Transport Modal Selection and Inventory Levels in the Context of Global Supply Chains

Abstract

In this dissertation, I study the transport modal selection in global supply chains and its effects on operational performance. First, I examine the factors that affect the transport modal selection and propose that revenue drivers and cost drivers of decision makers determine their transport modal selection in pursuit of profit maximization. Then, I study the effects of the use of air shipping in export on shippers' operational performance in terms of inventory levels. In the first essay, this study examines the macro and micro factors that affect the decision of transport modal choice in global supply chains. The factors affecting modal decision are classified as the characteristics of industry, mode, shipment, and region. This study proposes that the decision maker of the modal choice aims to maximize its own profit, taking the revenue drivers and cost drivers into account. The results show that both importers and exporters use more air shipping for high-value products and when there is a positive sales surprise. Large importers and exporters have a smaller proportion of air shipping compared with small ones. While an importer's modal decision is highly associated with demand dynamics, an exporter's decision is more determined by gross margin and cost of capital but less by demand variation. In the second essay, this study examines the effects of air share on manufacturing inventories. As globalization expands a firm's geographic coverage of business, the literature indicates that globalization has led to higher inventory levels due to longer supply chains. The experience in the U.S. domestic market showing that air transport plays a more important role in the practice of JIT after the deregulation in 1978 could be applicable to global markets. This study finds that the usage of air shipping in export can effectively reduce manufacturers' inventory levels at a diminishing rate. In addition, transportation modal selection is associated with profit maximization. It is found that the demand variation contributes to more use of air shipping. In addition, higher gross margins, cost of capital, and the relevance to timeliness facilitate firms to use air shipping to capture the demand and shorten the cash cycle. Furthermore, the industries with larger major players have higher shares of ocean shipping because of risk pooling advantage. For practioners, the results are used to develop guidelines for transport modal decision including the breakeven point of carrying costs based on total cost minimization and optimal air shares based on profit maximization. This study reiterates that a firm should pursue profit maximization rather than total cost minimization only.