Journal of the Eastern Asia Society for Transportation Studies, Vol. 6, pp.

936 - 951, 2005

SHIPPING ECONOMIC ANALYSIS FOR ULTRA LARGE CONTAINERSHIP

Chaug-Ing HSU Professor Department of Transportation Technology and Management National Chiao Tung University 1001 Ta Hsueh Road, Hsinchu 300, Taiwan, R.O.C Fax: +886-3-5720844 E-mail: cihsu@cc.nctu.edu.tw Yu-Ping HSIEH Ph.D. Candidate Department of Transportation Technology and Management National Chiao Tung University 1001 Ta Hsueh Road, Hsinchu 300, Taiwan, R.O.C Fax: +886-3-5720844 E-mail: patty@mail.ihmt.gov.tw

Abstract: Ultra large ships have the advantage of scale economies, but whether they successfully getting into service depend on cargo flow, shipping distance, port efficiency and constraints, etc. The study constructs a two-objective model to determine the optimal ship size and sailings frequency and analyze the shipping economies of ultra large ships by minimizing shipping costs and inventory costs. The results show the Pareto optimal solutions of the two-objective model and optimal ship size and sailings frequency with respect to each level of inventory costs and shipping costs. The sensitivity analysis shows the optimal ship tends to be large as route flow increases. Furthermore, the economies and possibility of using ultra large ships tend to increase, as port efficiency improves, shipping distance increases, the ports of call decreases, or the relative costs of large ships decrease. Key Words: ultra large containership, shipping economics, multi-objective analysis

1. INTRODUCTION The size of containership tends to be large as world trade expands and cargo traffic grows. The development strides of containership size being large are great, especially after 1990. The largest ship in the world is 4,400 TEU in 1991, 6,000 TEU in 1996, and 7,500 TEU in 2003. The 8,000 TEU ship of OOCL (Orient Overseas Container Line) currently rewrites the record, and the ship is the largest ship among existing ships used. Moreover, large ships of 9,000+ TEU will be brought into Asia-Europe and Transpacific services soon in the near future, and ultra large ships of 12,500+ TEU are also expected to deliver in five to ten years (Frankel, 2002). However, whether those large ships will provide services as well as expectation depend not only shipbuilding technology and port accommodation constraints are overcome but also those large ships must be more economic than existing ships used on current major routes. Although ultra large ships have the advantage of scale economies, that is, the average container cost decreases as ship size increases, it works only if cargo flow is large enough and sailings frequency is adequate for shippers. That is why, in reality, ocean carriers always alliance with each other or provide their services using hub-and-spoke networks to realize scale economies. Besides, key factors such as shipping distance, port efficiency, and the number of ports of call also influence the extent of scale economies. Therefore, this study takes those factors into account and constructs a model to analyze the shipping economies of ultra large ships and determine the minimum flows that realize scale economies. Previous studies on ship size or ultra large ships were focused largely on economies of ship

936

Journal of the Eastern Asia Society for Transportation Studies, Vol. 6, pp. 936 - 951, 2005

size. These studies indicate that economies of ship size occur at sea, while diseconomies of ship size are suffered in port, and that the choice of optimal ship size involves a balancing of the cost per ton at sea and the cost per ton in port (e.g., Jansson and Shneerson, 1987). Recently, Cullinane and Khanna (1999,2000) indicate that the diseconomies of ship size in port are not apparent and the optimal ship size tends to be large as a result of improving port productivity. Moreover, McLellan (1997) provided detail discussions about the effects of larger ships on ports. Lim (1998) discussed that ships being large would impact all shipping industry. And Robinson (1998) forecasted the shipping service position of ultra large ships based on the trend of shipping development. Differing from previous studies, the study considers that ocean carriers not only aims at lowering their shipping costs but also enhancing their services, thereby attracting more shippers. The study aims to construct a two-objective model by individually minimizing shipping costs and inventory costs for decision-making on the optimal ship size and sailings frequency and analyzing the shipping economies of ultra large ships. The inventory costs resulted from the shipping process along the shipping route and ports usually are the main considerations of shippers. Inventory cost is commonly regarded as a major factor affecting shipping service decision in logistics literature. These studies usually determined the optimal shipping frequency by minimizing total shipping and inventory costs (e.g., Daganzo, 1991; Hall, 1987; etc.). In maritime study, Jansson and Shneerson (1987) also proposed an economic model to analyze shipping service decision by minimizing total shipping and inventory costs. However, in reality, although container carriers consider inventory cost as a decision factor, the weight placed on inventory cost is usually not equal to that on shipping cost. Therefore, the model proposed herein regards minimizing shipping costs and minimizing inventory costs as two separate objectives. The optimal routing, ship size and sailings frequency with respect to each level of inventory cost and shipping cost can be determined using the proposed model. In addition, the proposed two-objective model not only provides flexibility for container carriers in ship size and sailings frequency decision-making, but also provides a tool to analyze the trade-off between shipping cost and inventory cost. Furthermore, a single-objective decision could be regard as a special case of the two-objective decision. The remainder of this study is organized as follows. In Section 2, shipping and inventory cost functions are formulated for a multi-port calling route. Shipping costs include ocean carriers capital and operating cost, fuel cost, and port charge on serving the route, while inventory costs include costs due to freight waiting to be shipped in a loading port and on a ship along the shipping route. Section 3 derives a relationship equation for exploring trade-off between shipping costs and inventory costs for using different sizes of ships. Based on this, all feasible solutions and Pareto optimal solutions for the two-objective model are determined, and the optimal ship size and sailings frequency can also be obtained, simultaneously. In Section 4, a case study regarding a transpacific container service is made to analyze shipping economies for ultra large ships. Ship and port costs related to the transpacific container service are collected to construct cost functions and make the optimal ship size decision based on the formulated model. Moreover, the minimum route flows that realize scale economies for using ultra large ships on different routes are estimated. And the effects of key parameters on the decisions of using ultra large ships are further analyzed. Concluding remarks are finally made in Section 5.

