Slow-steaming is the most potent measure for reducing fuel consumption with existing vessels, and it offers shipowners an attractive mix of reduced operational costs, lower external effects and lower vessel capacity on the shipping market. However, the challenge is to keep fulfilling the shippers’ quantitative and qualitative needs for maritime transport (Kalantari, 2012). This section focuses on the rationality behind the phenomenon of slow-steaming and its effects.
The negative external effects of shipping and the subsequent need for a substantial reduction of these externalities is increasingly accepted in the maritime community. Energy efficiency, and thereby the reduction of emissions per unit of transport work, can be achieved via a number of operational and technical improvements (Faber et al., 2010; Kontovas & Psaraftis, 2011a; Notteboom, 2006; Psaraftis & Kontovas, 2013; Sherbaz & Duan, 2012); slow-steaming is among the most effective and easiest to implement (Corbett et al., 2009; Cariou, 2011; Faber et al., 2012; Lindstad et al., 2011; Meyer et al., 2012; Psaraftis & Kontovas, 2010; Tai & Lin, 2013), and it often comes with a negative CO2 emission abatement cost. Due to the non-linear correlation between speed and fuel consumption (i.e., the so-called admiralty formula, which estimates a cube function, meaning a 10% speed reduction yields a 27% fuel consumption reduction), even a marginal speed reduction will result in a substantial fuel consumption reduction (Wang & Meng, 2012).
Slow-steaming, as a measure for reducing fuel consumption and emissions, is extensively examined in the literature (see, e.g., Mason & Nair, 2013) and can be divided into two categories: (1) the study of the technical validity and quantification of the impact of slow-steaming on ships’ fuel consumption and emissions, and (2) the economic viability of this strategy from the shipowners’ perspectives, primarily through the study of speed optimisation aimed at cost minimisation or profit maximisation. The first category thoroughly establishes the merits of slow-steaming. The second category, although it offers important insights, approaches slow-steaming more as a supply side reaction to tie up transport capacity, and thus affects the market price for shipping services rather than being an active measure for energy efficiency (Devanney, 2011). This becomes apparent, for instance, when the same body of literature reaches the conclusion of speed increase when market conditions are characterised by relatively low fuel costs, high freight rates and scarce capacity (Psaraftis and Kontovas, 2014), and speed reduction in markets with relatively high fuel prices, low freight rates and over-capacity, as elaborated on by Cariou (2011), Meyer et al. (2012), and Notteboom and Vernimmen (2009).
Although bunker cost savings is a major incentive for slow-steaming, the impact of the fuel price level alone is not as salient as one might suspect because fuel surcharges, or bunker adjustment factor (BAF), distort the economic signal that the fuel price provides to shipowners in regard to sailing speed (ibid). BAF is a contractual construct that transfers the risk of fuel price fluctuations from the shipowner to the shipper. This means that even when fuel prices are extremely high and bunker accounts for more than 60% of the shipowners total cost (UNCTAD, 2008), the shipowners might opt to retain high speeds as long as the underlying demand for the service is strong (Fransoo & Lee, 2013; Wang et al., 2011).
Nevertheless, slower speeds result in fewer voyages per year, which essentially reduces the annual transport work produced by the vessel; hence, more ships are required to uphold the frequency of the service (Psaraftis & Kontovas, 2010). Maximising the utilisation rate of capital intensive and scarce resources is obviously a priority, but in parts of the shipping business cycle, vessel capacity is far from scarce and the option is to lay up ships. Especially for liner shipping, changing the schedule for any reason might create bottlenecks and introduce more variability in the global system, which could create issues that are difficult to foresee (Harrison & Fichtinger, 2013).
