shipping – The OM Blog by Heizer, Render, & Munson

OM in the News: UPS Turns to RFID

United Parcel Service is rolling out technology to more closely track the billions of small packages that move through its U.S. network each year, reports The Wall Street Journal (April 15, 2026).

UPS has invested $100 million to date to set up RFID technology across its network

The company said the change will increase visibility throughout its small-package delivery network, while increasing delivery accuracy and reducing the manual labor needed to scan individual parcels.

“What this does is it offers our customers real-time, near real-time, visibility of where their packages are at within our network,” said a UPS exec.

The capability is a step beyond the shipment-tracking information widely used today, which relies on workers scanning bar codes as packages enter and leave warehouses or vehicles. That tracking point typically lags behind a package’s current location, leaving gaps in visibility where packages may be misplaced or lost.

UPS is now embedding RFID tags into shipping labels and has installed RFID sensors on all its U.S. delivery trucks, at its more than 5,500 retail stores and in its final-mile delivery centers.

The technology allows UPS to automatically sense and track when a package crosses a threshold into or out of a building or vehicle. That will give customers a more up-to-date, accurate picture of where packages are, though it does not include real-time location tracking.

The company in part uses the technology to identify what it calls misloads, where packages are loaded onto the incorrect delivery truck. The RFID tag on a given package sets off a sensor as it’s loaded into a delivery truck and makes a noise indicating if the package is on the wrong vehicle.

UPS said misloads have dropped near 70% since it started using the technology in 2024, and that the RFID technology will eliminate about 20 million manual scans per day.

The high cost of individual tracking devices and the complexity of small-package delivery networks have limited tracking technology to more industrial applications as well as shipping high-value goods such as healthcare products, electronics and luxury items. UPS said the cost of RFID tags has come down to a few cents each, allowing the company to deploy the technology at scale.

Classroom discussion questions:

What are the advantages and disadvantages of RFID?
Why are misloads to be avoided?

OM in the News: How AI Consumes–and Saves–Energy in Transportation

We all know AI’s dirty secret: It gobbles up a huge amount of electricity—and spits out a large volume of greenhouse gases in the process. But what if using AI can also save energy?

AI has the potential to drastically slash energy demand across a swath of industries and cut down on their carbon emissions. And it may be so effective, writes The Wall Street Journal (Sept. 16, 2025), that it will easily balance out its own power demands and carbon emissions.

In our blog today, we discuss how AI is remaking transportation, planning routes and timetables.

AI-driven route planning has helped major U.S. freight companies cut fuel use in ground vehicles—in some cases by 5% to 10%—by simply lowering the miles they travel. The whole ground-freight industry could cut its emissions by 10% to 15% by using AI-led dynamic route optimization in all vehicles.

Getting stuck in traffic adds up to a lot of pointless emissions. AI-driven route planning has cut fuel use in ground vehicles as much as 10%.

AI can analyze traffic in real time, and is starting to get better at guiding vehicles away from busy areas, reducing the fuel wasted by stop-and-go driving. (Sitting in traffic adds up to a lot of pointless emissions: Americans wasted 3.3 billion gallons of gasoline and diesel fuel in 2022—over 215,000 barrels a day of petroleum).

Also, e-tailers cluster deliveries together to save miles traveled. A crucial form of routing goes on behind the scenes. AI-enabled logistics predicts what goods people will be ordering, and where and when. That way, e-tailers can stock their distribution centers according to probable local demand, which means fewer miles spent on deliveries.

Further, marine freight is using AI to calculate the best times for ships to “slow steam”—lower their speed—which can greatly boost efficiency: A 10% drop in speed cuts fuel use by 20%. Improving traffic at ports can also cut down on wasted fuel. Ships burn as much as 7-10 tons a day of fuel while anchored near ports, waiting for congestion to clear. AI-assisted programs help shippers lower the waiting period by timing their arrivals at port efficiently.

The International Energy Agency says the spread of AI in the transportation sector alone could slash 900 million metric tons of carbon emissions by 2035. In comparison, the agency expects emissions from data-center electricity use to rise to 300-500 million metric tons by 2035, up from 180 million metric tons today.