937

Journal of the Eastern Asia Society for Transportation Studies, Vol. 6, pp. 936 - 951, 2005

2. COST FUNCTIONS Consider a multi-port calling route, m, calling at nm ports, where n m N . The route starts from port 1, follows by port 2, port 3and port nm, and then returns back to port 1. The ports of call on the route may be different or some of them are routed again on the returning route as shown by Figure 1(a) and Figure 1(b), respectively. On the route, ocean carrier operates f sailings frequency per season using ship type t. In this study, ships are full container ships, containers are dry cargo containers, and the unit of containers is TEU, i.e. twenty-foot equivalent unit.
3 2 1 2, nm 3

nm

nm-1

(a)

(b)

Figure 1. Shipping Routes: (a) All Ports of Call are Different; (b) Some of Ports are Repeated Suppose flow from one port to another port on the route is given. 1 f
m Let Qij denote flow

m from port i to port j on route m per season, where i, j=1,2nm and Qij =0 for i=j.

Then the 1 f

loading and unloading volumes in any port i per round voyage are respectively. 2.1 Shipping Cost Function

Q
j

m ij

and

Q
j

m ji

Shipping costs can be divided into three main categories: capital and operating costs, fuel cost and port charge. Capital and operating costs represent the total expenses paid for using the ship each day, including the cost of owning the ship, crew wages and meals, ship repair and maintenance, insurances, materiel and supplies, and so on. Capital and operating costs increase with ship size, operating time and sailings frequency. The total shipping time per round voyage for a ship includes line-haul time at sea and dwelling time in port. The port dwelling time include cargo loading and unloading time and time a ship spending on arrival and departure process at ports. The cargo loading and unloading time can be estimated by container loading/unloading volume and the handling rate. Let Ri denote average gross handling rate, TEU per day, in port i, then the cargo loading and unloading time in any port i is
1 f Ri

(Q
j

m ij

+ Qm). ji

The port arrival and departure process

time includes time a ship moving into or out from the port and time a ship waiting for entering or leaving a port. The length of the time can be estimated by the average ship waiting time and the average ship sailing time in a port. Let Wi denote port arrival and departure process time in any port i, and the unit of time is day. Then, time a ship spending in any port i is
Wi + 1 f Ri

(Q
j

m ij

+ Qm . ji

Moreover, the total time that a ship spends on all ports per round

voyage is the sum of the dwelling time of nm ports, i.e.

Wi +
i

1 f

m Q ij + Q m ji R i j i

938

Journal of the Eastern Asia Society for Transportation Studies, Vol. 6, pp. 936 - 951, 2005

Let Dim denote shipping distance between any consecutive port i and port i+1 on route m, and Vt denote average service speed for ship type t. Then, shipping time at sea per round voyage is 1
Vt

D
i

m i

, and the total shipping time per round voyage is the sum of time spent in
m Q ij + Q m ji R i j i

Dm 1 all ports and at sea, i.e. (W i + i ) + Vt f i

Furthermore, let St denote

average daily capital and operating cost for ship type t. cost for a season with f sailings frequency is
m Q ij + Q m D im ji fS t (W i + ) + St Vt Ri i i j

Then, the total capital and operating

(1)

Fuel cost is the expense of fuel consumption by a ship sailing at sea and dwelling in port. Fuel cost increases with ship size either at sea or in port. Moreover, fuel cost at sea is proportional to the shipping distance, since a ship normally cruises at constant speed at sea. Fuel cost in port is different from that at sea, for a ship must decelerate or accelerate when entering or leaving a port, while it also depends on the distance a ship moving in port. If the area of a port is larger, the relative moving distance may be longer and the fuel cost in port is higher. Therefore, fuel costs for the same ship in various ports are different. Let Ft denote fuel cost at sea per nautical mile by ship type t, and Bit denote fuel cost in port i by ship type t. Then, the fuel cost per round voyage on route m by ship type t is total fuel cost for a season with f sailings frequency is
f Ft Dim + Bit .
i

(F D
t i

m i

+ Bit , and the

(2)

Port charge is paid for a ship dwelling in port and can be divided into charge on ship and stevedoring charge. The former is paid for servicing the ship, including pilotage, towage, line handling fee, and berth occupancy charge, etc. The latter is paid for cargo handling, including container loading and unloading fee, equipment charge, and rent of container yard, etc. The level and structure of port charge in various ports are different. In usual, the port charge of a ship depends on the gross tonnage or capacity of a ship and also depends on berth occupancy time, so the port charge of a ship increases with ship size and berth occupancy time. However, pilotage, towage, and line handling fee are independent of berth occupancy time, while berth occupancy charge is proportional to berth occupancy time. Let it denote portion of the port charge of a ship that is independent of berth occupancy time, and it denote portion of the port charge of a ship that is proportional to berth occupancy time, where subscript i and t indicate port i and ship type t, respectively. Then, the total port charge on the ship serving a route for a season with f sailings frequency is m f it + it (Qij + Q m ) . Let Gi denote average handling fee per TEU in port i. ji i i j Ri Then, the total stevedoring charge for a season is

