Case# 3 Outcome Canna
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the Canaan Group Negotiation I will be playing the role of Joseph Russo
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Describe your Pre-Negotiation strategy and parameters (BATNA, ZOPA, AP, RP)
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CANAAN GROUP: PORT METRO VANCOUVER CONTAINER TRANS-
LOAD SERVICE
Professor Fraser Johnson wrote this case solely to provide material for class discussion. The author does not intend to illustrate
either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying
information to protect confidentiality.
This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the
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University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [emailprotected]; www.iveycases.com.
Copyright 2016, Richard Ivey School of Business Foundation Version: 2016-04-18
Immediately after parking his Tesla Model S in the company parking lot, Patrick Lo, president and chief
executive officer (CEO) of Canaan Group in Vancouver, British Columbia, grabbed his briefcase and
walked briskly to his office to begin work on a project that he felt offered a great deal of potential. It was
still early in the morning on Monday, January 11, 2016, and Patrick was finalizing his analysis of a
proposed trans-loading facility, which would be located 340 kilometres inland from Port Metro Vancouver.
If the new venture operated as Patrick hoped, it would simultaneously offer a lower-cost transportation
alternative for exporters and significantly reduce greenhouse gas emissions in the Lower Mainland.
Despite the potential opportunities, there were three important hurdles to overcome before successfully
launching the new operation. First, he needed co-operation from exporters and their shipping companies to
provide sufficient throughput of containers. Second, agreement from CP Rail to provide service, at a
competitive rate, was essential. Third, he would need to successfully negotiate a long-term lease for the
proposed site to justify the investment that would be required.
As Patrick examined the data from the pilot project that he ran in late 2015, he began to consider the
significant impact that the new terminal could have on the local transportation network. However, he was
most excited about the positive environmental impact of the project:
Similar to Elon Musks Tesla, I am trying to introduce an innovation that has the potential to
dramatically change my industry. It could represent a real game changer for the way that
companies transport their products to the port. If I can get the model to work, it will be a green
story that can benefit the Lower Mainland. However, I cant implement this new venture without
the support of the other stakeholders in the supply chain.
Patrick felt that he had collected enough information to make a decision. If he decided to proceed, Patrick
would need a plan on how to engage the various stakeholders to ensure success.
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CANAAN GROUP
Founded in 1981 by Paul Lo, Patricks father, as a freight forwarding company, Canaan Group (Canaan)
had grown to be one of the largest privately owned logistics companies in Canada. It provided an extensive
range of services for its customers, including global air and sea freight, customs brokerage, warehousing
and distribution, fully integrated courier service, cargo insurance, trade-aid consulting, real estate
development, and venture capital financing. Headquartered in Richmond, BC, the company also had
offices in Calgary, Toronto, Montreal, and Los Angeles.
Canaan Shipping Company handled approximately 50,000 TEUs each year, across a wide range of product
categories.1 Trans-Pacific shipments represented about 60 per cent of Canaans volume, while the balance
was split among Trans-Atlantic, South American, and Intra-Asia routes.
PORT METRO VANCOUVER2
Port Metro Vancouver was Canadas largest port. Operated by the Vancouver Fraser Port Authority, it
moved approximately CA$510 million3 in freight each day, supporting close to one in every five dollars of
trade in goods that flowed through Canada. The port offered a broad range of cargo-handling services,
supported by 27 marine cargo terminals, and was organized across five business sectors: automobiles,
break-bulk, bulk, container, and cruise.
Located on the southwest coast of British Columbia, Port Metro Vancouver managed approximately
16,000 hectares of water, more than 1,000 hectares of land and approximately 350 kilometres of shoreline.
It ranked as the third largest port in North America in total tonnage moved (140 million tonnes) and sixth
in terms of total annual TEU volume (2.9 million). Exhibits 1 and 2 provide a breakdown of inbound and
outbound cargo handled at the port. Coal, forest products and grain, specialty crops, and feed accounted for
63 per cent of the tonnage handled at the port. Trade with China, Japan, South Korea, India, and the United
States were the principle destinations for freight, collectively accounting for slightly more than one-half of
the total tonnage handled (see Exhibits 3 and 4).
