Areas of Focus
By Amar Ramudhin, director of the Supply Chain & Logistics Institute (SCL), and Don Ratliff, executive director of SCL
Higher fuel costs, slow steaming, the increasing trend toward bigger and bigger ships and the widening of the Panama Canal are some of the factors that are putting a lot of strain on the container shipping industry to the point that the current liner services may not be sustainable. This will have big impact on shippers that rely on frequent and increasingly time definite shipments. The big questions are how did the current condition of the industry come to be and what can shippers do to prepare for the changes ahead?
A bit of history: the idea for using shipping containers is attributed to Malcom McLean who got the idea in the 1950s while waiting for his truck to be unloaded onto a ship and thinking that there had to be a way to load ships in hours rather than days. This fundamental vision of speed and efficiency motivated the development of cellular ships, land based container cranes and faster container ships, and enabled the revolution of global trade between Asia, North America and Europe.
During the period from 2002 to 2008 global trade grew at a roughly linear rate of about $1 trillion per year and since most of this trade is transported on container ships, shipping lines were highly motivated to increase capacity in order to retain or increase their market share. They invested massively in bigger ships because the latter have more capacity and are more cost effective to operate (estimates vary from about 8% to perhaps as much as 30% on long hauls). The economic recession caused global trade to decrease from more than $15 trillion in 2008 to less than $12 trillion in 2009. This 20% drop in trade meant that there was suddenly an excess in capacity resulting in a drop of revenue for shipping lines. Slow steaming was introduced as a means of reducing operating costs. Modern container ships are designed to run at top speeds of about 25 knots. Slow steaming meant reducing their speed to about 20 knots or lower. When their speed is reduced the amount of fuel consumed per mile is reduced (e.g., a 20% decrease in speed results in about a 40% decrease in fuel consumption). Maersk line, which is one of the pioneers of slow steaming, claims that in 2010, 73 percent of the Maersk Line fleet was slow steaming at engine loads below 40 percent and this saved around 2 million tons of CO2.
While trade increased in 2010 and 2011, it remains well below what was expected before the 2009 drop. Slow steaming may have worked for the container lines in 2010 to offset much of the losses that they incurred in 2009. However, the $6 billion loss by the industry at the end of 2011 and the fact that the strategy is bad for the shippers are indications that this strategy is not sustainable. Slow steaming lengthens the trips and which means more in-transit inventory for the shipper. The result for more expensive products is that the increase in inventory cost is significantly greater. To make matters worse, many container shipping lines are adopting “super-slow steaming” at speeds of 12 knots or about 14 miles per hour. This more than doubles the in-transit inventory compared to running at 25 knots.
Today about 60% of all containerized cargo from Asia enters the US from the west coast. From there it travels mostly by rail to points east for further distribution. The other 40% travels through the Panama Canal to east coast ports. This “all-water” route is cheaper to the east coast but it takes 4 to 6 days longer and so shippers have more days of inventory in transit and thus higher inventory costs. With the widening of the Panama Canal in 2014, liners are betting on further reducing the cost of by using the bigger ships on this route. And ports all over the east coast are racing and spending large amounts of money to ensure that they are ready for the big ships.
So what should shippers do?
GT’s Supply Chain & Logistics Institute professional education course on Transportation and Distribution, the first to be held in GT’s Savannah campus, will give participants an overview of the complexities of transportation and distribution planning and educate them as to why this has become a critical corporate function. This course is focused on understanding the basic components of a global transportation and distribution system and its operation in terms of capacity development, freight consolidation, network alignment, and synchronization. It develops the principles, practices, and tools required to address all major issues and tradeoffs in domestic and international transportation including key financial and performance indicators for transportation and design of supply chains to minimize transportation and distribution costs.
Come join us in the beautiful coastal town of Savannah October 2-4, 2012. In addition to the course, participants will also hear from the key speakers such as the Executive Director of the Georgia Ports Authority, and tour the Savannah Port, the Intermodal Container Transfer Facility within the Garden City Terminal and the distribution facilities near port.
For more information, visit: http://www.scl.gatech.edu/professional-education/on-campus-courses/course.php?id=tdmgmt