Notwithstanding the positive environmental and economic effects of slow-steaming, the practice also entails significant and potentially negative operational and economic consequences for the shippers, i.e., the customers of the service that the shipping companies produce—most notably, the increased lead time resulting from longer transport times (Fredriksson & Jonsson, 2009; Maloni et al., 2013; McKinnon, 2012). Unilateral changes in sailing speed contribute positively to the reduction of CO2 emissions, but only temporarily if the supply chains using the service cannot cope with the lead times and opt for more carbon intensive alternatives. Nevertheless, it is feasible that slow-steaming will become the long-term norm due to environmental regulations (Kontovas & Psaraftis, 2011b), demand pressure or the shipowners’ own environmental ambitions. Over the past few years, the demand for environmentally sustainable transportation has amplified and shippers are taking different measures to reduce their negative impact on the natural environment. For instance, IKEA together with its transport providers is striving to minimize its adverse environmental impact, as nearly 80% of total CO2 emissions of IKEA’s business operations are caused by its transportation activities (Lai et al., 2011). Simultaneously, Nike and HP not only reduced emissions from their logistics operations but also saved millions of dollars in cost by shifting their shipments from air to sea transport (Gerdes, 2012). Contrary to these initiatives that highlight the best practices pursued by shippers, the empirical research demonstrates that environmental factor is comparatively given less importance by shippers when selecting a transport service. Lammgård (2007) in this context based on a survey conducted in 2003 among Swedish manufacturing and wholesale firms, exhibit that service price, total lead time, reliability, and environmental efficiency of a transport service are respectively the key factors considered in transport service choice decisions. Lammgård and Andersson (2014) in a later survey conducted in 2012 with same target group found that despite the increasing societal concerns about climate challenges, the environmental efficiency of a transport service is consistently considered the least prioritized factor by the Swedish shippers. Moreover, from the French shipper survey (ECHO) of 2004 that covers the properties of 3000 shippers, 10,000 shipments and 20,000 transport chain legs, it could be observed that to deal with demand fluctuations, to enhance production-process’ efficiency and not least to reduce warehousing costs, firms are increasingly applying the just in time (JIT) and lean supply chain approaches in their business operations (Guilbault and Gouvernal 2010). Thus, slow steaming as a green argument might not be convincing for shippers, as they prefer shorter lead time and higher reliability over the environment. Additionally, trade-offs—such as that between sailing speed and punctuality (Harrison & Fichtinger, 2013) or sailing speed and shelf time, as well as a low rate of waste and obsolescence for perishable goods like fresh food—might warrant fast shipping. Furthermore, slow-steaming increases pipeline inventory and safety stock that is affected by transport time and punctuality. Ronen (2011), however, found evidence that a reduced sailing speed actually increases the punctuality or reliability of the service. This point is contended, in whole or in part, by Harrison and Fichtinger (2013), Maloni et al. (2013), and Saldanha et al. (2009). Regardless of the impact of slow-steaming on service punctuality, there are few authors who have empirically tried to evaluate how the shippers value the trade-off between speed and punctuality.
Notteboom and Rodrigue (2008) contend that shipping lines design their systems to offer a service that is convenient, whereas they are contracted to provide their customers with a service they demand in terms of quality and price. This view, combined with the reasoning above, leads one to conclude that the shipowners are not receptive to any single outside signal to reduce their sailing speed; nor is the shippers’ demand on transport time, punctuality, frequency or route a deciding factor for liner shipping companies decisions regarding fleet management. The segmentation of the offered services on the supply side of the market is not sufficient, as shippers are not savvy enough purchasers to make use of a differentiation that exists (Saldanha et al., 2009).
Hence, when fuel prices are high and the market is characterised by over-capacity and, thus, falling freight rates, shipowners implement slow-steaming. Historically, this has been the case any time slow-steaming has been broadly employed in the shipping industry. The reviewed literature reveals a consensus concerning the fact that the adoption of slow-steaming, regardless of how it is communicated and marketed, is motivated by economic factors that arise from temporary market conditions; therefore, the speed increases again once the market characteristics are reversed.
