders placed by the customers are gathered together for a period of a month and only
after that they are delivered. As a result, there is increasingly limited space at the
warehousing facility in Imatra towards the end of the summer.
The most serious problem perceived by the workers at Imatra warehouse is the time
needed for the flow of materials from Finland to Russia. In the month of May 2008, the
eastbound vehicle transit was moved to the Imatra/Svetogorsk border crossing point. This
has affected the waiting time on the border. Trafo has reacted by scheduling its transport
to Vyborg for Mondays and Wednesdays. The time needed for transit from Imatra to
Vyborg is usually approximately five hours and the return trip is made on the same day.
These weekdays are chosen to avoid eastbound transit traffic queues, which are mainly
concentrated on the weekends. In case of urgent deliveries smaller lorries are used as they
are not required to wait in queue.
176 J. Saranen et al.
Border-crossing cargo has often difficulties with transported quantities; minor
inaccuracies in reported quantities can lead to severe interruptions in transportation and
time consuming process bureaucracy.
Furthermore, the lower salary does not directly translate on higher profits and
efficiency. Benefits could be easily eroded with additional inspections, while control of
production related operations in Russia is very intensive; customs, finance inspection,
working conditions, fire department, etc. frequently visit production facilities (for more
see Hilmola et al., 2008).
4.2 Finnish marina industry company supplying products to St. Petersburg and
Russia
Steel end-product company Q-tech (fictitious name) is a dynamically expanding global
company specialising in marina and pontoon construction industry. Variety of solutions
ranges from light timber pontoon to heavy breakwaters complemented by wide selection
of marine accessories. The firm was established in 90s; in Q-tech Group there are
altogether 16 subsidiaries employing at the end of 2007 over 250 people. Production
facilities are found in five countries: Finland, Latvia, Croatia, Portugal and United Arab
Emirates, while their distribution network with dealer agencies covers 30 countries.
Manufacturing is about to being launched in Turkey and sometime in the future
significant investments into a production site are expected also in Russia.
The company minimises its costs incurred by complex project oriented orders by
employing manufacturing to stock, based on forecasts made in early winter and covering
three-four months until the summer, which is the busiest time for pontoons. The
production capacity is fixed to a specific level and is used in a stable manner all through
the year. The components needed for products are transported in small batches in a
continuous manner to the place of assembly and to stocks as needed. For example, from
Finland to Latvia every week two to three trucks are loaded with components and final
products. There is only one exception to transportation policy concerning customer
deliveries: the company does not provide transportation services to Russia. In this case
customers are obligated to take care of transportation by themselves.
Besides these measures evaluations are carried out in each delivery concerning the
quality – cost dimensions of transportation service offer and by opting for the most
optimal one available on the market. All the transportation planning tasks are assigned to
one person. In addition, there is a plan to take into full scale use in the near future the
enterprise resource planning system of Microsoft Navision that will lower the costs of
coordination inherent to production and transportation. As the diffusion of the company
will be based on organic growth and acquisitions of other producers, there is a great need
for an agile process of supplier and producer collaboration platform, which could be
based on collaborative planning, forecasting and replenishment framework. The final
objective is to reach a state of flexibility, where it is possible to launch order fulfilment
strategy of engineering to order (ETO). At Q-tech currently the distribution,
manufacturing and sourcing activities are implemented regionally, while the predominant
buffering method is keeping stock at premises of dealers. At the moment the supply chain
structure in which Q-tech is part of can be seen as ‘modularised’, i.e., with high level of
modularisation, but low level of postponement (see Figure 3).
Transportation strategy in international supply chains – the case of Russia 177
Figure 3 Supply chain structure of Q-tech
M
A
M
P M
Notes: M = manufacturing, A = assembly, P = packing.
Source: Tuominen et al. (2006, p.44)
Within the next five years the majority of production is going to be transferred to lower
labour cost countries such as Russia and Turkey, near to emerging potential markets to
minimise the distance between suppliers and the final customers. In so the majority of
final goods will be distributed to Mediterranean Sea region and Russia at the beginning of
the summer, while components will be supplied during the winter from Portugal, Latvia
and United Arabic Emirates. The entities in Finland will take more of role of a
coordinator and will be a place mainly for research and innovation activities.