Classroom discussion questions:

How might AI be used in the commercial aviation industry?
How else can AI be of benefit to delivery firms like Amazon?

Guest Post: Shipping Risks in the Supply Chain

Prof. Howard Weiss shares his insights with our readers monthly.

Table 11.3 in the Supply Chain Management chapter in your Heizer/Render/Munson textbook discusses supply chain risks and tactics to minimize the risks. One of the risks that is mentioned is that distribution containers can be damaged, delayed or lost at the following points:

Sitting at a container yard
Handling at a container yard
Loading or unloading onto/from truck, train or ship
Enroute on truck, train or ship

Consider the three major modes of shipping – sea, rail and road and their associated risks. Many trillions of dollars in goods are transported via all modes annually.

Maritime Shipping. Currently there are about 6,000 container ships in operation globally. The largest of these can carry 24,000 twenty-foot containers or 12,000 forty-foot containers.

During the last decade an average of 1,300 containers were lost at sea. In 2022, 661 containers were lost. In 2024, 576 containers that were lost. A notable cause of container loss is severe weather. In the 2024, three incidents off the Cape of Good Hope resulted in losses of 99, 44, and 46 containers, respectively. The region is known for its rough seas. However, due to Houti terrorists in Yemen, more ships are rerouting around Africa instead of passing through the Red Sea, increasing exposure to such risks. (About 1/3 of lost containers are eventually recovered).

Trucking. Every year in the U.S., 3.5 million truckers travel 200 billion miles carrying $720 billion worth of goods. This is more than any other mode of shipping. Shipping containers by truck presents a different risk profile. While containers are rarely lost entirely, they are susceptible to damage and may be involved in traffic accidents, potentially causing property damage or hazardous material spills. There has been an average of 100,000 truck crashes per year.

Train Transport. Rail freight in the U.S. accounts for $210 billion worth of goods each year. The risks when using rail transportation are very similar to those with trucks. The key risks are derailments leading to significant damage and delays, cargo damage or release of hazardous materials and logistical disruptions due to infrastructure failures or collisions. The average number of rail accidents over the past decade has been 1,850.

Regardless of the mode of transportation, most containers are insured against loss and salvage operations will be conducted especially when hazardous materials are involved.

Classroom discussion questions:

What was the most expensive shipping disaster in the past decade?
What can be done to lessen trucking losses?

OM in the News: The Biofuel Controversy

The battle lines are being drawn on the alternative fuel debate and the steps that will contribute to the International Maritime Organizations’s (IMO) emission reduction goals, reports The Maritime Executive (Feb. 17, 2025). Major shipping lines and non-government groups are calling for the IMO to exclude biofuels from its list of green alternatives to traditional fossil fuels. They argue it would be unsustainable and could produce more harm than good.

Nearly a third of global shipping could run on biofuel in 2030– up from less than 1% today. But the price advantage of biofuels would result in unsustainable demand. Carriers have invested in the use of biofuels derived from used cooking oil and animal fats. With the supplies limited, just 2.5 – 3% of shipping could run out of used cooking oil and animal fat biofuels by 2030. Two interesting facts:

The vast majority of biofuels will come from palm and soy (60%), which are heavily linked to deforestation.
Close to 300 millions bottles of vegetable oil could be diverted to powering ships every day in 2030, putting pressure on grocery prices.

(There was a doubling of the use of palm oil biofuels in the EU between 2010 and 2020 following the introduction of a law promoting biofuels in cars.)

There is a debate in the EU on the competition for food supplies if the oils were also to be used as biofuels. “As things stand the IMO risks doing more harm than good. Palm and soy biofuels are devastating for the climate and they take up vast amounts of land,” argues one shipping exec. The fuel-intensive shipping industry would need farmland about the area of Germany to produce enough crops to meet its increased biofuel demand. Land that could be used for farming would need to be converted to growing biofuel crops, while burning vegetable oil in ships will deprive supermarkets of a staple food item.

This could pose a serious climate problem, as palm and soy are responsible for 2-3 times more carbon emissions than even the dirtiest shipping fuels today, once deforestation and land clearance are taken into account.

Classroom discussion questions:

We open the Supp. to Chapter 5 (Sustainability in the Supply Chain) with an example of airlines switching to biofuels. Is this a realistic approach given the above article?
Make the case for and against shippers switching to biofuels.