Shippers’ slow-steaming mitigation strategies
In manufacturing, most parts are procured from domestic suppliers while the strategic parts, which are characterised by a high value and being produced utilising economies of scale, are purchased from other countries (Reeves et al., 2010). Components and sub-assemblies, which also have a low price-to-weight or price-to-volume ratio, are increasingly sourced over longer distances. South Korea, Mexico and Eastern Europe—regular component suppliers to Japan, the USA, Canada and Western Europe, respectively—increasingly face competition from Asia. To a lesser extent, container shipping lines transport products from Europe and the USA to East Asia. In a research review regarding the location aspect of global sourcing strategies, von Haartman and Bengtsson (2015) indicate that most literature is descriptive and predominantly addresses cost advantages and business interactions, a phenomenon also identified by Schiele et al. (2011). Transaction costs (Williamson, 1979) and operational aspects including logistics often seem to be neglected. The phenomenon has attracted substantial scientific attention since then.
According to Deardorff (2005), theories of international trade often assume that transport is costless and instant, or it is simply treated as an add-on. For example, when interviewing Swedish manufacturing firms, Lindau et al. (2004) identified an attitude of treating transport services as “a given infinite commodity available at a market price”. This approach is sufficient for selecting hauliers for short distance transport, but much more effort must be spent on inter-continental transport with a large and increasing share of the supply chain’s lead times, costs and environmental impacts. Supply chain managers trained and used to solving lead time issues by shortening the length of the chain and send small consignment with road transport. Global supply chains minimising labour costs for each manufacturing step involves true challenges by reintroducing long transport lead times; slow-steaming amplifies these effects.
As mentioned previously, this article aims to identify, structure and analyse the measures for dealing with the increased lead times by slow-steaming. The rendering focuses on components, sub-assemblies and finished products transported by container shipping rather than raw materials transported by bulk shipping. In addition, it focuses on practical and economic issues related to global trade and does not particularly question the trade for environmental reasons, as is done by Tavasszy et al. (2003). When analysing the effects of extended supplier distances, Woxenius (2007) uses logical deduction to suggest a structure of approaches for dealing with the prolonged lead times. The structure is organised along approaches that the supply chain actors can choose from or combine, which are sorted according to the degree of changes in their own operations and the time frame needed for implementation. The set of approaches includes transferring the problem up- or downstream, transport, logistics, supply chain structure, manufacturing concept and product design. In the following sections, the structure is used to deal with the increased lead time induced by slow-steaming, with most attention paid to the measures that require the least adaptation from the manufacturing and retailing firms. The structure is found sufficiently fit for the purpose of categorising slow-steaming mitigation strategies because it also addresses longer lead times—but it might not cover all possible actions.
Coping by transferring the problem up- or downstream
The simplest, and often the immediate choice for strong actor along the supply chain—and often the final assembler or retailer under its own brand—is to keep its own activities as is and require that upstream or downstream actors solve the problems for them, that is, moving the problem along the supply chain rather than solving it. Obviously this reduces the potential benefits. In a more conceptual language, it can be referred to as a channel relationship using transaction cost theory (Coase, 1937; Williamson, 1979, 1981); because the framework will be used to structure discussions with practitioners, the straightforward term transfer-the-problem is used. Taking all the key components of transaction cost theory (i.e. transaction cost, contracting cost, coordination cost and search cost) into account, the total transaction cost of finding solution to the increased lead time caused by slow steaming within the firm itself may be greater than the transaction cost of transferring the problem up or down stream (Coase, 1937), which justifies this phenomenon. From Williamson, (1981, 1979) it could be inferred that the supply chain actor that possesses the stronger control over critical resources, in principle, has preferential access to information, which in turn ensures the efficiency and sustainability of its relationship with other supply chain partners. Furthermore, Williamson (1981), illustrates the bilateral exchange relationship from the transaction-cost-economizing perspective. The author explains that to meet the unexpected and substantial increase in demand of its closed body cars, and to cut the transportation and inventory costs, General Motors (GM) urged Fisher Body (the body supplier) to relocate its body manufacturing plants close to GM assembly plants. However, upon resistance from Fisher Body, GM made transaction-specific investments and purchased Fisher stock which later resulted into the merger of both firms and facilitated GM operations.
