April 2013 | Commentary | Viewpoint

Is Slow Steaming Good for the Supply Chain?

Tags: Ocean, Supply Chain Management

Lars Kloch is CEO, SBS Worldwide, 770-471-8950

When shipping lines began promoting slow steaming—operating ships at lower speeds to reduce fuel costs and carbon emissions—they highlighted its environmental benefits. Slow speeds reduce fuel consumption and, therefore, the output of harmful emissions, helping shippers reduce their carbon footprint and reinforce their green image.

Sailing ships at slower speeds does significantly reduce fuel consumption. Lowering engine speed by 10 percent cuts engine power by 27 percent, and reduces the overall energy needed for the voyage by 19 percent.

Shipping lines have widely implemented the slow steaming strategy of operating at 20 knots; some have even resorted to super-slow steaming at 15 knots. Slow steaming reduces shipping line costs, because it uses less fuel, and fuel comprises a huge share of operating costs. When oil prices were at their peak, fuel accounted for as much as 50 percent of the total cost of sailing a vessel.

If shipping lines are significantly reducing costs per voyage, shouldn't they pass on some of these savings to shippers? Some argue that in these difficult economic times, reducing costs is more of a priority than environmental benefits.

In fact, longer transit times can actually increase shippers' costs, because they need more inventory to feed this longer supply chain.

After considering factors such as depreciation and insurance, the added inventory costs shippers accrue when goods are on the water total nearly $170 million, based on price-per-hour waiting time, according to a recent study by Rotterdam's Erasmus University.

The study also found that ocean carriers can achieve fuel savings of up to $67 million through slow steaming—with $6 million more saved if ships are slowed to 15 knots.

The bad news: even if shipping lines passed on 100 percent of the fuel savings, it would still not counteract shippers' increased inventory costs.

Longer ocean transit times can also impact shippers' cash flow, as the time from production to sale is extended. For some companies this isn't an issue, but it may cause problems for those that rely on an expedited cash flow process.

Still, shipping line customers may be able to use slow steaming to their advantage because of the one great benefit it does produce: reliability.

Slow steaming vessels are more likely to arrive at port on schedule. When a ship sails at full speed, it has no buffer time if it is delayed by weather or congestion at other ports. If it is slow steaming, however, the vessel can increase speed to make up the lost time.

For many manufacturers, retailers, importers, and exporters, supply chain reliability is more important than transit time or rates. Delivering as promised is the basis of most business success—it wins customers and ensures their loyalty.

Increased reliability also allows shippers to reduce the inventory they hold in the destination country—counteracting the increased inventory levels needed for slow steaming. Shippers can hold less buffer stock because they can be sure new stock will arrive on time.

Gauging the Effects

It can be complicated to determine the effect slow steaming can have on an individual shipper. It depends on many factors—from product type and volumes, to credit facilities and insurance terms, to destination and customer expectations.

One thing is clear: the answer lies in information. Only by understanding their true transportation and logistics costs can shippers make informed decisions, and develop the most cost-efficient and customer-focused supply chain.