On land the only transportation mode is the truck, while on longer distance sea
vessels are occupied. Railway is not used at any extent though in theory it should be
quicker than sea transport and more environmentally friendly than road transport. No
transports vehicles in the ownership of the company exist. The trucks or vessels needed
are accessed through leasing contacts. For not opting railways, the main reason is that the
components pertinent to marina or pontoon solutions are sensitive and have special
requirements with regard to conditions during transferring that are not met by railway
wagons. In addition, it was indicated that railways cannot integrate cost efficiency with
flexibility in relation to delivery.
4.3 Finnish metal-manufacturer supplying products to construction and
mechanical engineering industries in St. Petersburg and Russia
The case company supplies metal-based components, systems and integrated systems to
the construction and mechanical engineering industries. The company has operations in
26 countries and employs 15,000 people. Net sales in 2007 were EUR 3.9 billion in total.
According to the annual report for 2007, 21% of the net sales are from Central Eastern
Europe, Russia and Ukraine.
The company has a steel production in 12 facilities in Finland, Sweden and Ukraine.
Local production and insight into building practices translate into speed, quality and
delivery accuracy. Investments aim at providing total deliveries of highly prefabricated
construction products made near the customer. The company considers delivery accuracy
to be one of its strengths. According to the company, Russian customers expect a high
service level.
178 J. Saranen et al.
In Russia the company imports its products to St. Petersburg and Moscow itself and
sells them locally. The customs procedure requires that the products are physically
transported to the customs area. It is also possible to transport the products further to their
customer without an additional unloading/loading procedure. On the other hand, facilities
in the terminal area can be used to refining of the products. In summer time the volume of
exports to Russia is around 60 trucks loads per week. Roughly 40 of these are transported
to St. Petersburg, while the rest go to Moscow. The road transport is outsourced. The
company uses several transport companies and signs long term contracts.
The main material flow between production facilities is concentrated between
Southern Finland and Ukraine, which is served by a train connection through Russia. The
distance is 2,400 kilometres; the travel speed of the trains is around 300 kilometres a day.
The annual volume transported on the route is currently 20–30,000 tons. A one day
decrease in the turn time of wagon would equal a 6,000 tons transportation capacity
increase. Materials are partly transported to both directions; raw materials and ready
products. The order lead time of a train on the route is two weeks, as the international
information exchange between the countries involved is based on sending faxes. Special
wagons used in railway transport and they are long time contracted by the company.
Basic coal wagons with wooden fittings require a lot of time and expensive fitting
materials. Furthermore, the timber supports does not always last the coupling procedure
of the wagons used in Russia, which is based on connecting the wagons at a speed of
5 km/h.
The company is satisfied with the service offered by the railways including
handling of documents and tracking services. The company considers that train has an
advantage over road transports on distances over 200 kilometres. One advantage of
railway transports is the avoidance of traffic jams on the border, while the main challenge
facing railway transports is communication and lack of unloading terminals. A potential
way to speed up the total travel time has been carried out by organising the import
customs procedure. The information about an arriving train should be available to all
parties in the terminal. This could enable the seamless collaboration of the different
parties: cranes, custom officers and the local station officer. The overall efficiency
of train transports would improve, if terminals would have railway access. In road
traffic the driver companies the vehicle, which might serve as an incentive to
improve transportation lead time, while in railway transport wagons can be left on the
tracks.
4.4 Finnish steel-combination manufacturer supplying products to construction
projects in St. Petersburg and Russia
The case company, a Finnish steel-combination manufacturer supplying products to
construction projects in St. Petersburg and Russia, was established in the 1980s. In 2007
the turnover of the company was 81.3 million euros, the company has 260 employees.
The majority of the turnover comes from Finland and Sweden, while Russia accounts for
5 to 15% of the turnover. Steel frames are the largest product category. The annual
production volume of the company is 20 to 30 thousand tons. The company has several
production plants in Finland and Sweden. Currently no production capacity in Russia
exists.
Logistics cost is taken into account already in product design phase. The products are
configured for each project. In the design, the dimension of the modules and the total
Transportation strategy in international supply chains – the case of Russia 179
load carried by each vehicle needs to be considered. For Russian road traffic, it takes up
to three weeks to receive a permit to transport oversized loads. Permits are costly and are
granted for a specified vehicle.