Another example is Volvo Trucks, representating a truly global manufacturing company with brands as Mack, Renault Trucks and UD trucks with a powerful position in the supply chain.. In an example from 2005, 215,000 trucks were manufactured to order with a planning horizon of 19 calendar days. Deliveries of sequenced components and sub-assemblies were very strictly scheduled. Second -tier suppliers were encouraged to produce components in any low-wage country but they had to carry the increased cost of storage and the risk of obsolescence. Batch-delivered parts were often produced and delivered from adjacent regions, but for suppliers with facilities further awaywere forced to store the parts at a pick-up point within a certain time distance set by Volvo.
Hence, Volvo merely moves the problem to its suppliers by defining where they must locate production or distribution centres. Volvo also transfers the risk of obsolescence to its suppliers by buying sequenced and small parts on an assembly plant use basis, i.e. vendor-managed inventory whereas ownership of batch-delivered parts is transferred at pick-up points (Alftrén, 2006).
Coping by changed transport system
Prolonged lead times by slow-steaming can also be addressed without changing the shipper’s operations by replacing container shipping for faster transport. According to Hummels (2001), faster transport services by air and sea reduced the tariffs on manufactured cargo from 32% in 1950 to 9% in 1998. Between continents, time is generally disproportional to the distance. For manufactured goods, air is sufficiently fast and sea offers large and sufficiently cheap capacity but it is a true challenge to close the supply gap between air and sea in terms of time, cost and capacity. The supply gap can be closed by cutting costs and capacity constraints for air, but absent propulsion technology breakthroughs, together with comparatively high fuel costs and environmental concerns, make it more realistic to improve the speed of sea transport byimproving the port operations, calling fewer intermediate ports, finding new routes, implementing faster vessels and combining traffic modes.
With ever-larger container ships, handling times are considerable, although port operations try to catchup Giving time-critical containers priority during port handling might cut handling time by a day or two but a more likely development is to cut transport time by a number of days when larger flows allow for routing vesselsdirectly between one port in each continent or increase their frequency. So far, however, shipping lines have deployed larger vessels to meet the larger flows .
A potential option is traversing the Northern Sea Route (NSR), which is about 6000 nautical miles—or 50%—shorter between Northwestern Europe and Northeast Asia than the Suez Canal passage (Raza & Schøyen, 2014). NSR transit shipping is likely to result in a higher capacity and may ultimately reduce risks of disruption and congestion (Schøyen & Bråthen, 2011). Nevertheless, literature suggests that the NSR is presently not economically feasible for liner shipping due to shallow waters, a short season and unreliable Arctic ice conditions, extensive building costs for standardised ice-classed vessels, poor infrastructre along the NSR, high and unpredictable NSR tariffs, and a scanty fleet of icebreakers (Furuichi & Otsuka, 2014; Lasserre, 2014; Lee & Song, 2014; Liu & Kronbak, 2010). In addition, the ice-classed ships are more costly, heavier and would consume excessive fuel when used in southern routes during winter (Pierre and Olivier 2015) 2015). Furthermore, the potential reduction in transport time is less significant for China and South Asia, which accounts for a significant share of the current container flows to Europe and a lack of intermediate ports of call along the route also restricts the scope of the NSR.
Nuclear propulsion has been a hope but they have not proven to be of any commercial success (Hass, 2014; Radiationworks, 2015). Nevertheless, there is a technical potential because nuclear-powered aircraft carriers match the size of container giants at 100,000 tons and cruise at up to 35 knots, although at a prohibitive cost (Carlton et al., 2011; DNV, 2014; Gu & Zhang, 2014). Currently, it is regarded as unrealistic to renew plans for commercial nuclear vessels for both economic and public opinion reasons. Neither significantly increasing speeds with current diesel engine designs nor fitting ships with steam turbines, like the Sea Land Commerce that crossed the Pacific at 33 knots average speed in 1973 (Schoyen and Steger-Jensen, 2017), would be economically justified. However, the potential for new propulsion technology for fast and economical sea transport remains to be seen.
