Transparency Issues Within a Transport Buyer and Provider Relationship

Transparency Issues Within a Transport Buyer and Provider Relationship

Eirill Bø (Norwegian Business School, Norway)
DOI: 10.4018/978-1-7998-2867-9.ch004


Transport is an important function in the supply chain. This chapter focuses on how to buy a transport service, how to form a transport contract, and how a transparent relationship will influence the risk and the relationship between transport provider and buyer. By developing a decision support tool (DST-model) and calculating the cost and the time parameters, the right price and the cost drivers will appear. The cases described in this chapter are a large Norwegian wholesaler for food, distribution to the retailer, and two Norwegian municipalities collecting household waste. In these cases, the buyer and the provider are acting blind in setting the transport price. This means that there is a huge risk for either a bankruptcy by the transport provider or an overpriced transport for the buyer.
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Transport is an important function in the overall supply chain and stands for a large share of the overall logistics cost. Trends like centralized warehouses and increased globalized purchases has led to longer distances and increased transportation. The complexity in the supply chains has increased (Christopher, 2012), which has led to the need for a new approach for transport cost analysis. Transport is among the largest controllable cost factors in the supply chain. (Bergmann & Rawlings, 1998) A traditional view of transportation, by practitioners, is that the cost of transportation is a necessary evil and the only way to reduce cost is by putting pressure on the transport provider to lower the price. . (Morash, 1987) (Bowman, 1994) (Mongelluzzo, 1999) (Hannon, 2005a) (Smyrlis, 2005) (Armstrong, 2006) (Trunic,, 2006. ). Competitive pressure is often the drivers of risk. In order to improve competitiveness, reduce costs, and increase or maintain profitability the transport providers are taking a “calculated risk” (Svensson, 2002)in order to get a contract. By academics, there is a new focus and interest on transportation cost and relationships between the transport buyer and provider. (Sahay, Halldórsson, & Skjøtt-Larsen, 2006) (Halldórsson & Skjøtt-Larsen, 2004; Langley, 2007) There is a need to change the traditional practices when buying a transport service from a price focused perspective to a perspective were transportation is seen as a mutual value-adding benefit in the supply chain. (Hannon, 2005a; Harrington, 1997) A new focus on analysing how the transport price can be determined and to visualize the real cost drivers in a transport arrangement has emerged. To be able to analyse the cost and the cost drivers, a transparent approach is necessary. A transparent approach means that all necessary information about both the cost structure and the time parameters in the transport arrangement needs to be visualized. This is often seen as sensitive information from the service provider side, but it is necessary to obtain value creation in the transport arrangement. (Lamming, Caldwell, Harrison, & Phillips, 2001) The relationship between the transport buyer and provider can be characterized as an agency relationship. (Logan, 2000). The transport buyer will act as a principal and the service provider as the agent. Agency theory (Eisenhardt, 1989) tries to solve two problems in an agency relationship; goals of the principal and the agent are in conflict and second it is complicated for the principal to verify the agents actions. The price is the conflict area between the transport buyer and provider, and it is often complicated for the buyer to know the transport providers costs and practical actions in the relationship. An important focus in the principal-agency theory is to set up a contract to share the risk between the partners. (Bergen, Dutta, & O. C. Walker, 1992; Eisenhardt, 1989).

The further discussion in this chapter is based on four articles and one chapter in an academic book within the area of relationship between a transport buyer and provider. An overview of the articles is shown in the table below;

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