The company does not own transportation equipment. Transports to St. Petersburg
and Moscow are completed using road transports. For loading of trucks the company
reserves one day, for unloading at the site two days are reserved. The turn to Moscow
takes a week; two trips to St. Petersburg can be made in a week. The transportation
companies are selected for each project separately. The company aims at fixing the
transport price for each project for the whole life time of the project.
The company considers delivery lead time, reliability of delivery and the quality of
planning to be their strengths. Construction projects follow a weekly schedule and
products are delivered to the site according to JIT principle. There is no storage after
production. However, if the site requires similar components over a longer period of time,
they may be produced in a batch and stored temporarily at the production facility.
Typically, detailed planning is still ongoing as construction work on the site has already
begun. There might be several projects on the way at the same time.
The company completed recently a production facility project, which production
phase took four months and required over 200 truckloads. Although railway has been
used for more distant destinations (Almaty in Kazakhstan), railway transports do not
fulfil the requirements of construction project in terms of flexibility. Furthermore, often
the projects’ locations do not have access to railroad and additional handling of the
products harms the products.
4.5 Finnish manufacturer of industrial filters supplying products to process
industry in Russia
The case company is a leading supplier of industrial filters for the process industries
utilising wet-processing in their production. The Finnish company was established in the
1970s. In 2008 the turnover of the company was 208 million euros, the company has 560
employees. 45% of the turnover comes from Europe, CIS, Middle East and Africa. The
share of the turnover which Russia accounts for has been rising. Customer companies
operate typically in mining and metallurgical and chemical process industries. The
company has production plants in Finland, Germany and the Netherlands. In addition to
in-house production, the case company leans on sub-contractor workshops. Currently, no
logistics facilities in Russia exist.
The products are configured for each project based on the manufacturing process
supported. Typical weight of a filter is from two up to 129 tons and height from 2.0 up to
7.6 metres. Filter prices typically range from EUR 0.1 up to 2.0 million euros.
Dimensions of the modules transported need to be considered already in the design phase,
as transportation cost accounts for around 20% of the total cost of the product. The
company does not own transportation equipment; the transportation company for each
project is selected separately. The transportation company selects the mode used, as a
general rule, road is used predominantly for shorter distances. Although the Finnish
production facility has a railway connection, in railway transports to Russia the wagons
are typically loaded on the Russian side of the border after a road transport leg.
In addition to filter sales the company aims at comprehensive cooperation agreements
with its customers including preventive maintenance, actual procedural services as well
180 J. Saranen et al.
as spare parts logistic planning and optimised spare parts services. In order to be able to
provide high quality after sales services, the company has a service centre with support
engineers and spare parts stock on each continent. In order to shorten delivery times and
improve service for its Russian customers, the company has announced opening of a local
warehouse for reserve parts near Moscow in 2009.
5 Discussion
In Table 2, summary of the transportation strategies of the interviewed case companies
is being presented. As can be seen from Table 1, road is the major mode of
transportation used over shorter distances. Railway is considered slow but reliable; it is
competitive over longer distances. The transportation task is typically outsourced by the
companies. The offering of the service providers are reviewed on regular basis. Only one
of the companies uses own fleet to serve production related flows. In just recently
published other case based research work (Ivanova and Hilmola, 2009), one logistics
service operator importing items to Russia (and other eastern markets; products
originating from Asia) argued that not owning the transportation fleet is not optimal in
this market in short-term (cost-wise), but volatility of economic growth makes it sensible
within long-term perspective (e.g., in late 90s and partially in current economic slow-
down, owning the fleet in emerging markets is not an asset). Further confirmation
concerning usage of outsourcing and not owning fleet was gained in this research; this,
among the diversity of transportation modes being used, is the major contribution of the
study. If fleet is owned, then it is limited to owning of railway wagons (metal
manufacturer) or owning some part of fleet between warehouses and production
(subcontractor).
Some of the companies let the customers take care of transportation exclusively in
Russia; this was particularly the case with marina and pontoon manufacturer Q-tech.
Although, company has already existed for nearly two decades, it has not been using that
much railways in its operations – this could explain, why customers are asked to take care
of transportation to Russia.