The combination of sea and air, e.g., through Dubai, is regarded as relatively mature, but Mediterranean ports like Trieste and Gioia Tauro in Italy, and Barcelona in Spain, offer a combination of sea and road or rail in order to cut a few days to Northwest Europe, compared to doubling the Iberian Peninsula. Besides reducing lead time, such transport chains avoid passage of the North European and Baltic Sea Sulphur Emission Control Area as well as additional costs from using cleaner fuel or emission reduction technology. The inland transport system in China is still slow despite extensive investments in the domestic road and rail network, but when the current investment scheme is finished and operational and administrative routines are improved, hinterland transport times are likely to be reduced significantly. For total transport chains, this can partially compensate for the longer times spent at sea due to slow-steaming.
The Trans-Siberian Railway (TSR) and coming rail alternatives within the Chinese Belt & Road Initiative are often mentioned as a viable alternative or rather complement to air and sea in regard to time and costs. The TSR is connected to rail tracks in Russia, Belarus, Poland and further in Western Europe, as well as Chinese and Mongolian tracks in Asia. The TSR offers a reduced lead time of nearly 10 days (34%) between Europe and Asia; for instance, the transport time between Hamburg and Shanghai is 18–20 days compared to 28–30 days via the Suez Canal. The lead time advantage of rail freight is enforced by the slow-steaming of vessels (Rodeman & Templar, 2014: Verny & Grigentin, 2009). However, test runs in 2005 for Dynapac, a Swedish manufacturer of construction equipment that imports containers with components from China, resulted in just 2 days to 1 week of lead time reduction at a tripled transport cost compared to sea transport (Wendel, 2005). To speed up transport time, various measures are taken by, e.g., the EU, Russia, Azerbaijan, Kazakhstan and China; these measures include easing border crossings, compatibility in gauges, voltages and safety systems as well as simplifying legal framework and new information and communication technologies (COMCEC, 2017).
For the TSR service operating between Moscow and Shanghai, the total volumes measured in Twenty-foot Equvivalent Units (TEUs) reached 948,000 TEUs in 2008; from this volume, 429,000 TEUs represent international container traffic (Tavasszy et al., 2011.) Currently, the TSR accommodates approximately 5% of the total shipments between Asia and Europe (Tsuji, 2013). DB Schenker operates weekly train services between Germany and China; 45,000 TEUs were transported by DB Schenker between both countries using the TSR in 2014. Freight rates are up to 50% higher for TSR over sea transport, but the TSR option between Germany and China is nearly twice as fast as ocean shipment from terminal to terminal (DB Schenker, 2015).
Although the TSR may be competitive in terms of time and costs, there are doubts regarding its capacity. According to the Government of Poland (2004), the capacity of the TSR, after modernisation, is limited to 600,000 TEUs a year compared to the 21,7 million TEUs transited between Europe and Asia in 2015 (UNCTAD, 2016). Hence, container ships will dominate the EU-Asia trade for many years to come, but the TSR is at least an option for reducing the supply gap between sea and air. The TSR can also be instrumental in developing areas along the TSR into sourcing regions for western firms (COMCEC, 2017), with 36 intermodal terminals along the route (Dynkin, 2002).
At present, there are many uncertainties that impair the smooth movement of container cargo between Europe and Asia using the TSR. Among the main issues are cultural and political differences across the countries involved in the TSR, poor cooperation among the railway companies, theft, corruption, and dissimilarities in railway systems in terms of infrastructure, equipment and management. Thus, the use of the TSR for container shipments between East Asia and Western Europe amplifies the cost and lead time compared to other transport modes. Currently, container shipping through the Suez Canal is the least expensive option, and the NSR and TSR may appear to be roughly equivalent second-tier alternatives (Cho, 2007; Rodrigue et al., 2013; Song & Na, 2012; Tavasszy et al., 2011; Verny & Grigentin, 2009).