G (Q
i i j

m ij

+ Q m ) . The total port charge ji

is the sum of the total port charge on ship and the total stevedoring charge. That is
939

Journal of the Eastern Asia Society for Transportation Studies, Vol. 6, pp. 936 - 951, 2005

m f it + it + Gi Qij + Q m . ji R i i j i

(3)

From eqns. (1)-(3), the total shipping cost for a season with f sailings frequency on route m using ship type t, TC1m, is the sum of capital and operating costs, the fuel cost, and the port charge. That is S S m (4) TC1m = f it + S t Wi + Bit + Dim t + Ft + Gi + it + t (Qij + Q m ) . ji
i

Vt

And average shipping cost per TEU, AC1 , is the total shipping cost, TC1 , divided by the total flow on the route,

Ri

Ri

Q
i j

m ij

That is

S S m f it + S t W i + B it + D im t + Ft + G i + it + t Q ij + Q m ji V Ri Ri i i j t . (5) AC 1 m = Q ijm

2.2 Inventory Cost Function Inventory costs represent opportunity cost or loss of value due to cargos cannot be used or sold in the shipping process, and are positively correlated with the cargo volume, the value of cargo, and the length of transit and storage time. In this study, only inventory costs related to container shipping process are taken into account, involving the waiting time cost in the loading port and the shipping time cost that containers are in-transit and shipped on a ship. However, the inventory cost that occurred in the unloading port is not taken into account due to it is not directly related to the containership shipping service and relatively small. The waiting time cost is the cost related to sailings frequency due to schedule delay either container freight waiting in the loading port or at the place of production or origin. The denser the sailings frequency is, the lower the waiting cost is. Assume the arrival process of containers at each loading port follows a uniform distribution, then the average waiting time per TEU in a loading port is one half of the shipping time cycle. Let H denote the daily value of time per TEU, and suppose one season approximates to 13 weeks or 91 days, then the total waiting time cost per season for containers shipped along route m is 91H (6) Qijm . 2f i j

The shipping time cost is related to time while containers are shipped on a ship, and increases with the shipping time. Let Tijm denote the shipping time of containers from port i to port j on route m. It includes time that a ship spends on routing through all links and ports on the path from port i to port j. Since time that containers spend in unloading ports is not easy to estimate and is relatively small as compared with the total shipping time. So time that containers spend in loading and unloading ports is approximately estimated as time spent in loading ports only, then Tijm is represented as
T
m ij

m ijk

Dm 1 W k + k + Vt f

k l

m ijk

Rk

(Q

m kl

m + Q lk

).

(7)

940

Journal of the Eastern Asia Society for Transportation Studies, Vol. 6, pp. 936 - 951, 2005

m Where ijk is defined as m ijk =

1, if path from port i to j containes a link between port k and k + 1; 0 , otherwise.

(8)

Then, the total shipping time cost per season for containers shipped on route m is equal to
m H (Qij Tijm ) , and can be expressed further by eqn (7) as: i j

Dm H H Q Wk + k + Vt f i j k
m ij m ijk

i j k l

m m Qij ijk

Rk

(Q

m kl

m + Qlk .

(9)

From eqns. (6) and (9), the total inventory cost for a season for containers shipped along route m by ship type t, TC2m, can be expressed as the sum of the total waiting time cost and the total shipping time cost. That is: m m Qij ijk m Dm H 91H m m m (Qkl + Qlkm ) .(10) TC 2 m = Qij + H Qij ijk Wk + k +
2f
i j i j k

And average inventory cost per TEU, AC2 , is the total inventory cost, TC2m, divided by the total flow on the route,

Vt

Rk

Q
i j

m ij

That is

Q m m m Dm m m m H Qij ijk Wk + k H ij ijk Qkl + Qlk Vt Rk 91H i j k i j k l . + AC 2 m = + 2f m f Qij Qijm

(11)

3. SHIP SIZE DECISION There is a trade-off between average shipping cost and average inventory cost as shown by eqns. (5) and (11), respectively. That is, shipping containers along a dense sailings frequency route, the average inventory cost is low and the average shipping cost is high, while on a thin sailings frequency route, the average shipping cost is low and the average inventory cost is high. However, a complete optimal solution does not exist when one objective aimed at minimizing the average shipping cost while the other objective aimed at minimizing the average inventory cost due to two objectives conflict with each other. Instead of a complete optimal solution, the Pareto optimality concept is introduced herein. The Pareto optimality is the solution where no objective can be reached without simultaneously worsening at leasing one of the remaining objectives. (Cohon, 1978) A trade-off equation between the average shipping cost and the average inventory cost is derived from eqns. (5) and (11). However, variables herein are simplified further. Let t11,m and t21,m denote the fixed components of average shipping cost and average inventory cost for ship type t on route m, respectively, and let t12,m and t22,m denote the marginal shipping cost and inventory cost for increasing one more sailings frequency, respectively. Then, t11,m , t21,m , t12,m , and t22,m can be expressed as:

941

Journal of the Eastern Asia Society for Transportation Studies, Vol. 6, pp. 936 - 951, 2005

11, m t

G
i j

it
Ri
i

St Ri
ij

Q
j

m Qij + Q m ji , m

(12)

t21, m

Dm m m H Q ij ijk W k + k Vt i j k , = m Q ij
i j

(13)

t12, m =

it

S + S t Wi + Bit + Dim t + Ft V t , m Qij

i j

(14)

22 , m t

91H = + 2

H
i j k l i

m m Qij ijk

Qijm
j

Rk

(Q

m kl

m + Qlk

)
. (15)

And average shipping and inventory cost functions (eqns. (5) and (11)) can be expressed as: (16) AC1m = t11, m + t12 , m f ,
1

(17) AC 2 m = t21, m + t22, m ( f ) . Then, a trade-off equation between average shipping cost and average inventory cost can be derived from eqns. (16) and (17). That is (18) AC1m t11,m AC 2 m t21, m = t12, m t22, m .

