Prof. Howard Weiss shares his OM insights with us monthly.
Recently, there has been a bottleneck of ships waiting to go through the Panama Canal with over 120 ships waiting, reports Institute for Supply Chain Management (Aug. 29, 2023). The main cause is that there has been a drought, lowering the canal’s water level which reduces its capacity. (This also happened in 2016 and 2019). Normally, 36 ships would pass through the canal every day. At the moment the limit is 32 ships. The waiting time average is roughly 10 days rather than the 6 days it had previously been. Shipping companies have three options to mitigate the problem.
Reduce ship weight Some companies have reduced the number of containers on a ship. This reduces the ship’s weight which reduces its “draft”. The reduction in containers can take place at the ship’s origin or in Panama by placing the containers on the Panama Canal Railway which runs across the country. As a result of this reduction, shippers have been adding surcharges to their clients. For example, Hapag-Lloyd has added a $500 per container fee on Asia to US east coast routes.
Use a different route There are several alternatives both by sea and land to avoid using the Panama Canal, each with its own advantages and disadvantages. By sea, a ship can go around South America. While the distance is considerably longer, the ship can make stops at major ports in South America such as Brazil, Argentina and Chile. The Suez Canal may be a less expensive option to the Panama Canal as the Asia to U.S. East Coast distances are roughly the same as when using the Panama Canal. Going around South Africa is another option. Land routes include the Panama Canal Railway.
Increase priority at canal In order to use the canal, shippers need to reserve a slot. The fee depends on the type of ship and other factors and ranges from $10,500 (small vessels) to $400,000 (largest vessels fully loaded). A few daily slots are left open and auctioned off through the “Transit Slot Auction” which essentially allows ships to jump the line. This auction fee is paid in addition to the normal fee. The base price for the auction is $100,000 and recently a company paid $2.4 million.
Discussion Questions:
1. Cite a waiting line situation where one can improve his/her place/priority in the line.
2. What other operations decisions require examining time and cost tradeoffs?
From the Process Strategies and Design of Goods and Services Class of 2026 – News Discussion
The group argued that there are several alternatives to mitigate this issue and to improve organizations’ supply chains:
-Technology can support climate and flow forecasts by using meteorological databases, atmospheric sensors, and historical data analysis to optimize shipping routes.
-Building lighter ships in the long term could help address operational restrictions.
-Implementing backshoring strategies as a form of diversification.
-Developing suppliers and manufacturing clusters is essential to increase supply chain efficiency.
-Constraint Theory is the rational way to increase capacity.
Greetings from the National Autonomous University of Mexico