The port managed an extensive network of rail lines and truck routes to efficiently move product. It was
responsible for 680 kilometres of rail line and 1,560 kilometres of truck routes on its property. Although
the total TEU volume was evenly split between rail and truck transport, inbound freight for export relied
on trucks for approximately three-quarters of the TEU volume, while approximately 70 per cent of
products imported were handled by rail, and about 92 per cent of imports eventually ended up on rail as
part of their journey to their final destination. A bitter month-long strike by container truck drivers virtually
shut down the port in March 2014. The strike ended when the provincial government tabled back-to-work
legislation.
Three Class 1 railroads served the port CN Rail, CP Rail, and BNSF Rail. CN Rail and CP Rail were set
up to provide on-dock service at the container and cargo terminals. Loading and unloading on-dock
1 TEU is a logistics term that stands for twenty-foot equivalent unit, which is a measure of a ships capacity. One TEU is
equivalent to a standard international shipping container, which is 20 feet long, 8 feet wide, and 8.5 feet high, for a volume of
1,360 cubic feet.
2 Port Metro Vancouver, accessed February 12, 2016, www.portmetrovancouver.com; 2015 Ports & Logistics Annual
Report, CRBE Research, 2015, accessed February 12, 2016,
http://f.tlcollect.com/fr2/215/82000/North_America_Ports_Logistics-Annual_Report-2015.pdf; Container Traffic Forecast
Study Port Metro Vancouver, June 2014, accessed February 12, 2016, www.robertsbankterminal2.com/wp-
content/uploads/Port-Metro-Vancouver-Container-Traffic-Forecast-Ocean-Shipping-Consultants-June-2014.pdf.
3 CA$ = Canadian dollar. All currency amounts are in CA$ unless otherwise specified; US$1 = CA$1.42 as of January 11,
2016.
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from Aug 2020 to Nov 2020.
Page 3 9B16D009
reduced freight handling, which improved transit times, decreased the potential for damage, and lowered
overall costs for the shipper. Reducing the amount of inbound freight handled by truck represented an
opportunity for Port Metro Vancouver in the following two ways.
First, reducing port-related air emissions was a major initiative. In 2007, it partnered with government
agencies and stakeholders to develop the Northwest Ports Clean Air Strategy, which had two primary
objectives: 1) Reduce diesel particulate matter emissions per tonne of cargo by 75 per cent by 2015 and 80
per cent by 2020, and 2) Reduce greenhouse gas emissions per tonne of cargo by 10 per cent by 2015 and
15 per cent by 2020. The port had invested in an air quality-monitoring infrastructure to capture and record
changes in air quality.
Second, noise levels at the port were a major concern. In 2014, 55 per cent of the complaints received
through the ports community feedback line were related to noise from terminals, tenants, vessels, trucks,
and rail movement.
THE CACHE CREEK TERMINAL OPPORTUNITY
A major issue facing Port Metro Vancouver was congestion and capacity constraints. In its strategic
planning document, Port 2050, the ability to grow the capacity at the port was identified as a key constraint
facing the organization. The availability of land in the Lower Mainland and the ability of the supply chain
to efficiently use the facilities were seen as the two most important factors affecting future growth.4
In 2014, British Columbia exported $12.4 billion in forestry products and $2.3 billion in agriculture
products.5 A significant portion of these products was shipped to overseas markets through Port Metro
Vancouver (see Exhibits 2 and 4). Trucks were most frequently used for the delivery of forestry and
agricultural products to the port from the interior of the province, contributing to congestion on local
highways and in the port infrastructure. Patrick estimated that that each year there were approximately
260,000 FEUs of lumber and logs and 230,000 FEUs of pulp trucked from Western Canadian producers to
Port Metro Vancouver.6
Cache Creek Terminal (Cache Creek) was a 220-acre7 privately owned inland trans-load and storage
terminal located approximately 340 kilometres northeast of Vancouver. Joseph Russo was the president
and CEO of Cache Creek, and had purchased the property in 2004, hoping to develop it into a trans-load
facility. Joseph was a successful entrepreneur who had spent most of his career working in real estate.