Guest Post: DHL Express Delivers to a Global Market

Dr. Misty Blessley, Associate Professor of SCM at Temple U., shares here thoughts with our readers on a regular basis.

“Every supply chain company will have to keep a close eye on big headlines like geopolitics, climate change and wars. If you are a global company, there will be a crisis somewhere, every day,” says DHL Express’s CEO John Pearson, in a recent article in The Economic Times. DHL Express, he adds, is the undisputed global leader in international express shipping.

Pearson disputes claims that globalization is decreasing, thus making crisis management less of a supply chain concern. In actuality, he states that, “Globalization is not giving way to regionalization and aspects like friendshoring, nearshoring and stronger regional trade are not taking place in a way that makes an impact,” making it as necessary as ever for firms to work through frequent and prolonged crises. For many firms, this has caused globalization to take on a new face.

This new global face comes from adding additional facilities alongside current manufacturing bases, as a means of mitigating risk. India has become a popular location for new manufacturing plants, warehouses and regional offices. “China plus one” is another mitigation strategy by which western firms decrease their Chinese dependence by setting up facilities in Indonesia, India, Philippines, Vietnam, Mexico and Turkey. Chinese firms are doing the same, but they are also the nearshoring exception as they move into Mexico to fulfill their U.S. demand.

How does DHL remain global in a crisis, that is, how does it deliver to a global market every day? It attributes its ability to foresee and anticipate a crisis, and agility for carrying it through. DHL’s pandemic response was rooted in the 2010 Eyjafjallajokull volcano eruption in Iceland, which shut-down air travel in Europe for 30 days. DHL moved to an entirely ground network overnight, by leveraging its available assets and relationships. In sum, DHL scans externally, knows its internal capabilities and learns from the past.

Classroom discussion questions:

1. Refer to the six reasons domestic business operations decide to change to some form of international operation in Ch. 2 in your Heizer/Render/Munson textbook. What advantages propel firms to take on a new global face?
2. Refer to the Logistics Management section in Ch. 11. DHL Express was able to pivot from air to ground transportation in Europe following the volcano eruption. What tradeoffs exist between the various shipping systems?

OM in the News: Two Canals–Two Problems

More than 50 ships queued to cross the Panama Canal on a recent day—from tankers hauling propane to cargo ships packed with food. A prolonged drought has led the canal’s operator to cut the number of crossings, resulting in longer waits. The tolls that ships pay are now around 8 times more expensive than normal. A single Panama Canal crossing costs around $500,000. But the canal operator has cut the number of daily ship crossings in half (from 36 to 18) and shippers have to go through a bidding process where the highest offer (sometimes $4 million) secures a crossing.

A Houthi helicopter attacking a ship off the coast of Yemen

Over 7,000 miles away, vessels that move containers through Egypt’s Suez Canal are waiting for naval escorts or avoiding the passage altogether to take a much longer voyage around South Africa. Ship operators fear that their crews could be imperiled on the journeys through the Red Sea by missile or drone attacks from a Yemen-based rebel group. Houthis have attacked more than 50 ships since November, including a cargo vessel loaded with fertilizer that sank into the Red Sea and another that resulted in three deaths.

The Suez’s problems are geopolitical and those in Panama are climate-based, but both are roiling global trade and supply chains, writes The Wall Street Journal (March 11, 2024) Cargo volumes through the Suez and Panama canals have plunged by more than a third. Hundreds of vessels have diverted to longer routes, resulting in delivery delays, higher transportation costs and economic wreckage for local communities.

Ship operators are bracing for months of uncertainty in the waterways where some 18% of global trade volumes crossed last year. It’s the first time that both are disrupted simultaneously. Daily freight rates on some routes between Asia and the U.S. surged to more than $20,000 per box, five times higher than current levels.

Businesses are starting to feel the ripples. Tesla and Volvo paused vehicle production for 2 weeks in January because of parts shortages. Some apparel companies opted for their spring fashions to be delivered by air instead of sea to ensure items arrived on time. As more businesses return to pre-Covid practices of keeping minimal inventories and rely on timely deliveries, they are more vulnerable to disruptions if bottlenecks at the two canals continue.

