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Shipping Innovations Impact

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New logistic concepts such as globalization, Just-In-Time (JIT) and outsourcing have created the need for the establishment of a complex international distribution chain. Its ultimate goal is to allow shippers to place the right product on the manufacturing or retail floor anywhere in the world at the right time and the right price. As a result, the global shipping industry is driven by innovations which impact the development of the global supply chain in order to drive costs down as well as to meet customers' requirements. []

Innovation is the successful utilization of a new product, market, service, practice or system, creating commercial benefits. An invention or something new as such is not a goal, but a means to create benefits. It follows that innovation can only be identified, after a successful implementation. []

This assignment will examine four (4) key shipping innovations: (a) "Containerization", (b) "Ships' sizes", (c) "Transshipment hubs", and (d) "Slow steaming" and their impact on the on the global supply chain.


Containerization has become one of the biggest innovations that changed not only commercial shipping but on a larger scale, the world economy.

Container ships have played a "critical role in allowing the world's economy to assume global dimensions".[] Before containerization, costs for (a) freight, (b) port operations and (c) cargo handling were the highest expense. About 60-75% of the cost of transporting cargo by sea was made up of portside costs, while study of a specific ship voyage proved cargo handling expenses were about 37% of total costs.[] Shipments consisted of different types of tare including pallets, wooden crates and others that required special hoisting and were labor intensive at both ends of the supply chain; commodities were handled many times before reaching the end customer and exposed to different risks including theft.

Marc Levinson sates that in 1961, ocean freight costs accounted for 12% of the value of U.S. exports and 10% of the value of U.S imports. [] This situation was a real show stopper for the development of world economy and international trade, especially in manufacturing industries since logistics costs were too high. World manufacturing industries concentrated in North America and Europe were selling their products locally and proximity to the markets was one of the main factors. This prevailed until 1955 when Malcom McLean, showed that individual pieces of cargo should be handled only twice at their origin and at their destination, adapting ships operated by Sea-Land company to transport truck trailers.[] In 1966 his company made the first international voyage to Europe and began the containerization of international trade.

Container shipping became an independent shipping market like tankers or dry bulk. Introduction of intermodal shipping containers and advent of containerships required revolutionary upgrade of the whole logistics infrastructure including ports, railway terminals, etc.

Containerization eliminated many operations that were needed in the past, resulting in tremendous drops in the number of dock workers on the U.S. East Coast falling by over two-thirds from 1952 to 1972, and the United Kingdom falling from over 70,000 to under 10,000 between the early 1960s and the late 1980s.[]

Containerization caused a real boost in the world manufacturing industries and became one of the locomotives of globalization. Emerging economies enjoyed the results of the advent made by McLean in the mid fifties of the last century; their resources and competitive advantage in labor and production costs became available for the international brands. The role of transportation component in global supply chain is increasing. Tendencies for outsourcing and relocation of fabrication activities make the container transport really vital for the world economy. Between 1990 and 2008, container traffic has grown from 28.7 million TEU to 152.0 million TEU, an increase by about 430%. []

However, the general conclusion is that world trade is growing at more than double the growth increase of the world economy, that trade using containers is growing at about triple the increase of world GDP growth.[]

Like any innovation i.e. product or service, containerization can be described from a Product's Life Cycle (PLC) view point. Container trade is the youngest innovation in the shipping market; therefore periods can vary even in researches of the same authors. Professor Rodrigue provides the following PLC stages for containerization:

Introduction (1958-1970)

Adoption (1970-1990)

Growth (1990-2008).

Maturity (2008-).[]

Another study undertaken by Rodrigue and Notteboom provides another version of PLC of containerization. The S-curve in includes the peak growth in 2002-2010. It also reflects a great uncertainty of the future of the maturity phase of PLC. []

Peak growth relates to the boost triggered by the "Chinese factor" in 2002-2010. The maturity phase heavily depends on macroeconomic issues i.e. world economy crises and shipping cycles. and reflect the container shipping market trends in 2006-2010.

Drewry experts believe that Global container traffic bounced back in 2010 and will continue to increase by 8% to 9% in the next few years. []

Currently containerization has two main trends: economies of scale i.e. bigger containerships and terminals; and consolidation i.e. the top-10 companies together have more than 50% market share.

Ships Sizes

In the last 50 years seaborne trade has grown steadily at 2-3% per year. Whilst bulk trade has grown at only 1-2% per year, container business has been far more dynamic and container movements have expanded at 6-8% per annum. To reduce operating costs by achieving economies of scale, carriers have increased their vessel sizes.