Cache Creek was adjacent to CP Rail and CN Rail mainlines, with approximately 9 kilometres of track on
the property that provided service to the CP Rail mainline. It was the closest large trans-loading terminal
outside the Vancouver Lower Mainland. In January 2016, the primary services provided by Cache Creek
were fleet management (e.g., rail car storage) and bulk storage (e.g., commodities, fertilizers, and industrial
products).
4 Deloitte Inc., Port 2050 Scenarios Update: Final Report, March 24, 2015, accessed February 15, 2016,
www.portmetrovancouver.com/wp-content/uploads/2015/03/2015-04-07-Port-2050-Scenario-Refresh-Final-Report-with-
appendices.pdf.
5 Government of British Columbia, Economic Forest Exports, accessed February 12, 2014,
www.for.gov.bc.ca/het/economics-forest-exports.htm.
6 One forty-foot equivalent unit (FEU) is considered to be two TEUs. An FEU is 40 feet long, 8 feet wide, and 8.5 feet high,
for a volume of 2,720 cubic feet.
7 220 acres is 89 hectares.
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from Aug 2020 to Nov 2020.
Page 4 9B16D009
Cache Creek completed a $6 million infrastructure project in 2014 to add a connection to the CP Rail
mainline, increase railcar storage capacity, and add new trans-load facilities and support tracks. It received
$3 million from the Canadian federal government to help fund the project.
Patrick felt that Cache Creek represented an opportunity to create a container trans-load operation, where
truckload shipments of forestry and agricultural products would be trans-loaded into containers and
transported to Port Metro Vancouver via rail. He believed his trans-load model provided an opportunity to
simultaneously reduce congestion in and around the port, lower costs, and improve sustainability
performance. Patrick was familiar with similar operations at the Fairview Container Terminal at the Port of
Prince Rupert, BC, and at the Inland Port in Greer, South Carolina, which provided trans-load rail service
to and from the Port of Charleston. Located approximately 200 miles inland from the Port of Charleston,
the Greer facility used Norfolk Southern Railways main rail line, handling approximately 60,000 TEUs
per year. Since its opening in 2013, the Greer facility had helped to relieve congestion at the Port of
Charleston while improving efficiencies. Patrick described how the Cache Creek facility would change the
flow of product to Port Metro Vancouver:
Our supply of empty containers is from Eastern Canada, and the delivery cost is $500 each. When
describing my vision for the container trans-load operation at Cache Creek, I like to use the
example of delivering lumber from a mill in Kamloops, BC, to a ship at Port Metro Vancouver.
Under the current system, the truckload of lumber would make a 350-kilometre journey from
Kamloops to a consolidation yard in Vancouver owned by the mills third-party logistics (3PL)
supplier, where it would sit in inventory. In the meantime, an empty container would be moved
from the railway yard to the 3PL consolidation yard and the lumber would be trans-loaded into the
container. When a firm delivery date is set through the ports reservation system, the lumber would
then be shipped to the dock. I estimate the variable costs of this supply chain model are about
$2,380 per container [see Exhibit 5].
The Cache Creek Terminal model can reduce the number of movements and take advantage of
lower-cost rail transportation. First, since CP Rail services Cache Creek, empty containers arriving
from the east can be dropped off at the terminal, thereby avoiding the need to truck containers to
consolidation yards. Cache Creek is approximately 90 kilometres from Kamloops, which is about a
quarter of the cost of trucking the load to Vancouver. We can trans-load the lumber in the
container and ship it from Cache Creek via rail to the port. If we can get enough volume to make
this worthwhile for the railway, my estimate is the rail transportation costs should be about $400
per container. Based on my estimates, the costs of shipping a container of lumber can be reduced
by approximately one-quarter, netting a savings of $655, excluding Canaans fees [see Exhibit 5].
A second advantage is the environmental benefits from substituting rail transport for trucks. Not
only will it help relieve congestion on the roads and at the port but CO2 [carbon dioxide] emissions
for rail, on a tonne-per-kilometre basis, are about 15 per cent of trucking. I estimate that at full
volume, the Cache Creek container trans-load operation will provide an environmental benefit
equivalent to removing 12,300 cars per year off the road in the Lower Mainland. This can be a
win-win from both an efficiency and environmental perspective.
THE PILOT PROJECT
To demonstrate the viability of the new venture, Patrick ran a pilot project from mid-July to the end of
September 2015. Working with CP Rail and Hapag-Lloyd, a large shipping line, Canaan shipped 30
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from Aug 2020 to Nov 2020.