Classroom discussion questions:

What options do shippers have?
How can supply chain disruptions be avoided?

Guest Post: Sailing Toward Sustainability Transportation

Temple U. Professor Misty Blessley describes a new technology that will uplift sustainability in the shipping industry.

Chemship B.V., a transporter of bulk liquid via its fleet of stainless steel chemical tankers, is the first of its kind to use wind assisted ship propulsion (i.e., sail toward sustainable transportation). Its MT Chemical Challenger, which covers the Trans-Atlantic route between the East Coast of the U.S and the Mediterranean, is the first chemical tanker to be equipped with sustainable wind technology. In a recent article, Chemship’s CEO writes: “We will use less fuel and thus reduce CO2 emissions. For this vessel, we anticipate an annual CO2 reduction of 850 tons. This is equivalent to the yearly CO2 emissions of over 500 passenger cars.”

The technology behind this is four VentoFoils, which have a 30X30 meter sail equivalent. The VentoFoils create a direct wind surface, which when combined with vacuum technology attenuates the force of the wind. The wind sails offer the benefits of easy installation, no needed reinforcements, push-button folding and sail setting, automatic sensing and folding with wind forces over seven and the sails do not obstruct the crew’s line of sight.

Four 16-meter high sails cut fuel consumption by 10-20%

This initiative by Chemship is not only good for the planet, but good for the shipowner’s profits. Since January 1, 2024, due to the expansion of the European Union’s Emissions Trading System (EU ETS) in the shipping industry, shipowners have been paying for the emissions associated with their sea transported goods coming into and going out of European ports.

Classroom Discussion Questions:
1. In Supplement 5 of your Heizer/Render/Munson text, the objective of the EU ETS to combat climate change is discussed. Consider their expansion into the shipping sector.
2. In what ways does Chemship’s adoption of VentoFoils create a competitive advantage? (Note: Water transportation is often preferred when cost is more important than speed).

OM in the News: Shipping Dangers on the High Seas

Ships today handle more than 80% of global goods. And the modern economy rests on the rule that ships of any nation may sail the high seas. “Suddenly, that pillar of the international order shows signs of buckling,” writes The Wall Street Journal (Feb 1, 2024).

In the Red Sea, Houthi rebels have stormed onto cargo ships, causing freight rates to quadruple and setting a precedent that American vessels aren’t welcome across one of the world’s most vital transport lanes.

Open oceans allowed a global economy to emerge from the wreckage of two world wars. The freedom for all container ships to safely ferry goods on the high seas helped lift China from poverty, turn the U.S. into a country of middle-class consumers and cement the dollar as the world’s reserve currency. Until the 20th century, trading nations competed in blood for the right to ship merchandise to foreign ports; these days they compete on price and quality.

Only eight decades separate the present from a past when most manufactured goods moved by land and a ship was only as safe as the state protecting it. Less than 500 million tons of dry cargo crossed the seas annually in the 1950s. That world was dotted with small manufacturers serving local buyers. Today, container ships carry 23 times more tonnage, integrating a global economy of mammoth conglomerates targeting whichever customer on earth offers the most profit, soonest. That integration has driven down costs, allowing IKEA to cheaply sell identical sofas in 59 countries and McDonald’s to fry Idaho’s Russet Burbank potatoes around the world.

But it has also made car factories, big-box retailers, fashion houses and electronics dealers significantly more vulnerable to even the smallest snags: Witness the tens of billions of dollars in trade held up when a single cargo ship, the Ever Given, ran aground in the Suez Canal for six days of 2021. Or the supply-chain breakdown that unfolded as the Covid-19 pandemic left container ships log-jammed outside Asian and American ports.

Governments from Europe to Asia that have grown prosperous and accustomed to safe seas want to keep maritime chokepoints open, particularly the Suez Canal, the Taiwan Strait and the Horn of Africa. Worldwide, the average cost of shipping a 40-foot container has jumped 2.7-fold in the past 3 months, to $3,964.

Classroom discussion questions:

What can operations managers do to address this risk?
In Supp. 11 of your Heizer/Render/Munson text (see page 477), transportation mode analysis is introduced. How can this model be used to deal with Red Sea disruptions/costs/dangers?

