Assessing the slow streaming strategy in shipping

Slow steaming is the traditional method applied in shipping industry to reduce liner speed. It was introduced as a response to environmental issues, over capacity in the shipping industry and unfortunate trading situation in European markets (Windsor, 2010). At present slow steaming strategies have been implemented by most shipping lines but during the time of expansion of container market, it was not considered as sustainable.

Background for slow steaming strategy

Slow steam strategy has larger influence on the entire industry, from cargo owners, carriers, ship owners and operators, to equipment manufacturers. The factors that resulted in application of slow steam are stated below

Recession in the global economy which resulted in decline of demand in transportation

Sudden downturn in shipping price

Increasing fuel price

Increasing operating costs (manning, lube oil, maintenance)

The global financing crisis

Declining freight charges, which in turn effecting charter rates.

Rapid growth of new ships

The above factors had larger effect on entire value chain and during this time shipping industry was under lots of pressure .In order to cop up with the situation the industry has to find all kinds of cost reduction methods like slow downing new ship orders, cancelling existing orders, laying up and idling of vessels and mainly the slow steaming (Weismann, 2010).

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Slow -Steaming

The biggest single factor that affecting a container ship is the fuel cost and slow steaming is a process of reducing the speed of ocean liners to trim down both capacity and cost. An ocean going liner ship is normally fitted with a low speed two-stroke main engine which is connected to a fixed pitch propeller via propeller shaft and by lowering the speed of main engine the propeller reduces the speed of the ship. However the power required by the main engine is disproportional to the ship’s speed and the below diagram explains it.

Impacts of slow steam strategy

Advantages

The main advantage of slow steam strategy applied on liner shipping is to increase the profit by reducing the fuel cost. Theoretically when a ship reduces its speed from 27 to 22 knots (-19%) the engine power is assumed to reduce by 42% of its total nominal output. If we consider a round trip from Asia -Europe -Asia there willbe a fuel saving of 45% at 22 knots and 59% at 18 knots. In practical these values may change due to number of other factors like weather, loaded cargo, vessel trims etc.

Slow steaming also render larger elasticity to increase the capacity again when the situation in the market changes. In addition to the fuel saving the cylinder lubricating oil consumption of the main engine is also reduced at almost equal percentages as the fuel, which in turn decreases solid particle emissions.

Another positive side of slow steaming for a ship owner is that ships that are idle or laid-up can be operated for these fleet additions, as too can new ships whose delivery time has been postponed. The introduction of slow steaming, and the resultant trade and fleet adaptations, has largely resulted in reactivation of idle vessels. ( Wiesmann,2010)

The other significant advantage of slow steaming is that, reductions in speed considerably reduce CO2 emissions. When a ship is sailing CO2 emission is directly related to the amount of fuel burned. For one ton of burned fuel 3.17 kilogram of CO2 are emitted. (Corbett, 2003).

Now for a container vessels, which is almost 4% of all maritime vessels generated 20% of emissions from international shipping ,that is about 206 million tons of CO2 in 2007 (Psaraftis,2009). About 15% of CO2 emission is reduced by decreasing the vessel speed by 10 %.(Longva, 2010).Besides reducing fuel costs and vessel emissions, slow-steaming reduces vibration and hull damage from slamming through heavy seas at high speeds.(Mishra,2010)

Disadvantages

One of the major arguments against slowing down ship speed is that more ships will be required to move the same amount of cargo in a given time and this account for grievous delays with several routes extended by days or weeks

There are some other serious problems to be looked at as well. Only 2 to 5% of global CO2 emission is put by shipping industry. Reducing ship’s speed has operational challenges as well, and it may account for increase in other categories of pollution, or cause mechanical problems. During Slow steaming engines are not operated at their rated capacities, which could cause lower engine temperatures and pressures, a drop in efficiency and a possible increase in particulate matter emissions Another problem faced by the engine is that engine warranty may not cover slow hauling. (Henderson,2010) Spending more time in sea can cause significant labour costs and labour issues of crew maintenance. Also, there are no official guidelines or internationally accepted standards to execute this practice. Ocean liners are following their own measurements and strategies. 

Although modern engines can be modified for slow steaming, most vessel hulls operate more efficiently at higher speeds (Mishra, 2010)

Low steam strategy in logistics management

Even though slow speed shipping reduces fuel cost shipping lines are not passing the savings to the customers.

When the transit time in a voyage increases, inventory cost increases along with it. Longer transit time results in delayed delivery and later the shipper gets paid. This adversely affects shipping company’s cash flow, where the cash is blocked in inventory in transit which could otherwise have been employed elsewhere. Cash is a set resource for most of the shipping companies which must be applied at appropriate time where the shipper can make the most money, i.e. its core business activities.

In case of cargo owners due to slow steam strategy, they have to accept fact that transportation period of their cargo will be increased slightly. For example reducing speed from 27 to 22 knots in a voyage from Asia to Europe increases transportation time by 3 to 4 days and if the speed is reduced to 18 knots it might take more than a weak to reach the destination.(Weismann, 2010). For a manufacturer, freight rate alone comes under third or fourth highest cost item. During manufacturing process in a supply chain, transportation is done in many times through various parties to reach the finished product from raw material and thus introduction of slow steaming puts more impetus on shippers to control its containerised shipment.

