Supply Chain Frontiers issue #43
How reliable is ocean transportation, and what is the business case for improving its reliability? The answers to these two questions have far-reaching implications for the efficiency of global supply chains. Research under way at the MIT Center for Transportation & Logistics (MIT CTL) indicates that the reliability gap is a cause for concern. The case for investing in measures to make the mode more dependable is being investigated by the MIT team.
Ocean shipping is notorious for its cyclical ups and downs. A recent example is the capacity crunch in 2010, which followed the recessionary years of 2008 and 2009 when carriers scrambled to cut services in response to plunging demand.
MIT CTL launched the Global Transportation Reliability Initiative earlier this year to find out just how reliable this vital supply chain link is, and to explore the underlying causes of delays. Preliminary results were presented to a gathering of transportation executives from more than 20 firms in October 2011 by MIT CTL Executive Director Dr. Chris Caplice, who heads the project.
The invitation-only roundtable meeting on the MIT campus gave the participating shippers, carriers, and third-party services providers an opportunity to exchange some frank assessments of the current state of ocean shipping. Caplice kicked off the discussions with six key observations from the MIT CTL research.
What shippers procure often is not what they get
Operational outcomes generally do not match procurement expectations. Almost every trade lane studied by the researchers had an average transit time that was several days worse than the contractual times. Average transit times were easily 5 to 10 days slower than stated in the contracts.
Reliability varies across segments of an end-to-end shipment
The researchers looked at actual versus expected transit times for five core segments that constitute a door-to-door container movement – origin-to-port, origin port dwell, port-to-port, destination port dwell, and port-to-destination. Variability of the individual segments differed drastically.
Landside bottlenecks are culpable
After analyzing the five core segments, the researchers found port-to-port times to be relatively stable. Delays tended to crop up at the ports and during inland transportation legs. Port dwell times of approximately 3 to 4 days were recorded, for example. Moreover, these landside hiccups are largely beyond the control of shippers. A more encouraging finding for ocean carriers is that their estimates for port-to-port movement times were generally accurate.
Vessel stops increase lead-time delays
Transit time variability increased when the number of port calls increased. In fact, port-to-port variability showed a 60% correlation with the number of stops. Some shippers attempt to offset these risks. One major company, for example, tries to avoid feeder ship connections when booking ocean freight.
Port performance varies widely
The amount of time that cargo remained parked in ports varied substantially among the 20 US facilities in the preliminary data set. Median dwell times ranged from 2.43 days to 8.42 days. Most ports required more than 5 days for 75% of the containers, and almost half the ports had at least 25% of the containers sitting for a week or more. Ports where dwell times are extremely scattered included Los Angeles, Seattle, Tacoma, Newark, and Tampa. Some of the figures made little sense. For example, Long Beach (3.44 days) was almost one day faster than the immediately adjacent Los Angeles (4.36 days) port. Additional work on identifying and quantifying the driving factors of port throughput time is being led by Dr. Basak Kalkanci, Postdoctoral Fellow at MIT CTL.
The impact of variability on inventory can be overestimated
Traditional planning methods tend to build excessive amounts of safety stock in order to compensate for the unreliability of ocean transportation. Take, for example, the Hadley-Whitin formula, which is commonly used to calculate required inventory levels. Caplice showed that the formula can produce results that do not make much operational sense when the safety stock for different combinations of lead times and carrier reliability records is evaluated.
When ocean transportation performs erratically, shippers can pay a high price in terms of extra inventory, expedited orders, lost sales, and production downtime. A leading manufacturer at the roundtable sets safety stock volumes at a 99.5% service level because running out of inventory is so expensive. Carriers also suffer in an unreliable service environment. According to a leading shipper, many carriers have a 30% no-show rate every week. When booked shipments do not turn up, unused cargo slots – as well as inaccurate shipper forecasts – add cost and eat into carriers’ profit margins.
Phase Two of the Global Transportation Reliability Initiative will explore these costs in more detail, and provide guidance on when there is a viable business case for devoting resources to improving the reliability of ocean shipping. This second phase has just started. “We are looking for more corporate partners to participate in the research,” says Caplice. “Ocean is a crucial link in global supply chains, and there is an urgent need for better information on how carriers and shippers can improve the performance of this mode.”
For more information on MIT CTL’s Global Transportation Reliability Initiative, contact Dr. Chris Caplice.