)(

Eqn. (18) indicates clearly that there exists a trade-off between average shipping cost and average inventory cost. When flow, ship related variables, and port related variables are hold constant, average shipping cost per TEU for any type of ship decreases as average inventory cost per TEU increases, and the substitute rate between two costs is decreasing. Average shipping cost per TEU is approaching to t11, m , i.e. AC1m t11, m , when average inventory cost per TEU is approaching infinite, i.e. AC2 m . Similarly, average inventory cost per TEU also decreases as average shipping cost per TEU increases, and the substitute rate is decreasing. And AC 2 m t21, m when AC1m . Eqn. (18) is a hyperbolic function, an elementary geometry as circle, ellipse, or parabola. Hyperbolic function with center, vertex, focus, focal length and asymptote can be shown exactly in two-dimensional space. Figure 2 illustrates the hyperbolic function for any ship type t in objective value space with horizontal dimension representing average inventory cost per TEU and vertical dimension representing average shipping cost per TEU, while center, vertex, focal length, horizontal asymptote and vertical asymptote of the hyperbolic function are ( t21,m , t11, m ) , ( t21, m + t12, m t22, m , t11, m + t12, m t22, m ) , 2 t12, m t22,m , AC1m t11,m = 0 , and AC 2 m t21, m = 0 , respectively. The hyperbolic function illustrates not only trade-off relationships between average shipping cost and average inventory cost, but also solutions for the two-objective model for any ship type t. However, since cargo loaded on a ship cannot exceed its capacity on any voyage link, sailings frequency for any ship type t must be larger than or equal to the maximum link flow divided by ship capacity, that is

942

Journal of the Eastern Asia Society for Transportation Studies, Vol. 6, pp. 936 - 951, 2005

m m Max ijk Qij k i j

Ut
k i j

Moreover, let f t m min denote the minimum sailings frequency,

f t m min =

m m Max ijk Qij

Ut

, and let AC1tm

and AC 2 tm

denote the minimum average

shipping cost and the maximum average inventory cost when a ship is operating with the minimum sailings frequency, respectively. And names the point ( AC 2 tm , AC1tm ) in objective value space the minimum sailings frequency point. Then the feasible solutions for the two-objective model are located at the hyperbolic function curve, which AC1m values are higher than that of the minimum sailings frequency point, ( AC 2 tm , AC1tm ) , as shown in Figure 2.
AC1m
asymptote ( AC 2 m t21, m = 0) cost trade-off curve

21,m 12,m 22,m 11,m 12,m 22,m vertex ( t + t t , t + t t )

t11,m

Focus length 2 t12,m t22,m center

( AC 2 tm , AC1tm )

( t21,m , t11, m )

asymptote ( AC1m t11, m = 0)

t21,m

AC2 m

Figure 2. Feasible Solutions for Any Ship Type t The Pareto optimal solutions are the feasible solutions in the case that there is only one type of ship. Since ship-related variables, such as port charges, it and it, and average daily capital and operating cost, St, and fuel costs, Ft and Bit, and service speed, Vt, all change with ship type, therefore the hyperbola curve and the minimum sailings frequency point for each type of ship is different. Consequently, Pareto optimal solutions are located along the envelope of different curves, which are the closest solutions to origin (0,0) among all feasible solutions for all types of ships.

4. SHIPPING ECONOMIC ANALYSIS A Transpacific Northwest Service (TPN service), on which ultra large ships are possibly applied, is considered herein to demonstrate decision-making on the optimal ship size and sailings frequency and analyzing shipping economics for ultra large ships. The route of the TPN service starts at Kaohsiung, passes Hong Kong, Osaka, Tacoma, Vancouver, and backs to Kaohsiung. It calls at 5 ports in total and total distance per round voyage is 11,945 nautical miles, as shown in Figure 3. There are 5,652 TEU containerships currently used to provide shipping services on the route.

943

Journal of the Eastern Asia Society for Transportation Studies, Vol. 6, pp. 936 - 951, 2005

Osaka Vancouver 4,557 154 1,376 5,516 Kaohsiung 342 Hong Kong Tacoma

Source of shipping distance: Caney and Reynolds (1995).