Page 5 9B16D009
containers of pulp and lumber each week from Cache Creek to Port Metro Vancouver. Patricks objective
was to demonstrate the viability of the proposed model by validating operational efficiencies and on-time
delivery performance. Performance of the pilot project had gone well, confirming Patricks assumptions
for handling costs and delivery lead times (see Exhibit 5).
Based on the results of the pilot project, Patrick planned on a three-phase implementation schedule. The
start-up phase would involve one train per week carrying 200 FEU containers. Phase 2 would double the
volume with two shipments per week. When the project was running at full volume in the third phase,
Patrick expected Cache Creek to operate six days per week, with one shipment of 200 FEU containers to
the port each day. The new trans-load operation would require 5 acres of land at Cache Creek.
Canaan would need to commit resources to support container-handling operations, scheduling, and
administration. A yard manager and administrative staff for the trans-loading operation at Cache Creek
needed to be hired. Canaan would also need to purchase office equipment and put in a computer system.
The yard would require container-handling equipment, which could be leased, and a new pad for container
storage would need to be installed. The material handling equipment would include two container stackers,
each with capacity of 20 moves per hour for both unloading empty containers and loading full containers.
Patrick estimated that fixed overhead costs for administrative costs, including salaries, administrative
expenses, and lease payments would be $75,000 per month. The number of material handling operators in
the yard would be driven by container volume, and labour costs would be recovered through fees charged to
the shipper (e.g., the $400 container stuffing fee; see Exhibit 5). Initial capital costs were expected to be
$200,000.
PREPARING FOR NEGOTIATIONS
Patricks concerns turned to aligning the stakeholders collective interests and finalizing a deal that would
make Cache Creek a viable trans-load operation. Patrick described the situation:
We need to get CP Rail committed to the project at a competitive rate. They charged a fee of $900
per container during the pilot because of the small volumes. I expect a fee in the $400 range would
be more reasonable for phase 1. At full volume, I would expect the rate to be even lower.
The segment of the market with the best potential is export of forestry products and agriculture
products, such as grain and other crops. The major shipping companies, such as Hapag-Lloyd,
Yang Ming Marine Transport Corporation, K Line, Maersk Line, and China Ocean Shipping
Company (COSCO Group), manage transportation for the producers and their customers. They
will need to be convinced of the benefits of using Cache Creek before making changes to their
supply chain. In my discussions with Hapag-Lloyd during the pilot project, we had discussed a
preliminary total price of $1,825 per container shipped through Cache Creek, as established by the
cost structure set up in our base model [see Exhibit 5].8
I will need to negotiate a lease with Cache Creek, but it will need to be structured in a manner to
share the benefits and risks. We paid Cache Creek $1,000 per acre per month during the pilot. If
the project moves ahead, in addition to $5,000 per month in rent, they are expecting a royalty fee
for each container shipped as compensation for using the Cache Creek rail network. However, I
8 The shipping fee of $1,825 is the base model. The trucking cost in line 2 of Exhibit 5 would change based on the location
of the producer and the shipping fee would be adjusted accordingly. For example, if the trucking fee was $150 instead of
$250, the price to the shipper would be $1,725 instead of $1,825.
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from Aug 2020 to Nov 2020.
Page 6 9B16D009
am not prepared to enter into a long-term lease where Canaan assumes all of the risks. I believe
there is enough opportunity in this project where all the stakeholders can come out ahead. We need
to set a fair arrangement for the royalty fee based on our success in growing the business.
Canaan brings a combination of relationships with the producers, shipping lines and the railways,
and 35 years of experience in global logistics. We have the expertise and capabilities to manage a
large trans-loading operation that will make this operation a success.
As Patrick reviewed the data from the pilot study, he wondered what his next step should be. With which
stakeholder should he start his negotiation? What were his bargaining strengths and weaknesses? Were
there other stakeholders that should be engaged? Patrick knew that success would depend on the
willingness of each party to share the benefits and risks, and he wondered where to start.
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from Aug 2020 to Nov 2020.
