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Chapter 40

STRUCTURE AND OPERATIONS IN THE LINER SHIPPING
INDUSTRY†
H.E. HARALAMBIDES
Center for Maritime Economics and Logistics (MEL), Econometric Institute, Erasmus University Rotterdam, PO BOX 1738, 3000 DR Rotterdam, The Netherlands

1. Introduction
Shipping is a global service industry that by general acknowledgement provides the lifeline of international trade. Suffice it to say that, due to the morphology of our planet, 90% of international trade takes place by sea. Technological developments in ship design and construction, and the ensuing economies of scale of larger ships, have also promoted trade – particularly those of developing countries – by making economical the transportation of goods over long distances. This has expanded markets for raw materials and final products and has facilitated the industrialization of many countries around the world. Often, international ocean transportation and information and communication technologies are referred to as the two basic ingredients of globalization (Stiglitz, 2006). Traditionally, the shipping industry is categorized in two major sectors (markets): the bulk shipping sector – engaged mainly in the transportation of raw materials such as oil, coal, iron ore and grains – and the liner shipping sector (involved in the transportation of final and semi-final products such as computers, textiles and a miscellany of manufacturing output). From a market structure point of view, the two sectors are as different as they could be bulk shipping uses large and unsophisticated ships, such as tankers and bulk-carriers, to transport goods in bulk on a contract basis. The service requires minimal infrastructure, and in this respect, it resembles a taxi service whereby the contractual relation between passenger and driver (cargo owner and ship owner) expires upon the completion of the trip. The industry is highly competitive with prices (freight rates) fluctuating wildly even in the course of a single week.

†

The first edition chapter was co-authored with A.W. Veenstra

Handbook of Transport Modelling, Edited by David A. Hensher and Kenneth J. Button © 2007, Elsevier Ltd

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Modeling in bulk shipping is therefore focused on the estimation of demand and supply functions and freight rate forecasting. For a good literature review, see Haralambides et al. (2005); Veenstra (1999); Stopford (1997); Beenstock and Vergottis (1993); Wergeland (1981); and Norman (1979).

On the contrary, liner shipping is geared to the provision of regular services between specified ports, according to timetables and prices advertised well in advance (Haralambides, 2004; Jansson and Shneerson, 1987). The service is in principle open to everyone with some cargo to ship, and in this sense, it resembles a public transport service, like that of a bus or a tram. The provision of such a service – often of global coverage – requires extensive infrastructure in terms of terminals and/or cargo handling facilities, ships, equipment, and agencies. For instance, the provision of a weekly service between Europe and Southeast Asia requires investments in excess of one billion US dollars. Understandably, investments of this magnitude may, on the one hand, lead to undesirable capital concentration and, on the other, pose considerable barriers to entry for newcomers. These aspects of the industry have constituted important research areas and are briefly discussed below.

Cargo carried by liner shipping has come to be known as general cargo. Up to the beginning of 1960s, such cargo was transported, in various forms of packaging, such as pallets, boxes, barrels, and crates, by relatively small vessels, known as general cargo ships. These were twin-deckers and multi-deckers, i.e., ships with holds (cargo compartments) in a shelf-like arrangement, where goods were stowed in small pre-packaged consignments (parcels) according to destination. This was a very labor-intensive process and, often, ships were known to spend most of their time in port, waiting to load or discharge. Congestion was thus a chronic problem in many ports, raising the cost of transport and hindering the development of trade. Equally importantly, such delays in ports made trade movements erratic and unpredictable, obliging manufacturers, wholesalers, and retailers to keep large stocks. Consequently, warehousing and carrying (capital) costs were adding up to the cost of transport, making final goods more expensive and, again, hindering international trade and economic development. This situation started to change in the nineteen sixties with the introduction of containerization in the trade between the United States and Europe and, subsequently, in the rest of the world. Containerization is often described as a revolution in transport. General cargo goods are now increasingly carried in steel boxes (containers) of standardized dimensions (most common is the 8 × 8 × 20 feet unit known as TEU –Twenty (feet) Equivalent Unit – although containers of double this size (40 feet) are quite common mainly in North America). Perhaps one of the most important effects of containerization is that, now, containers can be packed (stuffed) and unpacked (stripped) away from the waterfront, either at the premises of the exporter (consignor) and/or the importer (consignee), or at Inland Container Depots (ICD), warehouses, and distribution centers.

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Expensive and often strongly unionized port labor is thus by-passed; pressure on port space relieved; and ship time in port minimized. These developments have increased ship and port productivity and system reliability immensely, thus allowing ships to become even bigger, achieving economies of scale and low transport costs. Nowadays, containers are increasingly carried by specialized cellular containerships many of which able to carry more than 8000 TEUs, while designs for 10,000 or even 15,000-TEU ships are already on the drawing boards of naval architects.

At the time of writing, such a mammoth ship could cost anything in the neighborhood of 100 million US dollars and it could take up to eight of them to run a weekly service between Europe and Southeast Asia. The capital intensity of these ships – the equivalent of a jumbo jet in aviation – obliges them to limit their ports of call at each end to just a few hub ports or load centers such as Singapore, Hong Kong and Rotterdam, from where huge surges of containers are further forwarded (feedered) with smaller vessels to regional and local ports. Complex hub-and-spoke networks have thus evolved whose fine-tuning and optimization bears directly on consumer pockets.

Around the world, the port industry has invested a lot, to cope with the technological requirements of containerization. Modern container terminals – and commensurate cargo-handling equipment – have been built and new, more efficient, organizational forms (including privatization) have been adopted in an effort to speed up port operations. Operational practices have been streamlined; the element of uncertainty in cargo flows largely removed; forward planning has been facilitated; port labor regularized; and customs procedures simplified. These developments took place under the firm understanding of governments and local authorities that ports, now, constitute the most important link (node) in the overall door-to-door supply chain and thus inefficiencies (bottlenecks) in the port sector can easily whither away all benefits derived from economies of scale and scope in transportation and logistics.

By-passing the waterfront in the stuffing and stripping of containers, and thus having them ready in port to be handled by automated equipment, increased immensely the predictability and reliability of cargo movements, enabling manufacturers and traders to reduce high inventory costs through the adoption of flexible Just-in-Time and Make-to-Order production technologies. Inter alia, such technologies have helped manufacturers to cope with the vagaries and unpredictability of the business cycle and plan business development in a more cost effective way.

2. Optimization of liner shipping operations
Under the assumption of a certain market share (demand); the constraints of regularity and frequency; and the incessant drive to cut costs (mainly through

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the deployment of larger ships), liner shipping companies must optimize their operations providing solutions to a number of important problems such as: how many ships to deploy on a route? Should one serve a specific demand with few larger ships or with more smaller ones? What are the logistical requirements of the customer in this respect? What speed? At which ports to call? How should one deploy ships and containers? How to manage a fleet of empty containers and trade imbalances? Should one buy or lease containers?

Operations Research (OR) – mainly linear and integer programming algorithms – has been extensively used to give answers to such questions. For a ...

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