Video Tip: Inside Amazon’s Strategy to Redefine Fast Shipping

In the fiercely competitive retail segment, three factors drive consumer choices: product availability, price and delivery speed. Minor variances in delivery time can considerably sway customer decisions.

Consumers often pay a premium for quicker delivery. This trend is particularly stark in the U.S. Here, e-commerce companies grapple with Amazon’s evolving delivery benchmarks, shifting from 3-day to 2-day, to 1-day and now same-day delivery in many areas. Amazon’s speedy delivery consistently outpaces other retailers, being powered by advanced robotics automation.

But to stay ahead of Target and Walmart, Amazon is overhauling its distribution network. The Wall Street Journal just visited a same-day facility to explore the company’s fast-shipping strategy and produced this excellent 8-minute video that your students will enjoy.

Amazon launched Prime in 2005, with a revolutionary free Two-Day Shipping on 1 million items. Today, Prime has more than 300 million items available with free shipping and tens of millions of the most popular items available with free Same-Day or One-Day Delivery. Across the top 60 largest U.S. metro areas, more than half of Prime member orders arrived the same or next day.

Here is how Amazon did it:

“Regionalizing” U.S. operations network They divided the country into 8 smaller, easier-to-reach regions with a broad selection of inventory in each region, making it faster and less expensive to get those products to customers. Previously, the firm fulfilled orders from operational sites across the country. Over 76% of customer demand is now fulfilled within their region.

Selecting the Right Items Amazon uses increasingly advanced machine learning algorithms to better predict which items customers in various parts of the country will want and when they will want them, and then works with vendors to store those products closer to customers. This helps to ensure that we have the right inventory, in the right places, at the right time. Each same-day facility stores the top 100,000 items sold in the region.

Growing the Same-Day Delivery network Same-Day facilities are smaller buildings situated close to the large metro areas they serve, which decreases the distance to customers. These buildings are designed for speed with smaller footprints, streamlined conveyors, and picking directly to pack stations. As a result, the average time from picking a customer’s items to positioning the customer’s package on the outbound dock is 11 minutes in Same-Day facilities, more than an hour faster than traditional fulfillment centers.

Note that we highlight Amazon’s inventory practices in Chapter 12’s Global Company Profile on pages 490-491.

Guest Post: The Panama Canal Backlog

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.

A caravan of cargo ships sits in the Pacific Ocean last week, waiting to enter the Panama Canal

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?

OM in the News: Maritime Supply Chains Begin to Break

Tugboats guide the MSC Mia container ship arriving at the Port of Los Angeles i

There have been delays once again in processing ships at the Ports of Los Angeles and Long Beach. One shipping expert told CNBC (June 9, 2023) that current vessel wait times are stressing the maritime supply chain in a way not seen since the Covid peak. The number of vessels due to dock at these two major ports is increasing as labor slowdowns on the West Coast have impacted supply chain operations, from trucks to rails and ocean carriers. Some docked vessels are now occupying space for as many as 9 days. Vessels have yet to be loaded/offloaded and sent away, which is critical to make room for the next wave of ships arriving.

At the Los Angeles area ports, the CGN Lyra has been at the dock since May 31; CGM Amerigo Vespucci has been there since June 1; YM Unicorn since May 31; and One Hangshou Bay since June 2. When ships go off schedule, the delays slide the arrival to additional ports, impacting their container deliveries, and ultimately contributing to container congestion, which was seen in the extreme during the Covid pandemic.

These developments come as shipping enters it peak inventory build season ahead of back-to-school and the holidays, a period which runs from July to October.

Inflationary spikes from new supply chain hiccups are a fear. Vessel delays, while up recently, are nowhere near the Covid port “parking lots.

Throughout the recent spike in labor tensions, some union workers have refused to show up for shifts, while others have been pulled off the job by port management. The Port of Seattle relieved union labor gangs working on vessels for the third day in a row due to “low productivity.” In maritime terms, a terminal can “fire” a labor gang for one shift if they perceive the work to be slow, and the workers can return the next day. The Port of Tacoma reports worker productivity at 50%, and my coauthor Chuck Munson tells me his new car has been caught up there. It was supposed to arrive several weeks ago.