Coping by changed sourcing
The sourcing domain, similar to what (Meixell & Gargeya, 2005) denotes the supply chain design domain regards which actors are part of the chain and, predominantly, the localisation of the intermediate nodes; more definite locations of suppliers, such as investigated by Eberhardt et al. (2004) and Woxenius (2012); and the localisation of its own plants (Gammeltoft et al. 2010; Radlo 2016). One option is to balance demand over the season and production life cycle by sourcing a specific product from different locations. A manufacturing firm can then order products that matches the lowest forecasted sales volume from distant locations, complementing orders over the season or product life cycle from closer places and emergency orders from suppliers in adjacent countries. With short product life cycles, the first batches of components can be sourced in the relative vicinity of the assembly plants and then sourced from longer distances when the product matures in the market.
A similar distinction is plausible for manfucturing firms sourcing components and sub-assemblies. Generic components are sourced in distant countries and semi-generic products in nearby countries, and successively move the source closer to the assembly facility because the components are more unique. A contradiction is that generic components are often heavy or voluminous products with comparatively low labour content, with small benefits of sourcing in distant low-wage countries involving container shipping.
These measures imply different levels of integration between buyer and seller. Taninecz (2004), for example, finds that firms with the least supplier integration and the most customer integration are less likely to source from China and, thus, be a subject of slow-steaming. He believes that the reason for the latter is just-in-time delivery commitments, but another interpretation is that tight integration means the supplier develops the components, and then the assembly firm simply cannot use another supplier.
Coping by changed logistics and manufacturing concept
In the logistics and manufacturing domain, an obvious—but often painful—option is surrendering from build to order (Gosling and Naim 2009; Gunasekaran and Ngai 2005; Li and Womer 2012) and rather use prognoses and go back to stock-keeping finished products. In other words, they will make to stock (MTS) (Altendorfer and Minner 2014; Shi et al. 2014) based on forecasts, rather than make to order (MTO) based on customer orders. Buffering components at different stages and applying postponement, i.e., delaying the moment when generic products become specific, might also be an approach for coping with longer lead times caused by slow-steaming. One aspect of logistics involves purchasing transport services, e.g., choosing traffic mode and how to use and combine them based on standard offers as investigated by, for instance, Kiesmüller et al. (2005). Examples are using different traffic modes in different seasons or product life cycles, using air transport for solving occasional problems, and adapting consignment sizes and departure frequencies to the transport offer. The current sourcing strategies generally take the supply gap between air and sea into account. Either low-cost, generic products are sent by container shipping or expensive products are sent by air. As a consequence, products with a medium price-weight or price-volume ratio are often not traded between continents. Using the TSR or new offers as part of Belt & Road Initiative would rather facilitate new trade than taking market shares from sea and air.
Coping by redesigning the product
In the long run, the product design domain will be further affected by the globalisation of supply chains. The measures include over-delivering, i.e., building with “optional” equipment in the standard model, like the Japanese car manufacturers when they first challenged the manufacturers in Western Europe and the USA. Another way is to modularise the product to decrease the dependency on accurate prognoses (Doran, 2005; Frigant & Lung, 2002), which the Swedish truck manufacturer Scania realised and mastered. To really reap the benefits of global sourcing, manufacturers are likely to increase the share of generic components, design the product for postponement, or at a minimum decrease the value of unique parts that require local sourcing. Economies of scale in manufacturing also fosters this development. As an example, Japanese producers of electronic calculators used the same electronics in the interior of different calculators in the 1980s—only differentiated by the available buttons on the calculator cover. Drilling extra holes allowed for using all functions also after buying the cheapest model. Another example is Volvo Car Corporation, which only differentiated the V70 models with 140 and 170 hp. engines by settings in the engine control software, hence an example of postponement. Another obvious and often commonly cited example is Benetton’s dyeing of T-shirts following the sales of the colours in their stores. The conceptual rendering is summarised in the conceptual model in Fig. 1.
Nevertheless, it is a significant simplification that the magnitude of change increases to the right in the figure. For instance, a new product design might imply incremental changes if done consciously between product generations, whereas changing suppliers might imply severe strain on the work in the purchasing department and the punctuality of deliveries will affect the assembly operations. Other measures might not feasible at all; channel relationships are obviously not an option for firms with a weak position in the supply chain, and even strongly positioned firms will pay a price in one way or another.