By Ferdinand Carré, August 2021
The global use of containers as a standardised transport format entailed major cost-cutting shocks, boosting supply chain efficiency. Indeed, what we call “container shipping” covers a range of innovations that affect supply chain, primarily via a dramatic drop in intermodal transportation costs: the use of containers has made ports, goods stations and cargo terminals significantly more effective than they used to be. Such a technology has furthermore had consequences on the whole organisation of supply chain and enabled a growing number of activities to rely on international trade, thus boosting efficiency and profitability. Therefore, let us first look at the details of this cost-cutting revolution and its implications for modern-day business.
Making the supply chain more efficient: a cost-cutting revolution
The cost-cutting shocks first operated on an intensive margin, thanks to the containers’ standardisation an equal amount of investment may account for the transport of larger quantities of cargo. ‘Standardisation’ means that whatever the place on earth and the transportation mode, cargo will nowadays travel in a container whose dimensions are always the same, or a multiple of the same basic unit; the twenty-feet equivalent (TFE). This allows cargo to be moved, not only from one point to another, but also from a boat to a truck, a train or another boat, always in the same box; this simple effect of global standardisation has had vast consequences on supply chain costs.
Being able to move some cargo from a boat to a train without changing anything but the very boat and train represents a big step forward from the time when cargo would be taken by dockers from the hold of a ship to a freight car, often with a stop in a warehouse. This illustrates how an intermodal point, such as a port, would be a bottleneck for trade and hence the limiting factor of global supply chain: a large part of the costs associated with it used to come from connecting points between transport modes. But with the container, changing transport modes and taking the cargo off them is much easier and a lot less costly. All it takes is a crane that takes the containers off the ship and then puts them on the train, truck or anything large enough. This means that once cranes were bought and containers were built, the same amount of investment from a firm could pay for much larger quantities of cargo. In fact, the first use of intermodal containers illustrates the way that associated cost-cutting shocks modified the supply chain of a business. In 1956, a truck-shipping firm operating between New York and Houston, Texas chose to avoid traffic congestion by moving some of the route to the sea, even though at that time coastal navigation was seen as much less profitable than trucking (in fact, it had practically disappeared in the US for large quantities of goods). This company’s innovation was to load the cargo in metal containers that could be transferred from a truck to a boat, and vice-versa, with only the help of a crane: suddenly, intermodal points became 40 times more productive than they used to be with dockers handling break-bulk cargo. It only took ten years, to 1966, to see the International Organization for Standardization (ISO) setting an official standard for the container, still valid today.
More precisely, this soar in productivity, associated with an equal drop in costs, can be traced to several cost-cutting factors, the first of which is the cost of labour entailed by the sudden irrelevance of dockers, not only were cranes more productive, but they also cost much less. Dock labour productivity, therefore, soared in unprecedented proportions. A study estimated this jump from 1.7 tons per hour before containerisation to 30 tons per hour afterward, meaning that productivity was suddenly 17 times higher.
On top of this slash in labour costs, the use of mechanic cranes and the fact that directly handling the cargo was no longer necessary also decreased the costs of insurance against deterioration and pilferage, which were real concerns before containers appeared (an old joke from the break-bulk cargo age estimated a docker’s wage at “twenty dollars and all the Scotch you could carry home”). Container shipping therefore ensures higher levels of cargo preservation all along the route, as a given cargo often stays in the same container from departure to arrival points. Finally, the automation of cargo handling at intermodal points drastically lowered the need for inventory, as a container can be taken off a ship and loaded on a truck without any additional steps, costs otherwise associated with warehouses and delays are thereby avoided.
Insurance costs and inventory costs show that the productivity and efficiency gains of using containers go beyond the intensive margin of ‘how much cargo can I move for this amount of money?’.
New organisation: the extensive margin of the container revolution
The very fact that costs disappear is because the container of cargo never changes, whatever the transport mode. This has consequences on the extensive margin of supply chain optimisation, because it changes the way things are done. Indeed, global-scale standardisation via containerisation implies deep transformation of supply chain structures.
For instance, nowadays, supply chain agents choose to specialize in container transport, which means they are able to deal with any of a supply chain’s steps, as everything is transported in a standardised format that can be perfectly anticipated and standardly handled. A single transportation format and specialised supply-chain agents who operate the whole journey significantly decrease organisational costs as the monitoring of transport is simplified by such integration. More generally, a complex supply chain aggregating very different goods may also benefit from container shipping as each type of goods can be moved using containers, thus taking away most of the complexity.