Classroom discussion questions:

What are the OM implications of a slowdown in West Coast ports?
How bad was the port congestion during Covid? (Hint: see prior posts for details).

OM in the News: Ikea Tries to Shrink

IKEA is today the world’s biggest seller of furniture, with 460 mostly franchise-operated stores spread across 62 countries that carry some 9,500 products. Its price-conscious shoppers wonder: How does a nice chair cost only $35?

IKEA grew into a furniture behemoth with a relentless focus on keeping costs low, but that goal has become more challenging, writes The Wall Street Journal (April 26, 2023). The price of metal, glass, wood and plastic have spiraled up, as have shipping costs. Inflation has squeezed consumers’ wallets. IKEA knew that something had to change to keep prices down and profits up, so in the past couple of years they have taken some of their products back to the drawing board.

Designers experimented with ways to reduce IKEA’s reliance on wood to cut material and shipping costs. Lighter, less expensive plastics, they discovered, could be used instead in cabinet doors and drawers. IKEA’s wooden furniture has traditionally used veneer that is glued onto a main structure of particleboard. Particleboard is formed from compacted wood chips and sawdust, and is significantly less expensive than solid wood.

They learned that they could substitute less expensive recycled aluminum for zinc, which had doubled in price over two years to $4,371 per ton. Recycled aluminum is now going into bathroom hooks and other products. When they turned to packaging, they cut freight costs by purging flat packs of “fresh air and wasted space.”

For one of IKEA’s most popular office swivel chairs, the Flintan, smaller armrests and less steel and plastic in the back cut manufacturing costs. The new Flintan is the same size as its predecessor, but it’s much more efficient to ship after designers tweaked its components to make them fit more snugly into a flat pack. IKEA can now squeeze 6,900 Flintans into one shipping container, up from 2,750.

Designers likewise reworked the Säbövik bed, by changing the construction of its wooden frame. It was previously made of two thin layers of wood glued together. IKEA settled on a less expensive and lighter combination of solid wood, plywood and a compressed structure of wood strands and glue. The Säbövik used to come flat-packed in 3 cardboard boxes, but now fits into just 2 more compact boxes, enabling the company to cram twice as many flat-packed beds into a shipping container.

Classroom discussion questions:

What is IKEA’s competitive advantage? (See Chapters 2 and 5 in your Heizer/Render/Munson text).
Is there a downside in the product redesigns such as the ones noted above?

Guest Post: Supply Chains and Transportation Options

Prof. Howard Weiss is providing Guest Posts while I am travelling abroad.

There have been many articles detailing the supply chain problems at the California coast. In particular, this blog has an article detailing the ship backup at ports and an article detailing the recent unclogging at those ports. There are three main methods for manufacturers to acquire capacity for shipping their goods. They can contract out for space from a shipping company; they can charter an entire vessel; or they can own their own container ships.

Several large companies have recently changed from booking space with a shipper to chartering entire vessels. These include Amazon, Ikea, Walmart, Costco, Target and Home Depot for some of their shipping. For example, chartering accounts for roughly 25% of Costco’s shipping from Asia to North America. Chartering a ship gives these companies control over the sailings because as Target states, “As co-managers of the ship, we can avoid delays from additional stops and steer clear of particularly backed-up ports.” Another possible problem with contracting space is that the shipping company may not honor a contract as OJ Commerce, a furniture distributor, found out when Hamburg Süd shipping said it had no room on its vessels even though OJ Commerce had a contract with Hamburg Sud.

To gain even more control, some companies, such as Walmart, are chartering smaller ships in order to be able to use smaller ports. The tradeoff to chartering smaller ships is that it increases the shipping costs, which range in the area of $40,000 per day for vessels carrying 3,000 twenty-foot containers. In addition, some of these companies are also purchasing their own containers, which gives the company more flexibility but is costlier.

Others are going a step further than chartering by starting their own shipping line. For example, Lidl, the giant German retailer (with 11,000 stores in 32 countries and more than 200 warehouses in 30 countries), is starting its own shipping line in order to have more control over the transportation of its goods. It decided that this was preferable to other options. The obvious purpose is to reduce shipping delays but the new line should also reduce freight costs and increase shipping consistency and flexibility.