Figure 3. The TPN Service (numbers represent link distance in nautical miles) The study considers four types of large/ultra large ships, including 5,652 TEU ships which are currently used on the TPN route, 7,500 TEU ships which are almost the largest ships among existing ships used, 9,000 TEU ships which will be brought into service soon, and future 12,500 TEU ultra large ships. Table 1 shows capacity, gross tonnage, draft, service speed, daily capital and operating costs, fuel cost per nautical mile, and fuel cost in port for each type of ship. Table 2 shows fixed and variable port charges, and average cargo handling fee per TEU for each type of ship. In addition, Table 3 shows cargo flows between any two ports of call. Since ocean carriers make ship size decision may not take the cargo flow inside one region into consideration, therefore the study assumes cargo flows between any two ports inside either Far East region or U.S. West Coast are zero for the TPN route and considers merely cargo flows between Far East and U.S. west coast. Cargo flows are estimated by the container loading and unloading volumes of the TPN route in port of Kaohsiung at the second season in 2001 and Containersation International Yearbook 2002 (2003). Besides, the average gross handling rate, Ri, and port arrival and departure times, Wi, are 1,680 TEU per day and 0.125 day, respectively, which are estimated from related data of Kaohsiung. Table 1. Capacity, Gross Tonnage, Draft, Service Speed, Daily Capital and Operating Cost, Fuel Cost per Nautical Mile, and Fuel Cost in Port for Each Type of Ship Types of ships T1 T2 T3 T4 Capacity, Ut (TEU) 5,652 7,500 9,000 12,500 Gross tonnage (G.T.) 69,245 94,000 106,000 160,000 Draft (m) 12.7 14.5 14.5 16.0 Service speed, Vt (nautical miles per day) 600.0 600.0 600.0 600.0 Daily capital and operating cost, St (US$) 25,813 27,675 29,187 32,715 Fuel cost per nautical mile, Ft (US$) 29.89 37.99 44.57 59.92 Fuel cost in port, Bit (US$) 149.44 189.95 222.84 299.58
Note: Daily capital and operating cost and fuel costs are estimated by data in Wang (1998).

Table 2. Fixed and Variable Port Charges and Average Cargo Handling Fee per TEU for Each Type of Ship Types of ships T1 T2 T3 T4 4,241 5,827 7,177 10,820 Fixed port charge,it 4,302 5,455 6,545 9,091 Variable port charge,it Average cargo handling fee per TEU, Gi 53 53 53 53
Note: Suppose values of

it , it

and Gi are identical in all ports of call and estimated by the port charge of

Kaohsiung Harbor (Kaohsiung Harbor Bureau, 2002).

944

Journal of the Eastern Asia Society for Transportation Studies, Vol. 6, pp. 936 - 951, 2005

Table 3. Cargo Flows between Any Two Ports (TEU) Origin\Destination Kaohsiung Hong Kong Osaka Tacoma Kaohsiung 0 0 9,663 Hong Kong 0 0 23,553 Osaka 0 0 1,918 Tacoma 6,026 14,689 1,196 Vancouver 5,093 12,413 1,011 0 4.1 The Optimal Ship Size

Vancouver 8,166 19,904 1,621 0 -

The study further applies the models in Sections 2 and 3 to determine the trade-off equation, minimum sailings frequency, minimum shipping cost per TEU, and maximum inventory cost per TEU for each type of ship on serving the TPN route. The results are shown in Table 4, and the feasible solutions are illustrated in Figure 4. Table 4 shows that larger ships have the higher advantage of ship size economies on serving the TPN route and the minimum shipping cost per TEU decreases as ship size increases. Ocean carriers might provide services with the minimum sailings frequency to reduce their shipping costs and obtain the advantage of ship size economies if they ignore the inventory cost and sailings frequency constraints. However, the minimum sailings frequency for ship types T4, T3, and T2 are 5.186, 7.203, and 8.643 per season for current demand flow, respectively, and those service frequencies are lower than the weekly service, i.e. 13 per season. However, an ocean carrier that provides such levels of services using large ships might not compete with other ocean carriers using current ship size and sailing frequency. In Figure 4, four curves representing ship types from T1 to T4 are shown from left to right, and the shapes of curves are hyperbolic functions as derived in Section 3. The curve of ship type T1 is the one closest to origin (0,0), and then ship type T2, ship type T3, and ship type T4. It shows that the shipping cost for ship type T1 is the lowest one for the same inventory cost level among all ship types. Table 4. Trade-Off Equation, Minimum Sailings Frequency, Minimum Shipping Cost per TEU, and Maximum Inventory Cost per TEU for Each Type of Ship for the TPN Route Minimum Minimum Maximum Ship sailings shipping cost inventory cost Trade-off equation type frequency (US$/TEU) (US$/TEU) per season T1 (AC1m-141.852)(AC2m-308.734) = 28067.3 11.469 240.907 592.084 m m T2 (AC1 -145.440)(AC2 -308.734) = 32486.3 8.643 231.841 684.729 m m T3 (AC1 -148.539)(AC2 -308.734) = 36085.3 7.203 228.516 759.928 m m T4 (AC1 -155.769)(AC2 -308.734) = 44557.7 5.186 226.873 935.393 Pareto optimal solutions in an objective value space are the envelope of the feasible solution curves, which are closest to origin (0,0) and determined by comparing the feasible solutions between all types of ships. As a result, the Pareto optimal solutions for the TPN route are made up of all feasible solutions of ship type T1 and part of feasible solutions of ship types T2, T3 and T4, as shown by solid lines of Figure 5. Figure 5 shows that the optimal ship sizes of the TPN route are T4, T3, T2 and T1, for four different values of average inventory cost per TEU, i.e. without constraint, lower than 921.236 U.S. dollars, lower than 741.92 U.S. dollars, and lower than 649.023 U.S. dollars, respectively.