The fact that containers are today’s standard and global transportation formats also benefit firms looking at end-to-end logistics and business-to-consumer strategies, which can represent a big step in supply chain optimization. With a container being able to cross thousands of miles between two global ports as well as being fit for transport on a small truck designed for narrow roads, cargo can be brought from large production centres to virtually every consumer, which allows for a huge efficiency-driven restructuration of the supply chain. Indeed, the need for inventory, large deposits and the costly reliance on large consumption centres, such as department stores and malls, can be avoided through a hub-and-spoke logic made possible by the universalness of containers and the large range of transport modes they are compatible with.
Such management therefore enhances a supply chain’s efficiency thanks to standardisation and network effects; but it also requires a strong organizational structure to ensure optimal coordination. Today’s transportation systems tend to treat containers as commodities that can be traded on highly integrated markets, which aims at an optimal allocation of container shipping slots. This would mean an allocation that is virtually instantaneous in order to shrink delays and participate in a just-in-time supply chain, and more generally that would eliminate most frictions associated with local bargaining. Such ‘stock exchanges’ where containers, journeys and slots are traded heavily depend heavily on IT.
Today’s containers: an overview
Standardisation also means that very different types of cargo can be transported via the same transport system, thus allowing for high cost efficiency as costly, specific infrastructure is often made irrelevant. This means that boats, trains or trucks specifically designed for cold products, raw materials or goods with uncommon dimensions are no longer needed by the supply chain. What prevails instead is a wide range of container types adapted to an even wider range of cargo, which can be transported by a globally available infrastructure.
The typical journey of a container would include some road travel on trucks, small (for a 1-TFE container) or large (for a 2-TFE one); it would then typically continue on a container-carrying ship, which would statistically exceed 300 meters of length and 20,000 TFE of tonnage, and would take a trip between two global ports following a precise route, with the obligation of maintaining a certain distance with fellow container-carrying ships behind and ahead of it (so that smaller ships could cross the route without danger). The finishing port would standardly be very large and at least partly built in deep waters in order to welcome those giant boats, with extremely wide docks, called terminals, where containers may be stocked awaiting transfer via another transport mode. But a container might also be directly transferred by a mechanic, and very often, an automatic crane (computer-controlled from the port authority centre) on a train or a truck parked along the wharf. Once the train is complete, it may depart for any region in the port’s vast hinterland; a global port’s hinterland typically goes beyond national boundaries, which is a consequence of the hub-and-spoke logic. There, it may reach the place of final consumption, or a factory, an assembling centre or a dispatching hub, depending on the supply chain involved.
The second frontier that container shipping helped cross is that between very different cargo types: today one may use a container-carrying boat in order to move dry or fresh cargo, solid or liquid products, and goods of various dimensions, precisely because there exist several types of containers adapted to each of these categories.
The dry container, first, is the most visually recognizable one, and certainly the one with the most possible different uses; the website of a large shipping business advertises how one may use such a container to move clothes (with optional hanging rails inside it), cars, or coffee bags.
In order to manage fresh cargo, refrigerated containers (or reefers) are used. Each container is equipped with a refrigerating engine. This engine relies on external electrical power (typically in a warehouse, on the ship or on quay) but for the time of transport on road or rail, this power can be provided by diesel gen sets. For long rail or road trips, where external electrical alimentation is not possible, cryogenic refrigeration offers efficient temperature regulation for a long period (up to one month). Such a set-up further enables you to stock the container anywhere on the boat (not necessarily next to a source of external power). The idea behind it is that when a liquid evaporates, it tends to cool the air around it. By stocking liquid nitrogen, or even solid CO2, and letting it slowly evaporate, such temperature regulation can be achieved. Thanks to these different refrigeration technologies you may keep fresh cargo in a very large span of temperatures, from +25 to –60°C.