Classroom discussion questions:
1. Use Google to name Lidl’s major competitors.
2. What is a possible downside of chartering or owning your own ship?

OM in the News: What’s Really Behind all the Empty Shelves?

Pictures of more than 70 container ships anchored near the government-owned ports of Los Angeles and Long Beach, which process 40% of all containers of goods entering the U.S., are all over the news. Thousands upon thousands of containers are onboard, full of everything from car parts to baby diapers. New ships arriving there are facing 3-week delays in unloading and processing. The system is in crisis mode, writes The Daily Signal (Oct. 29, 2021).

Meanwhile, Americans are facing shortages. Schools are having a hard time sourcing food for lunch programs. Food producers are missing inputs for packaging, while small businesses are facing shortages of bulk items like utensils, cups and to-go boxes. The government attributes these delays and shortages to worldwide factory disruptions during the pandemic and increased consumer demand. While these play a role, that is not the whole story.

What led to this crisis is a system of government-imposed regulations and red tape that seemed innocuous when the economy was healthy. A series of barriers in California, and at the federal level, prevented the market from responding efficiently to the demand at the ports. First and foremost, union hour rules for longshoremen and truckers have resulted in port operations not matching the influx of ships. The Port of LA has been operating at only 60%- 70% of capacity, closed evenings and Sundays. While Long Beach promised months ago to go 24/7, it’s still only running 4 days per week.

At the same time, California law is restricting independent contractors, which includes many truckers, from stepping in. And that state’s new emissions mandates limit the number of trucks able to even operate there. Amid such rules, California now has half the trucker density as states such as Texas, Pennsylvania and Ohio. To add insult to injury, these 2 ports just announced a new fine system for containers that remain at the ports too long, even though there aren’t enough trucks on the road to transport the containers. An impending vaccine mandate could worsen the ports’ labor shortage.

Classroom discussion questions:

What are the the solutions?
What other factors (besides the ports) are creating these supply chain problems?

OM in the News: Global Supply Chain Problems Worsen

It has become an almost daily headline, The front page of The Wall Street Journal (Oct. 9-10, 2021) is the title of today’s post and opens: “Global supply-chain bottlenecks are feeding on one another, with shortages of components and surging prices of critical raw materials squeezing manufacturers around the world.”

New Ford F-Series pickup trucks stored in a lot in Kentucky awaiting semiconductors that are in short supply.

Factories and retailers in Western economies that have largely emerged from lockdowns are eager for finished products, raw materials and components from longtime suppliers in Asia and elsewhere. But many countries in Asia are still in the throes of Covid lockdowns, constricting their ability to meet demand.

Meanwhile, global labor shortages, often the result of people leaving the workforce during the pandemic, are throwing further off production obstacles. At the heart of the gridlock is China, the world’s largest trading nation. Arriving ships often must quarantine for a week or more before they are allowed to dock. Disruptions to customs and port services add to delays. The more ships wait on the inbound side at Chinese ports, the longer it takes for them to start out again from China to the rest of the world, waiting for Chinese-made electronics, clothing and toys. Freight rates on the heavily trafficked China-North America route more than doubled this year.

Beyond China, Covid-related factory closures in Malaysia have hit chip supplies to car makers in a semiconductor market already hit by outages in Texas, Japan and Taiwan. In Indonesia, mining companies want more trucks to feed the world’s rising demand for coal and minerals. Yet the waiting list for new truck deliveries is 9 months. Their own supply-chain problems make it harder to deliver the fuel and materials that would help resolve supply problems elsewhere, reinforcing the bottlenecks. Strikes and Covid cases among port workers in Australia have curtailed operations. Passenger flights to the country, which used to be an option for air cargo shippers, are still mostly halted.

The global auto industry will lose 7.7 million vehicle sales world-wide, 10% of expected production in 2021 (costing $210 billion in revenue), as a result of the chip shortage,. “We are not demand-constrained, we are supply-constrained,” said Daimler’s CEO, adding that the chip supply squeeze would be felt into 2023.

Classroom discussion questions:

Summarize the basics of the global supply chain breakdown.
What is the impact on consumer goods?