Erasmus University Rotterdam MSc in Maritime Economics and Logistics 2017/2018 Cascading Effects and Optimal Network Configuration Design for Liner Shipping by Rafiazka Millanida Hilman copyright © Rafiazka Millanida Hilman Acknowledgement Hartelijk dank dat ik StuNed-beurs heb mogen ontvangen, hierdoor was ik in staat om mijn studie in Nederland te vervolgen. Het was ondenkbaar om aan de andere kant van de wereld een masteropleiding te volgen zonder de steun van het Koninkrijk der Nederlanden. Lieve Prof. dr. Ir. Rommert Dekker, Dank u wel voor deze kans en ik wens u het beste. Lieve mijn ouders, Ik ben jullie dankbaar voor de steun en vrijheid die jullie mij geven om mijn eigen keuzen te kunnen maken. Lieve het leven van mij, Ik heb gezegd. Ik ben tot de tanden gewapend. Doe maar gewoon, dan doe je al genoeg. ii Abstract Container liner shipping gains it centrality in the maritime transportation research along with the growth of seaborne trade. Global trade performance at higher speed brings twofold impact. The attractiveness of economies of scale captures the attention of major container liner as lower shipping cost per TEU may allow thicker profit margin. The deployment of Ultra Large Container Vessel (ULCV) afterwards is motivated by the aforementioned assumption. Consequently, persistent entrance of ULCV could exacerbate overcapacity condition. Falling transportation cost per TEU and tightening competition among shipping liners are the critical implication to which container liner should deal with. Most of ULCV are phased into Asia-Europe route due to demand hike within this trade lane. A swing in preference of the container liners towards ULCV triggers reallocation of ship assignment. The previously dominant medium size vessels are allocated to smaller routes, widely known as cascading phenomenon. It serves the main focus of this thesis to examine the subtle point to challenge: Is that a strategic decision to make given the presence of ULCV? Does ULCV guarantee economies of scale such that profit can be maximized? What is strategic response that may lead to optimum solution for container liner in this setting? The objective of this thesis is to construct a model for the situation where cascading phenomena driven by the deployment of ULCV exist in container liner shipping and propose a network design as a strategic response to the current situation such that profit is maximized. At first, network structure is analyzed based on network properties in graph theory such as degree centrality and betweenness centrality. Using a mix integer programming formulation, combined ship-scheduling and cargo-routing problem is solved by conducting two-phase problem namely Regional Route Network Design (RRND) and Route Construction and Ship Allocation (RCSA) are solved. In order to reduce the problem size, clustering algorithms of PAM and DBSCAN are performed to ports located along Asia and Europe trade lane. This thesis highlights the implication of ULCV deployment on profitability of liner shipping in which Maersk is used as a case study. To capture the cascading phenomena, two consecutive periods are selected based on the development of ULCV namely 2010 and 2018. Maersk original routes in Asia-Europe service network are used as a reference network. There are 1,935 OD pair demand observed between 58 ports for both year, while demand in 2018 is projected by 34% growth from the initial period in 2010. This thesis finds that highly centralized and connected ports can be regarded as candidates of additional port to be called on route, among others are Shanghai, Hong Kong, Rotterdam, and Singapore. On the clustering part, PAM clustering is upper hand than DBSCAN as it results in shorter distance and larger demand concentration at hub ports. Overall, the proposed network CBN A with 10 clusters is the best to compare to reference network because both are performed under slow steaming practice at 15 knots with demand volume in 2010. It allows higher profit by 30 with cost efficiency of 12%. This finding indicates that more competitive financial performance can be induced by properly adjusted network design with combination of maximized cargo flow between ports given minimized distance. iii Table of Contents Acknowledgement ................................................................................................. ii Abstract ................................................................................................................. iii Table of Contents .................................................................................................. iv List of Figures ....................................................................................................... vi List of Tables ........................................................................................................ vii Chapter 1 Introduction ........................................................................................... 1 1.1. Problem Description and Complexity ........................................................ 2 1.2. Research Problem ....................................................................................... 2 1.3. Contribution ................................................................................................. 2 1.4. Structure ...................................................................................................... 3 Chapter 2 Literature Review .................................................................................. 4 2.1. ULCV Economies of Scale .......................................................................... 4 2.2. Liner Network Design ................................................................................ 10 2.3. Decision-making Level .............................................................................. 12 Chapter 3 Methodology ....................................................................................... 15 3.1. Network Structure ..................................................................................... 15 3.2. Problem Formulation ................................................................................ 16 3.3. Solution Algorithm .................................................................................... 17 3.4. Assumptions.............................................................................................. 24 3.5. Conclusions ............................................................................................... 24 Chapter 4 Data ...................................................................................................... 26 4.1. Port ............................................................................................................. 26 4.2. Distance ..................................................................................................... 26 4.3. Ship and Network ...................................................................................... 26 4.4. Speed ......................................................................................................... 27 4.5. Demand ...................................................................................................... 27 4.6. Port Tariff ................................................................................................... 27 4.7. Cost ............................................................................................................ 27 4.8. Revenue ..................................................................................................... 28 4.9. Conclusion ................................................................................................. 28 Chapter 5 Theoretical Proof of Economies of Scale on ULCV .......................... 29 5.1. The Model .................................................................................................. 29 iv 5.2. Proofs of Cost............................................................................................ 29 5.3. Proofs of Economies of Scale .................................................................. 30 Chapter 6 Cascading Effects on Existing Maersk Network ............................... 31 6.1. Original Route Network ............................................................................. 31 6.2. Weighted Demand Network ...................................................................... 33 6.3. Cascading Phenomena ............................................................................. 34 6.4. Conclusion ................................................................................................. 36 Chapter 7 Estimated Profitability of the ULCV Deployment .............................. 37 7.1. Capital Cost ............................................................................................... 37 7.2. Operating Cost .......................................................................................... 37 7.3. Fuel Cost .................................................................................................... 38 7.4. Movement Cost .......................................................................................... 38 7.5. Total Cost ................................................................................................... 39 7.6. Revenue and Profit .................................................................................... 39 7.7. Conclusion ................................................................................................