The emergence of large-sized ships has two important effects on international shipping; ship size not only determines competitive power in the shipping industry, but also becomes a major criterion in determining the size of a port. Thus, the issue of ship size has important implications for both shipping and ports, and thus for international logistics as a whole. []

Increases in the size of the ships leads to intense competition and economies of scale, especially container fleet. The capital cost per container slot falls as vessel size increases, while the ratio of crew to carrying capacity and the consumption of fuel per unit of cargo carried also decline as vessel size increases.

Stopford suggests that although the sort of "size creep" is a pervasive part of shipping economics, it can take many forms. The average size trends for tankers, bulk carriers and gas tankers show some different patterns; the average size of crude oil tankers shot up in the 1970s, but is smaller today than it was twenty five years ago. The same applies to gas tankers, the reason being the changes of the commercial environment.

Bulk carriers behaved quite differently from tankers. There was no spectacular increase in size. Rather the average size crept steadily upwards, increasing by 60% between 1975 and 2002, an average of 2.2% per annum. Today the standard Capesize bulker, the biggest vessel, is 175,000 - 180,000 dwt, compared with 120,000 dwt thirty years ago, a 46% increase. There are a handful of 300,000 dwt bulk carriers but these are used in specialist trades. []

Until end of 20th century the containership fleet followed a very similar pattern to bulk carriers. However in the last 10-15 years the containership size index has drawn ahead of the bulk carrier index.

The tendency for ship size to increase re-emerged in the mid 1990s, several owners choosing to order vessels that were too large to transit the Panama Canal, thus sacrificing operational flexibility. Hundreds of these ships are now being delivered or are on order for every major container shipping line. []

The attraction for shipping lines, is a lower cost per container to carry cargo on large vessels, if they are reasonably full. That logic has seen a doubling in the size of the largest container ships since 1988, when the first post-Panamax container ship, a ship too large for the Panama Canal came into service.

But such ships pose challenges for container ports' organization and for the supply chain that will carry the containers. The new, larger ships load and unload larger cargo volumes in ports at one time, putting extra strain on storage areas, making cargo sorting more complex and putting extra load on truck, rail and waterway systems that transfer the cargo onwards. Vessels' patterns of port calls and routes also change radically.

Serving mega-size container ships presents several problems for ports including ensuring: adequate deep water (including environmental concerns related to required dredging), wider channels, deeper berths, suitable high-speed cargo-handling equipment (including longer out-reach post-Panamax sized, quay-side gantry cranes), a highly productive and reasonably priced labour supply, suitable berths for coastal feeder vessels, and good road and rail intermodal connections to inland destinations.

Intense competition has compelled ship owners to adopt innovative, productivity-enhancing and cost cutting strategies. Successively larger vessels have been employed on mainline East-West Northern Hemisphere trades. In their search for cost reduction and faster transit times, lines have reduced the number of port calls, leading to the growth of 'hubs' or 'load centers' and the evolution of feeder networks.

Big ships are fascinating, especially really big ships like the Malacca-Maxes. But we need to keep a sense of balance. Stopford in his research discover following five points. Firstly, economies of scale diminish, beyond 3000 TEU and over 8000 TEU the savings become immeasurably small. Secondly, there are significant diseconomies due to the cost of dredging, congestion, distributing cargo from hubs and associated logistic difficulties. Thirdly, there are massive economies to be made by upgrading ship sizes in the small and mid size trades. Fourthly, the trading world is broadening and this will favor mid size ships. Fifthly, a business dominated by logistics operators is likely to value the flexibility offered by smaller ships. []

Transshipment Hubs

The supply chain of maritime transportation has experienced important changes during the last 25 years and several ports have specialized in the concentration of transshipment activities. Ocean going containers ensure flexibility of shipments and several ports are consolidating their status as hub centers. [] Opportunity exists to create regional logistics hubs to improve connectivity access to global supply chain, create value added export that could reduce the imbalance between import and export gap. []

The structure of the global marketplace requires that goods and materials be delivered not only to the exact geographical location where they are required (in effect, applying the "door-to-door" system) but also within a very precise time frame. Today, goods in transit are carefully factored into the supply chain, a development that underpins the importance of transshipment hubs operating to very high standards of efficiency and effectiveness. []

From origin to final destination, goods may often have to be transshipped (on various modes) 5 or 6 times. Recent statistics show that approximately one quarter of containerized traffic in port relates to transshipment (Peters, 2000). []

Further research also shows that although sea-leg costs may have been going down in real terms as a result of economies of scale in liner shipping, door-to-door costs have been increasing. And this without taking into account the external costs of road transport as well as of the fact that the use of road capacity is cheap in so far as it does not as yet allow the recovery of infrastructure investment costs. It thus becomes increasingly clear that economies of scale in shipping are countered by increasing diseconomies in terms of door-to-door costs. []

Transshipment services are now widely used on major trade routes. According to shipping industry statistics, about 23% of all port container handling movements in 2001 came from transshipment, compared to 7 just 12% in 1980 (Damas).