Page 7 9B16D009
EXHIBIT 1: PRINCIPAL COMMODITIES INBOUND CARGO FOR 2013 AND 2014
(IN METRIC TONNES)
Commodity 2013 2014
Chemicals, base metals, and minerals 9,831,083 11,036,067
Consumer and related goods 5,474,762 5,644,872
Machinery, vehicles, construction, and materials 4,389,984 4,858,696
Forest products 3,784,769 3,579,434
Petroleum products 2,449,887 1,841,745
Processed food products 705,777 752,737
Animal products, dairy, and produce 559,380 586,282
Grain, specialty crops, and feed 171,678 181,117
Fertilizers 18,594 25,620
Coal 208 300
Total 27,386,122 28,506,870
Source: Port Metro Vancouver, Statistics Overview, 2014, 9, accessed February 12, 2016,
www.portmetrovancouver.com/wp-content/uploads/2015/03/2014-statistics-overview.pdf.
EXHIBIT 2: PRINCIPAL COMMODITIES OUTBOUND CARGO FOR 2013 AND 2014
(IN METRIC TONNES)
Commodity 2013 2014
Coal 38,171,011 38,105,611
Forest products 24,164,723 23,294,876
Grain, specialty crops, and feed 19,336,134 23,168,623
Fertilizers 9,446,650 9,961,923
Chemicals, basic metals, and minerals 4,738,680 6,062,738
Petroleum products 5,371,478 5,525,025
Consumer and related goods 2,201,873 2,171,933
Processed food products 1,434,562 1,140,004
Machinery, vehicles, construction, and materials 1,021,821 993,081
Animal products, dairy, and produce 735,896 698,142
Total 106,622,828 111,121,956
Source: Port Metro Vancouver, Statistics Overview, 2014, 10, accessed February 12, 2016,
www.portmetrovancouver.com/wp-content/uploads/2015/03/2014-statistics-overview.pdf.
For the exclusive use of N. Martinez, 2020.
This document is authorized for use only by Nadreen Martinez in MS in Logistics & Supply Chain / Negotiating Fall 2020 Version 1 taught by NICOLO ALAIMO, Florida International University
from Aug 2020 to Nov 2020.
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EXHIBIT 3: PRINCIPAL TRADING ECONOMIES INBOUND CARGO FOR 2014
(IN METRIC TONNES)
China 7,461,278
United States 2,104,743
South Korea 1,530,060
Morocco 915,051
Taiwan 698,729
Japan 679,226
Mexico 596,663
Hong Kong 444,135
Thailand 415,413
India 237,060
Source: Port Metro Vancouver, Statistics Overview, 2014, 13, accessed February 12, 2016,
www.portmetrovancouver.com/wp-content/uploads/2015/03/2014-statistics-overview.pdf.
EXHIBIT 4: PRINCIPAL TRADING ECONOMIES OUTBOUND CARGO FOR 2014
(IN METRIC TONNES)
China 24,149,633
Japan 15,795,649
South Korea 12,382,309
India 4,981,500
United States 4,852,856
Brazil 3,600,859
Chile 2,656,862
Indonesia 2,405,304
Taiwan 2,361,706
Bangladesh 1,329,078
Source: Port Metro Vancouver, Statistics Overview, 2014, 13, accessed February 12, 2016,
www.portmetrovancouver.com/wp-content/uploads/2015/03/2014-statistics-overview.pdf.
EXHIBIT 5: FINANCIAL ANALYSIS OF VARIABLE COSTS
Current Cache Creek
Model
1. Empty container shipped from Eastern Canada and
repositioned at Vancouver rail yard
$ 500 $ 500
2. Truck lumber to trans-load yard 1,050 250
3a. Truck empty container from rail yard to trans-load yard 140
3b. Internal rail movements 75
4. Container stuffed at trans-load yard 400 400
5. Container delivered to dock 140 400
6. Dock charges and reservation fees 100 100
7. Dock demurrage and 3PL storage fees (average) 50
Total $ 2,380 $ 1,725
Note: 3PL = third-party logistics supplier
Source: Company files.
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This document is authorized for use only by Nadreen Martinez in MS in Logistics & Supply Chain / Negotiating Fall 2020 Version 1 taught by NICOLO ALAIMO, Florida International University
from Aug 2020 to Nov 2020.