Although gas and oil are generally moved by tank ships, the tank container or “tanktainer” allows for transportation of such cargo within the global container system: the cargo is stocked in a standardised tank, which is kept still in a metal framework - the dimensions of which exactly fit those of standard dry containers. The question behind the tanktainer is: when is it profitable to use a tanktainer rather than a gas or oil tanker ship? On the one hand, tanktainers keep the price of transport low due to all the cost-cutting shocks discussed hereinbefore; but on the other hand, the use of very large tanks on supertankers also allows for large scale gains. The loading and unloading of such ships is not as costly as that of pre-container cargo ships, therefore, when dealing with common, widely used fuels, it may be more interesting to use gas and oil carrying tankers. But tanktainers may be more profitable when it comes to rarer fuels and/or smaller quantities, when such scale gains are less easy to profit from. The same reasoning applies when one deals with smaller trips, which often implies smaller quantities (as they’re not necessarily between two global hubs). Again, tanktainers are more likely to be the less costly option.
Finally, for large merchandise that cannot be loaded by the door and oversized goods that stick out (laterally or vertically), where you cannot use a classic dry container, you may use what is called a “Flat Rack”. Such a container is open everywhere except for the floor and the two small sides, all in steel, in dimensions 20 or 40 feet. This container format is especially used for large cars, some break-bulk cargo and mostly oversized engines like cranes or pipelines. The Collapsible Flat Rack version is easy to move when empty (which is a plus compared to other formats): the sides collapse so that when empty the containers can be piled up (4 CFR add up to one dry!) and easily transportable.
Reshaping the World Economy—and Beyond
The container revolution has had blowing consequences on the supply chain of every firm—but it also has had implications on the global economy and beyond, on the way societies organise themselves worldwide.
For a supply chain operator, one may speak of scale gains that are shared with its client firms; for an economy, one may speak of a positive externality, the gains of which are shared with all its trading partners. This externality is of the “network” type: when a country decides to invest so that one of its ports is container-compatible, domestic firms enjoy smaller transport costs, but what happens on top of that is that this enlarges the container-trade network and therefore makes every other country better off, because the transport cost is smaller everywhere. Finally, one may add up the gains of trade, according to which a new country taking part in international trade makes every other country, as well as itself, richer.
Economically, this network externality mostly operates via the concentration of ports according to a hub-and-spoke mechanism. A 1972 study on the trade between Western Europe and Southern Australia estimated the number of European southbound Australia leading ports to 11 before the container revolution, and to only 3 after that. Today’s European Northern Range of container ports is mostly concentrated around Rotterdam, Antwerp and Hamburg, which serve as the three European hubs. Cargo is then dispatched to smaller, national hubs like Felixstowe in the United Kingdom, Le Havre in France or Gioia Tauro in Italy. Due to this hub-and-spoke logic, a port’s hinterland (the geo-economical features of the land around the port) is of less importance than it used to be for very large ports; on the contrary, it is very local characteristics that are a matter of importance: an efficient container port must be located close, first, to deep waters, so that large ships may come and go easily, and second it needs to feature very wide docks called container terminals where cargo may be stocked for a day or two. This explains why today’s largest ports are not necessarily those of historic importance or, when they are, they actually dwell very far from the port’s historic centre. However, because of the hub-and-spoke logic, the geographical space around a container port does not necessarily enjoy its economic advantages. A country’s strategy about whether such investments are an opportunity must therefore integrate a number of parameters, such as the nature and directions of the flows transiting through it. Geopolitical influence, strategic concerns as well as trade gains must be included.
Concentration operates when it comes to space but also affects time: the rising importance of international trade and, more broadly, the coming of age of today’s globalisation has enabled supply chains to be more sensitive to demand, as they do not rely as much as they did on inventory. For whole economies, this is embodied by the just-in-time system that has proven very cost-efficient with regards to stocks. But, just-in-time also entails a higher level of interdependence between supply chain agents, which in turn increases systemic risk in the case of failure of one of these agents or of global disruption.
Containers’ influence in the just-in-time theme also has applications in supply chain fields other than trade. Containers, and especially reefers, because they include some sort of energetical plug-in, may be used as a building unit in emergency or tentative situations. For instance, hospitals or data centres may be assembled very quickly using containers as blocks, as long as they come with an internet connection and a source of electricity.
- Estimating the effects of the container revolution on world trade, Daniel M. Bernhofen, Zouheir El-Sahli, Richard Kneller, Journal of International Economics, Volume 98, 2016
- The Box. How the Shipping Container Made the World Smaller and the World Economy Bigger, Marc Levinson, Princeton University Press, 2016
- Containerization: A 5-year balance sheet, McKinsey Company, 1972