This is mainly due to the following reason (Baird): the increase in ship size has forced carriers to seek higher levels of return from their assets, especially so for the mega container ships of 6,000 TEUs or higher. This has led to the end of calls to ports with a lower trade cargo volume, justifying the need for transshipment services.

Indeed, in the case of Singapore which is already a major transshipment node, PSA Singapore develops 5 new berths with drafts of 15m at her Pasir Panjang Terminal. The new berths will add to PSA Singapore's existing 37 container berths, an increase of 13.5% in berth capacity, and are expected to boost current annual box handling capacity by 20% from 20 million TEUs to 24 million TEUs. Frankel has also commented that the objectives of transshipment are not just restricted to total cost reduction, but also to improve the just-in-time delivery of cargo, reduce in-transit inventory, and make the total origin-to-destination movement of containerized cargo more seamless. Transshipment is thus not just a logistics convenience measure, but also an opportunity to add value to the goods transshipped.

PSA Singapore, for instance, has recognized the importance of the value-added proposition of the transshipment hub. It launched a new service called N2N Mobile Hub that allows shippers to use the PSA container yard as a temporary storage space for their containers. This helps to eliminate unnecessary transport costs and time delays incurred in draying containers away from the hub to external yards or warehouses. Containers under the N2N hub concept arrive at the PSA's yard with no onward carrier nominees and no set destination. Customers are allowed to route the containers to final destinations based on actual demand requirements. This reaps significant advantages in the risk pooling of inventory, as the cargo's final destination can be delayed until the containers reach the PSA port. []

The trend toward larger containerships also makes it more difficult to choose between hub port and feeder port strategies. This trend is driven by the continued growth in container shipping and increased deployment of mega-ships on major trade routes. The time-sensitive operating practices of such mega-ships mean that they require full loading capacity so that they can efficiently call at major hub ports with minimal dwelling time. []

However, increased port costs and heavier reliance on feeders could erode the operating cost savings because bigger vessels must spend more time at ports, but make fewer calls because of the draft constraints at many ports. For ports to successfully meet the challenges stemming from bigger vessels, they must invest a great deal in the improvement of terminal facilities and landside intermodal access. In addition, to achieve more feeding to serve regional trades from a hub and also to bring in containers to fill mega vessels, vessels have to be spending more time and money at port and incurring more marketing costs. []

The value of the transshipment hub operation is largely determined by the trade-offs of three factors:

the cost of loading/unloading operation at the hub

the cost of detaining goods at the hub, and

the cost of material/inventory in transit. []

Therefore we can conclude that the utilization of the transshipment system is justified from the perspective of cost effectiveness when the in-transit inventory cost dominates the total cost.

Slow Steaming

For the past decade, fuel consumption and emissions from the shipping industry have increased drastically as shown in below, with fuel consumption varying with the speed a ship is travelling. Put into simple terms, the faster a ship goes the more fuel it burns with those last extra knots of top speed achieved. Ship-owners are currently facing a dilemma with the explosion in fuel prices increasing yearly. Shipping companies could try transmitting this increase to their customers, but the latter would be sensitive to surcharges. []

A solution to less fuel consumption and less CO2 emissions would be slow steaming - at lower speeds a ship encounters less resistance and therefore moves with less effort. Maersk Line began innovating in slow steaming way back in 2007 with a target to reduce CO2 emissions by 12.5% by end 2009. [] This company managed to reduce them by about 7% between mid 2008 and end 2009. [] Slow steaming saves money, carbon emissions and can give clients a more reliable date of arrival. []

A reduction in a ship's speed by 20% will mean that the ship moves between 20 to 22 knots instead of the normal speed of 25 knots which will use 40% less fuel and reduce CO2 emissions. To compensate the decrease in speed, extra vessels are added to each route and although the number of vessels is increased it still gives a reduction of emission by about 7% per container moved, thus decreasing the miles travelled in a year for these vessels resulting in a longer lifespan of the vessels' machinery.[]

In mid 2009 Maersk proved that the two-stroke engines on its container vessels were able to run continuously at low loads ensuring a more flexible and energy efficient vessel operation resulting in 10 to 30 percent reduction in fuel and CO2. This leads to an annual saving of about $1 million for a post-Panamax Container vessel while reducing CO2 by 10,000 tons and fuel by 3,500 tons. [] Reducing fuel cost would imply lower shipping rates, but shipping lines are reluctant to minimize these savings and afford them to their customers.