Some of the challenges in transport are related to customs procedures on the border.
This affects delivery lead times as well as the reliability of transports. Further challenges
in transportation are connected with over-sized deliveries which require special permits,
increasing transportation cost and decreasing flexibility. Companies face these challenges
by adapting their weekly delivery schedule and fleet used. Furthermore, the size of the
units transported is taken into account already in the product design phase. In after sales
services local service centres are introduced to shorten delivery times and improve
reliability.
Considering the large population of the greater St. Petersburg area exceeding
6–7 million inhabitants and the huge market and relatively cheap labour force potential
offered by it, the across-border business networks and subcontracting possibilities have
not yet been realised by the Finnish companies. The speed and reliability of the transports
on the Finnish-Russian border could be improved by a block train connection between
Russia and South-Eastern Finland. Such improvements in the infrastructure would
enhance regional collaboration by strengthen manufacturing networks of even smaller
sizes.
Transportation strategy in international supply chains – the case of Russia 181
Table 2 Summary of the transport strategies of the case companies
Case company Subcontractor
Marina
industry
company
Metal-
manufacturer
Steel-
combination
manufacturer
Process filter
manufacturer
Transportation
mode
Road Customer
takes care of
delivery,
typically road
Road except
railway for the
flow between
two
manufacturing
units
Road Forwarding
company
selection
based on
tendering in
each project
Fleet ownership In
procurement
and
distribution
outsourced,
own fleet
between
warehouse and
production
Customer
takes care of
delivery
Road
outsourced,
owns some
railway
wagons
Outsourced Forwarding
company
takes care of
delivery
Challenges Lengthy
customs
procedure at
border
Varying
transportation
requirements
Delivery lead
time
Special
transports
costly and
reduce
flexibility
Products
require special
transportation,
international
delivery lead
times in
service
logistics
Adaptation
strategy
Transports in
the beginning
of the week,
use of smaller
vehicles
Customer
takes care of
transportation
Improving
information
flow
Product design Product
design, local
service centre
Considerations
of alternative
modes
Might use
railway in the
future
Railway not
considered
due to lack of
flexibility and
product
sensitivity
Railway
access a
criteria for
new locations
Railway lacks
flexibility and
access,
additional
handling
harms
products
Railway used
over longer
distances,
border
crossing
typically by
road
6 Conclusions
6.1 Managerial implications
Based on the interviews conducted in the case companies, the recent development and
economic growth in Russia has affected the transportation sector. The customer
requirements have currently set higher standards in terms of speed, frequency and
reliability of delivery. Currently, road is the preferred transportation mode over shorter,
up to several hundred kilometre distances.
182 J. Saranen et al.
On the Russian transportation market road transports are typically outsourced. Only
one of the case companies owned road transportation capacity. The company used this
fleet to serve the critical two-way material flow between the warehousing and production
facilities. Because the material flow is stable the utilisation of the fleet is high. Also this
company relied on outsourcing other road transportation tasks. As the Russian road
transportation sector is highly competitive, transport companies and prices are reviewed
on regular basis. However, in case of longer projects, the aim is to reduce the risk by
fixing prices for the duration of the project.
Custom clearance and documentation requires special attention from the companies.
If the cargo does not equal the documents exactly, delay might be incurred. Based on the
interviews, some companies have adapted their weekly transportation schedules to
minimise queuing on the border. In urgent express deliveries, smaller vehicles are used to
avoid queues totally. The customs procedure and the nature of the competition on
Russian road transportation sector affect the service portfolio of some smaller companies.
In case of the pontoon manufacturer, the customer takes care of transportation. On the
other hand, the metal manufacturer interviewed imports it products to Russia and sells
them locally; as it wants to develop a local brand.
In some industries, the legislation concerning road transports affects already product
design. Oversized transports require special permits. These costly permits reduce the
flexibility of transports as the lead time getting such permit can take up to three weeks. In
case of vehicle break-down these can lead to reduction in reliability as each the permit is
load and vehicle specific.