945

Journal of the Eastern Asia Society for Transportation Studies, Vol. 6, pp. 936 - 951, 2005

Figure 4. Feasible Solutions for Four Types of Ships for the TPN Route

Figure 5. Pareto Optimal Solutions and Practical Solutions for the TPN Route

Moreover, consider, in reality, that sailings frequency for the liner service generally is weekly and sailings frequency less than fortnightly are commonly regarded as inadequate. The study determines the optimal ship size and sailings frequency that could be possibly chosen by ocean carriers in reality. Those practical results are shown in Table 5 and depicted by the discrete points in Figure 5. It is shown that the 5,652 TEU ships of ship type T1 are optimal-size ships when ocean carriers would like to provide service frequency equal to or higher than the weekly sailings service. And ocean carriers may use the 7,500 TEU ships of ship type T2, if they prefer providing 3 sailings frequency per month. Table 5. Practical Shipping Services for the TPN Route (US$/TEU) Weekly Optimal Shipping Inventory Optimal Shipping sailings ship type cost cost ship type cost frequency Infeasible 3 T1 478.674 T2 235.406 669.829 4 T1 590.949 T1 254.126 558.723 5 T1 703.223 T1 310.263 475.393 6 T1 815.497 T1 366.400 433.728 7 T1 927.771

Weekly sailings frequency 0.5 0.75 1 1.5 2

Inventory cost 392.064 371.231 358.732 350.399 344.447

In summary, the Pareto optimal solutions, the practical solutions in reality, and the optimal ship size with respect to each level of shipping costs and inventory costs for the TPN route using four types of ships can be determined by applying the model. If other types of ships are taken into consideration or other routes are analyzed, the optimal solutions can also be obtained. For instance, if one type of ship with the same service speed but with capacity less than 5,652 TEU is considered, its trade-off curve must be located on the left hand side of the curve of the 5,652 TEU ship. Then the Pareto optimal solutions must contain the curve of the smaller ship. However, whether container carriers use the smaller ship or not will depend on the sailings frequency in reality or the shipping and inventory costs. 4.2 Cargo Flow Effects As shown above, although the bigger ships, i.e. the 9,000 or 12,500 TEU ships, have more advantage of ship size economies, the smaller ships, i.e. the 5,652 or 7,500 TEU ships, have more competitive advantage. However, optimal ship size tending to be larger is assumed as cargo flows increase with the world trade expands. And it can be shown by further using the

946

Journal of the Eastern Asia Society for Transportation Studies, Vol. 6, pp. 936 - 951, 2005

proposed model to determine the critical flow when the 9,000 or 12,500 TEU ships are used. First, the influences of route flows on the optimal solutions are analyzed. Let Qm denote route flow, and suppose the share of cargo flow between two ports is constant. Then, the study further analyzes variations in the trade-off equation, the minimum shipping cost per TEU, and the maximum inventory cost per TEU due to changes in route flows and summarizes the results in Table 6. Table 6 shows that as route flow increases, the center point and asymptotes of the trade-off equation do not change but the focal length decreases; as a result, the curve moves toward the center point. Moreover, the minimum shipping cost per TEU is independent of route flow, and the maximum inventory cost per TEU decreases as route flow increases. Consequently, the minimum sailings frequency point ( AC 2 tm , AC1tm ) is shifted to the left. The result of the minimum shipping cost per TEU for each type of ship being independent of route flow implies that the relative economies of different ship sizes do not change as route flow varies. Figure 6 further illustrates an example regarding a 5,652 TEU ship, i.e. ship type T1. Table 6. Variations in the Trade-Off Equation, the Minimum Shipping Cost per TEU, and the Maximum Inventory Cost per TEU as Route Flow Changes Minimum Maximum Ship Trade-off equation shipping cost inventory cost type (US$/TEU) (US$/TEU) 9 1.252*107 1.240*10 m m . 240.907 473071+ T1 ( AC1 141.852)( AC2 308.734) = 16,278+ Qm Qm
m m T2 ( AC1 144.068)( AC2 308.734) = 18,841+

1.436*109 Qm

231.841

526803+ .

1.662*107 Qm

m m T3 ( AC1 145.868)( AC2 308.734) = 20,928+

1.595*109 Qm

228.516

570417+ . 672183+ .

1.994*107 Qm 2.770*107 Qm

m m T4 ( AC1 150.068)( AC2 308.734) = 25,842 +

1.970*109 Qm

226.873

Figure 6. Variations in Trade-Off Equation for Ship Type T1 as Route Flow Changes

Figure 7. Optimal Ship Size with Respect to Inventory Cost and Route Flow

Moreover, the optimal ship size of the TPN route with respect to route flow and inventory cost per TEU can be determined using the trade-off equation and the minimum sailings frequency point for each type of ship, as shown in Figure 7. When both the inventory cost per TEU

947

Journal of the Eastern Asia Society for Transportation Studies, Vol. 6, pp. 936 - 951, 2005