Transport rates are not necessarily the largest cost. Reducing the transport rates can have a negative impact on the supply chain. A reduction in freight rates can increase the cost for distribution, for example, lower freight rates might involve feeder vessels, thus reducing trucking to the most efficient port. Feeder vessels are cheaper but increase the transit time and thus the savings from freight rates is offset by holding the inventory in-transit longer resulting in higher inventory cost. This also affects cash flow, that is, a longer transit time result in later delivery and thus the later the shipper gets paid. Cash is a limited resource and is a shipper's main business activity. []

NITL claimed that slow steaming had a negatively affected supply chain. As transit time is longer the vessel capacity have decrease, there is shortage in containers and equipment and meeting customers' demands is more difficult. They also claimed that a key aspect of supply chain is that transit time's affects inventory. At the beginning slow steaming rapidly reduced inventory, thus shipper found it difficult to fill up their empty stores and harder for manufacturers' production lines to meet the demand in a timely manner. []

Transportation of goods is repeated many times throughout the supply chain by different parties from raw material to the consumer. Thus shippers look at slow steaming as an incentive to move their containerized cargoes. []

Manufacturers depend on inbound transportation to deliver raw materials for production, in particular when goods are in a Just-In-Time environment. Delivery of goods in time is crucial to avoid unnecessary production costs. Delivery time usually is between 4 to 6 weeks and it's not always possible to make advanced planning. Transit times could increase by another week with slow steaming and thus making it more difficult for production planning. This will result in delays of the products and could disarray manufacturing, ending very costly. On certain products this can be avoided by building inventory, nevertheless a manufacturer would incur an inventory holding cost. []


Containerization is an innovation that triggered the processes that led to entirely new logistics processes. The advent of containerization is mainly due to the need for a tool that could reduce logistics costs which led to the repercussion in handling/transportation part of the global supply chain. The introduction of container vessels meant larger cargo volumes per port call and shorter handling times per ton. []

The ability of exporters and importers to effectively connect with international markets depends partly on the performance of the entire supply chain in terms of cost, time, and above all, reliability and predictability. The introduction of bigger ships could reduce the carbon footprint of shipping exports and imports. Maersk Line, has ordered ten of the world's largest and most efficient ships and delivery is scheduled for between 2013 and 2015, which will change completely the shipping industry's understanding of size and efficiency. They are called the 'Triple-E' class for the three main purposes: economy of scale, energy efficiency and environmentally improved. Besides setting a new benchmark for size, they will also surpass the current industry records for fuel efficiency and CO2 emissions per container moved by producing 50% less CO2 per container moved []. This is being acclaimed across the shipping industry as it sets new standards in fuel efficiency and reduced environmental impact.

Transshipment in container shipping logistics offers greater flexibility, potential cost savings, as well as less time from origin-to-destination. But to be effective, transshipment must be effectively designed. Most importantly, it must be highly efficient. In many cases the cost of transshipment is not justified by savings in shipping costs.

Institutions and corporations have invested and researched the economic and environmental impacts of slow steaming. Maersk and COSCO have proved that slow steaming does save fuel and cut down greenhouse gas emission and also save money. It is also a turnaround for the global fuel crisis, laid up ships and oversupply of tonnage worldwide. []

Group Assessment

The compilation of this assignment has been achieved with the equal contribution of all four (4) group members. Each one of our group members contributed based on Module learning and sharing personal experience exchanging a different way of thinking to select the key innovations.

To select the key innovations we put the following questions:

How global supply chain was before the selected key innovations?

To what extent these innovations impact the development of the global supply chain?

What are the key advantages of these innovations?

To achieve assignment requirements we placed deadlines for the compilation of assignment on time as well as we provided each other useful links and sources concern the selected key innovations impact the global supply chain.

Furthermore in order to achieve a most accurate evaluation of our sources, we exchanged ideas and proposals, we made corrections and amendments on each individual piece of work.

Finally all together we contributed to finalize the formal version of our assignment after reviewing several draft versions and making several corrections.

All group members efficiently contributed as a team.

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