6.2 Policy implications
The companies view railway as a reliable, but inflexible transportation mode. Its
applicability is reduced by limited access of the railway network. Thus, additional
handling is required, which in turn increases cost and risk of damage. In some cases, the
Russian procedure in which wagons are combined to compose a train adds to the
damages of the cargo; the wagons are connected at a speed of 5 km/h. Currently, railway
is favoured by larger and continuous material flows over longer transport distances. One
of the Finnish companies located close to the Russian border and having a railway
connection indicated that in case of using railway in Russian transports they load their
products on trains only after transporting them to Russia by road. Although railway
freight is under free competition within EU, railway traffic across the Finnish Russian
border is currently privilege of two operators (Mäkitalo, 2007). Companies typically
consider railway transports as an option for the future – also over shorter distances. Even
a 35 km. leg could be served by two weekly block trains avoiding customs queues on the
road. Another of the case companies uses access to railway network as a selection
criterion when choosing new terminal locations.
In practice international supply chains in Russia need to compromise both in terms of
leanness and agility. Currently road transport seems to be better able to serve the
requirements of the customers in terms of frequency and speed. However, custom
procedures reduce their efficiency. The unpredictability of the changes in custom
procedures and location of customs facilities makes international supply chain planning
harder. Currently railways are considered reliable but slow. In the future the share of
railway transports will increase, there seems to be potential efficiency improvement by
simply changing communication procedures.
Transportation strategy in international supply chains – the case of Russia 183
The Russian economy has been grown fast in recent decade time period. Typically the
volume of transports rises even quicker than GDP (Quinet and Vickermann, 2004). The
Russian Government supports this development by investing heavily in infrastructure. In
order to be able to improve the platforms for more sophisticated lean manufacturing
networks, developing economies first have to implement liberalising reforms into core
industry sectors, such as transportation and logistics. The success of international supply
chains on Russian territory will partly depend on how investments and changes in
procedures affect both the speed and the reliability of the flow of traffic on the borders.
According to Quinet and Vickermann (2004), the level of economic development is
connected to level of transportation infra- and infostructure. Russian and Chinese markets
are so attractive that enterprises are not afraid of investing more in those developing
regions of the world. It will be interesting to see if the Russian initiative in improving the
national transportation system will further increase the polarisation of regional industrial
development between the large metropolitan centres of Moscow and St. Petersburg
against the rural areas (see Quinet and Vickermann, 2004; Gulyani, 2001).
7 Further research
As a further research in this area, we have the intention to continue with the topic of
transportation documentation in the cross-border area – this was identified as one
stepping stone in the company interviews. This does not only concern transit import to
Russia, but also export of items and then items, which start from Finland continue to
Russia to be processed and thereafter return to Finland for packaging and final delivery.
During the last decade, time border traffic has concerned mostly import of items to
Russia through EU harbours and transportation systems overall, but in the near future this
flow could turnaround favouring more industrial needs and outbound traffic from Russia
to Europe rather than other way around. As could be noted, diversity of transportation
modes being used as well as transportation management overall, is a bit different from
current general practices applied in international companies for logistics flows.
Therefore, supply chain management practices need to be modified for this new
environment, which is partially a challenge for companies as well.
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Notes
1 For example, the ARIS platform provides modules for defining business strategies, modelling
and analysis of business processes, implementation of IT systems as well as control of current
business processes.
2 The evaluation is based on a survey, in which the quality of national infrastructure is measured
on a Likert scale from 1 to 7 (1 = underdeveloped, 7 = extensive and efficient by international
standards).
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One of the basic problems in logistic system design consists of supply chain structuring. The structuring is based on the determination of the number of elements in a supply chain, their variety, and the interrelations between them. Thus, structural complexity exists. An additional complexity is caused by the uncertainty of a real supply chain execution environment. In order to assess the potential ability of a supply chain configuration to adapt structurally, we introduce the term 'supply chain adaptation potential (AP)' and propose a method for its assessment based on the system entropy. The results show that the simultaneous assessment of the structural complexity and the AP can be used as an additional indicator to select the supply chain configuration while designing supply chains.
... In contrary Finnish export relies on the road transportation side (very significant part from the volume), and rail as well as sea has much smaller share (below 10% each). Previously conducted case studies from Finnish metal industry support statistics still (Saranen et al., 2010); outsourced road transportation is being favoured in large-scale, but long-distance and non-time sensitive deliveries could be completed using railways. ...
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