and route flow are low, the optimal ship size is ship type T1; when either inventory cost per TEU or route flow increases, the optimal ship size tends to become large and changes from ship type T1 to T2, T3 or T4. Besides, if weekly service is provided on the route, the optimal ship sizes are T1, T2, T3 and T4, for four cases that the route flow less than 143,272 TEU; from 143,272 TEU to 182,385 TEU; from 182,385 TEU to 257,883 TEU; and larger than 257,883 TEU, respectively. Therefore, the route flow being an important factor for ship size decision-making is clearly shown, and the optimal ship size tends to become large as the route flow increases. In reality, if ocean carriers increase route flows by alliance with others or using hub-and-spoke networks, the average shipping cost will be lower. As a result, the optimal ship size will become larger, and the ultra large ship will be brought into the service sooner. 4.3 Sensitivity Analysis In addition to increases in cargo flows, shipbuilding cost is assumed to decrease when technology is advanced, and port efficiency is also assumed to improve when faster loading/unloading equipment or new operating methods are used in the future. These two factors again are key factors pushing container carriers to use ultra large ships. However, the proposed model can show the effects of changes in these key factors on the carriers decisions on using ultra large ships. Besides, other key factors such as shipping distance, the number of ports of calls, and the cargo flow balance factor, are analyzed at the same time. Table 7 shows the minimum average shipping cost, AC1tm , for each type of ship, the difference in the minimum average shipping cost between any two types of ships, and the minimum route flow for ship types T2, T3 and T4 when weekly service are provided. Therefore, decisions-makings on whether using ultra large ship are appropriate or not can be made by these three indexes. First, the influence of the change in port efficiency is evaluated. The minimum shipping costs for all types of ships decrease yet the difference between any two consecutive types of ships expands as port efficiency increases, in particular, when the cargo handling rate, Ri, is improved up to 140 TEU per hour and the port arrival and departure process time, Wi, is decreased to 1 hour. Thus, ship size economies increase and the possibility of using ultra large ship also increases when the relative advantages of larger ships become large. Moreover, these are also shown by the trend that the values of the minimum route flows for using ship types T2, T3 and T4 for weekly service are decreasing. On the other hand, the minimum shipping costs for all types of ships increase as port efficiency decreases, in particular, when the cargo handling rate, Ri, is reduced to 35 TEU per hour and the port arrival and departure process time, Wi, is increased to 6 hour. Therefore, the value of the minimum shipping cost for ship type T4 is larger than the value for ship type T3, consequently, neither ship type T4 has the advantage of ship size economies, nor ship type T4 is the optimal ship size for any route flow. Second, the production costs of ultra large ships will be decreased as technology advances, so the relative daily capital and operating costs of ultra large ships will be decreased as well. Suppose the relationship between the daily capital and operating costs and ship capacity is a logarithm curve (e.g., Jansson and Shneerson, 1987), then the daily capital and operating costs for four types of ships can be estimated as 25,042, 25,750, 26,186, and 26,973 U.S. dollars, respectively. As a result, as ship building technology advances, the difference between any two consecutive types of ships increases, and the minimum shipping costs and route flows for the weekly services of all types of ships decrease. Therefore, ship size economies increase
948

Journal of the Eastern Asia Society for Transportation Studies, Vol. 6, pp. 936 - 951, 2005

and the possibility of using ultra large ships also increases, due to the comparative advantage in the average shipping cost of larger ship is large. Table 7. Results of Sensitivity Analyses (US$; TEU) Minimum route flow Minimum shipping cost, AC1tm for weekly service Scenaries T1 T2 T3 T4 T2 T3 T4 240.907 231.841 228.516 226.873 143,272 182,385 257,883 Current situation (9.066) (3.325) (1.643) Port efficiency increases 221.806 211.174 206.414 201.316 140,784 179,191 246,035 (Wi=1hr.;Ri=140TEU/hr.) (10.632) (4.760) (5.098) (-) (-) (-) Port efficiency decreases 278.517 272.701 272.303 277.649 148,474 189,040 (Wi=6hr.; Ri=35TEU/hr.) (5.816) (0.398) (-5.346) (+) (+) Relative costs of 238.264 226.303 220.726 214.228 138,399 176,942 239959 larger ships decrease (11.961) (5.577) (6.498) (-) (-) (-) Number of ports of 238.417 229.506 226.248 224.624 143,134 182,322 257,766 calls decreases (n=2) (8.911) (3.258) (1.623) (-) (-) (-) Number of ports of 245.057 235.732 232.296 230.619 143,486 182,482 258,062calls increases (n=10) (9.325) (3.435) (1.677) (+) (+) (+) Shipping distance 185.728 183.868 184.214 187.710 150,999 (1.859) (-0.346) (-03.496) (+) decreases (Di=5000) Shipping distance 265.179 252.943 248.004 244.099 142,128 180,979 252,674 increases (Di =15,000) (12.236) (4.939) (3.904) (-) (-) (-) Balance flow 222.267 215.582 213.466 213.493 178,033 226,614 (Ratio=50%) (6.685) (2.116) (-0.026) (+) (+) Unbalance flow 254.433 243.639 239.437 236.582 125,492 159,758 224,221 (Ratio=70%) (10.794) (4.202) (2.855) (-) (-) (-) Moreover, the influence of the change in the number of ports of calls is evaluated. Results show that as the number of ports of calls decreases, the minimum average shipping costs for all types of ships increases slightly; the difference between any two consecutive types of ships also increases slightly; and the minimum route flows for using ship types T2, T3 and T4 all increase. However, since the extent of the effect is relatively small as compared with those of other factors on ship size economies and the possibility of using ultra large ships. Therefore, the number of ports of calls is not a significant impact factor. The study further performs two sensitivity analyses, in which the total shipping distance is decreased down to 5,000 nautical miles and increased up to 15,000 nautical miles, respectively. Results show that as the total shipping distance increases, the minimum shipping costs for all types of ships increase, the difference between any two consecutive types of ships increases, and the minimum route flows for the weekly services using ship type T2, T3 and T4 decrease. Consequently, ship size economies and the possibility of using ultra large ships increase as the total shipping distance increases. Additionally, the minimum shipping costs for ship types T3 and T4 being larger than that for ship type T2 implies that these two types of ships do not have the advantage of ship size economies. Finally, the influence of flow balance is further analyzed. On the TPN route, the flow from Far East to U.S. West Coast is higher than the reverse flow from U.S. West Coast to Far East, and the share of one-direction flow to total route flow is 61.59%. Suppose the total route