In present world market, production time is more precious and manufacturers depend on inbound transport for timely delivery of key components or raw materials required .Production cost increases if there is a failure in delivery of goods at the right time especially when working in a Just-In-Time environment. Major problem involved in Slow steaming is longer transit times, which means that manufacturers should put an extra effort to plan further ahead to meet the production schedules.

Planning ahead in this circumstance is a difficult task as the transportation time is highly unreliable during slow steaming and delivery date could vary from days to weeks from the expected date thus making production planning more challenging. If the deliveries are not made in time it could disrupt manufacturing process, proving very costly. The only way a manufacturer can defend from such a trouble is by building inventory which would obviously results in an inventory holding cost.

Now from a customer point of view slow steaming, like manufacturer, he too have to plan ahead and when there is a late delivery, he could lay penalty on the manufacturer because of the poor service record build by the shipper with the customer and this directly can affect future business.

For a manufacturer short transportation time is vital in order to compete internationally against domestic alternatives. This is mainly because a customer will always have an option to select local supplier with faster delivery. Now to stay in the competition the manufacturer have to find an alternate routing or shipping lines that are able for quicker delivery and this might cost him more.

In order to face the new challenges created by slow steam strategy a shipper is forced to develop new managerial quality to negotiate freight rates and to control transit time and on time delivery (Holter,2010).Transport management is also expensive however, this cost is normally much lower than the impacts of transport on customer service, production, and inventory and freight rates and hence it is a good option for manufacturer to invest in transport management since it has numerous benefits across the supply chain.Source: Shippers Voice

The above table shows the impact of slow steaming on a shipper

In present day market, product or goods prices changes in a day to day basis and there is always a probability that late shipment can miss the beginning of selling season and cause financial loss to the customer. Another major problem faced by manufactures due to slow steaming is scheduling items to arrive well ahead of, when they need to be in stores which directly results in higher warehouse costs and increased wastage(Sengupta,2010).

Answer to this problems caused by this low steam strategy is shifting from a single-carrier scenario to multiple sourcing. When multiple carriers are introduced for the same transport volume shipper can introduce more than one carrier for competing and select the carrier(s) which offer the best combination of rates and transit times. To decrease the future problems on production and customer service, a guarantee from the carrier on transit time is important. Once the guarantee is obtained, genuine transit times should be observed against what was originally promised. (Holter, 2010)

Sustainability of slow steaming is always the question arises and the current strategy of slow steaming in container shipping will be the third time in shipping history were speed is reduced on a larger scale. Previous circumstances were due to increase in oil prices .First time it was after the Yom Kippur War in 1973 were oil price was doubled and second time occurred in 1979 when OPEC increased the oil price. However speeds of 25 knots were still common. (Bloom & Borisson,2008) There is always a chance that when economic conditions improve ocean liners will go back to their normal speed and hence the sustainability of slow steam strategy is still unpredictable.

Conclusion

For years ship builders and naval architects were trying to increase the speed of ocean going vessels but the recent trend has resulted in slowing down the vessel speed which has drastically changed the entire perspective of ship building industry

Even though shipping industry has mixed opinion about slow steaming it is still gaining momentum due to immediate monetary gains. Slow steaming generates profit for carriers and ship owners but from logistic point of view it has more negative than positive sides. Fuel savings and reduced CO2 pollution due to slow steaming cannot be neglected always and a new scenario has to be found so that everyone in value chain is benefitted.

References:

Bloom,J &Borisson,L (2008) Cost breakdown and surcharge mapping for sea freight Unpublished Thesis (P.G),Lund University

Corbett, J., Khoeler, H., 2003. Updated emissions from ocean shipping. Journal of

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Henderson .k (2010) Innovation’s on fuel market growth, Ship and boat November 2010

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http://www.shippersvoice.com/2010/04/14/the-impact-of-%E2%80%98slow-steaming%E2%80%99-and-how-to-mitigate-its-effect/

[Accessed on 21st October 2010

Longva, T., Eide, M., S., Skjong, R., 2010. Determining a required energy efficiency

Design index level for new ships based on cost-effectiveness criteria, Maritime

Policy & Management 37(2), pp. 129-143

Mishra,R.(2010) Super Slow Steaming -Good v/s Bad, Shippingbiz 360

Available from

http://www.shippingbiz360.com/article/12/20100308201004121128523176407ec7/SUPER-SLOW-STEAMING–GOOD-VS-BAD.html [Accessed on 12th November 2010]

Sengupta.S (2010) Slow Steaming by Ocean Liners – Will slow and steady win the race. Available from http://printing.kellysearch.com/profile/liners/us/902462277

[Accessed on 16th November 2010]

Windsor (2010) Slow steaming- Is it here to stay? Trade Available from:

http://www.companyclothing.co.uk/library/pdf/Features/ccnov10_trade_634238797119524455.pdf [Accessed on 9th November 2010]

Wiesmann,A(2010) Slow steaming – a viable long-term option?Wartsila Technical Journal Feb 2010 pp 51 to 55