949

Journal of the Eastern Asia Society for Transportation Studies, Vol. 6, pp. 936 - 951, 2005

flow does not change, while two cases with the shares of 50% and 70% are tested, respectively. Results show that as the route flow is more unbalanced, the minimum shipping costs for all types of ships are larger and the differences between any two consecutive types of ships are larger as well while the minimum route flows for weekly service using ship types T2, T3 and T4 are all smaller. Consequently, ship size economies and the possibility of using ultra large ships all increase, as the route flow is more unbalanced. In summary, shipping economies enhance and the possibility of using ultra large ships tend to increase as the port efficiency increases, the shipping costs of larger ships decrease, the total shipping distance increases, the number of ports of calls decreases, or flow is unbalanced. In fact, the ultra large ships must be more and more economic in the future as the cargo flow increases, shipbuilding cost decreases, and the port efficiency improves. They are expected to deliver firstly in lines with the longest shipping distance, such as the Asia-Europe service or the Transpacific service. In addition, the number of ports of call will only be a few. The numerical results obtained using the proposed model are identical to the judgment of experts. However, the study can assist container carriers in decision-making by considering all key factors comprehensively. Also the results of the study can further show container carriers how to find the optimal timing of using 9,000 TEU, 12,500 TEU, or other larger ships and understand deeply the effects of shipping distance, the ports of call, the relative costs of large ships, etc. 5. CONCLUSIONS This study develops a two-objective model for decision-making on the optimal ship size and sailings frequency by minimizing shipping costs and inventory costs. Shipping and inventory cost functions are formulated for a multi-port calling route. Shipping costs include ocean carriers capital and operating costs, fuel cost, and port charge on serving the route, while inventory costs include costs due to freight waiting to be shipped in a loading port and on a ship along the shipping route. Besides, the cost functions formulated herein are flow-dependent. Moreover, this study derives a relationship equation for exploring the trade-off between shipping costs and inventory costs for using different sizes of ships and shows all feasible solutions of ship size and sailings frequency. The relationship equation is further identified as a hyperbolic function, which could be shown in objective value space. Accordingly, Pareto optimal solutions of the two-objective model are then determined, and the optimal ship size and sailings frequency with respect to different inventory costs and shipping costs are shown. Then, a case study regarding the TPN route is made to analyze shipping economies for ultra large ships. Feasible solutions for different types of ships, Pareto optimal solutions, and practical solutions in reality are determined. And the optimal ship size and sailings frequency with respect to inventory cost and route flow are shown. The results show that if the weekly service is provided, the optimal ship is the 5,652 TEU ship that is the same as the ship currently being used on the route. Additionally, the optimal ship tends to be large as route flow increases. Finally, the sensitivity analysis shows that shipping economies enhance and the possibility of using ultra large ships tend to increase, as port efficiency increases, the shipping costs of larger ships decrease, the total shipping distance increases, the number of ports of calls decreases, or the route flow is unbalanced. The numerical results can assist container carriers in decision-making by considering all key factors comprehensively and further to find the optimal timing of using ultra large ships. Furthermore, because co-operations or competitions between container carriers make cargo

950

Journal of the Eastern Asia Society for Transportation Studies, Vol. 6, pp. 936 - 951, 2005

flows change, analyzing these two strategies in the future study is suggested. ACKNOWLEDGEMENTS The authors would like to thank the National Science Council of the Republic of China for financially supporting this research. REFERENCES Caney, R.W. and Reynolds, J. E. (1995) Reeds Marine Distance Tables. Thomas Reed Publications, Printed in Great Britain. Cohon, J.L. (1978) Multiobjective Programming and Planning. Academic Press, New York. Containersation International (2003) Containersation International Yearbook 2002. Cullinane, K. and M. Khanna (1999) Economies of scale in large container ships, Journal of Transport Economics and Policy, Vol. 33, Part 2, 185-208. Cullinane, K. and M. Khanna (2000) Economies of scale in large containership: optimal size and geographical, Journal of Transport Geography, Vol. 8, 181-195. Daganzo, C. F. (1991) Logistics System Analysis. Springer-Verlag Press, Berlin, Heidelberg. Frankel, E.G. (2002) New generation container terminal technology, Port Technology Journal, Edition 15, Section 1. Hall, R. W. (1987) Direct versus terminal freight routing on a network with concave costs, Transportation Research B, Vol. 21, No. 4, 287-298. Jansson, J.O. and Shneerson, D. (1987) Liner Shipping Economics. London: Chapman and Hall. Kaohsiung Harbor Bureau, Ministry of Transportation and Communications, ROC (2002) Port of Kaohsiung: Tariff of Port Charges. Kaohsiung Harbor Bureau Publications, Republic of China. Lim, S.M. (1998) Economies of scale in container shipping, Maritime Policy and Management, Vol. 25, No. 4, 361-373. McLellan, R.G. (1997) Bigger vessels: how big is too big? Maritime Policy and Management, Vol. 24, No. 2, 193-211. Robinson, R. (1998) Asian hub/feeder net: the dynamics of restructuring, Maritime Policy and Management, Vol. 25, No. 1, 21-40. Wang, H.J. (1998) Container Transshipment Analysis for the Port of Kaohsiung as a Transshipment Center. Department of Shipping and Transportation Management, National Taiwan Ocean University, Master Thesis. (in Chinese)

951