Re-engineering grain logistics: Bulk handling versus containerization
March 01, 1999
by Teresa Acklin
In this 2-part series, Barry Prentice, director of the Transport Institute at the University of Manitoba in Winnipeg, Canada, explores the opportunity to re-engineer the logistics of the grain handling system. Last month, he looked at the historic development of the bulk handling system and its economic advantages and disadvantages. This month Mr. Prentice examines the logistics principles and technological advances that make containerization of grain a competitive alternative.
Innovations in transportation and communications create opportunities for developing improved logistical systems. The alternative to handling grain in bulk is to ship grain in ISO containers.
Containers can be loaded at the farm or at a consolidation facility, such as a country elevator. Containers can be trucked to double-stack train terminals and forwarded to marine container ports.
Grain in containers moves with other containerized cargo to foreign buyers. As a result, containerized grain faces only the marginal costs of the intermodal shipping system, rather than the full costs of the bulk handling system.
A key problem in re-engineering logistical systems is to escape entrenched ideas. Logistical theory has developed strategic concepts that are useful in assessing the prospects for re-engineering market channels. Five strategic concepts of logistics theory are used to argue why the grain handling system should be re-engineered to containers.
USE MIXED SYSTEMS.
The first concept is that mixed systems are superior to pure systems. A mixed system is always superior if the process is subject to fluctuating volumes. The low utilization of the fixed capacity during the off-season can make it less expensive to use an alternative that has variable capacity.
This is the argument for using public warehousing to supplement a private warehouse during a peak sales period. It is less expensive to use a small private warehouse at full capacity all year, and hire public warehousing as needed. Rather than incurring the cost of a large private warehouse that is only used at capacity for a very short time, the total cost of a mixed system is less.
Congestion cost theory supports the principle that mixed systems are superior. As increasing volumes are forced though any fixed capacity, congestion will lead to diminishing returns.
Congestion can be reduced by expanding capacity or by shifting some activity to an alternative system. The marginal costs of shifting peak volumes to the container system are much lower than adding new capacity to the bulk handling system.
The second concept is that variety exacts its price. The greater the variety of products in a logistical system, the higher the inventories necessary to maintain customer service.
Product variety increases pipeline inventories. This raises the logistical costs for storage and financing inventories. Greater variety also lowers the average shipment size. Assuming the same volume of demand, dividing the product into more classifications produces smaller shipments.
Variety is the soft underbelly of the bulk handling system for grain. The more products that the bulk system has to maintain separately, the less efficient it becomes. The demand for “Identify Preserved Grains” (IPG) is increasing: organic wheat, variety preferences and specific quality attributes, such as protein. Advances in genetics and demand for product differentiation threaten to congest the bulk system with further variety. The bulk system could operate more efficiently if the lower volume, small shipments are moved in containers.
The third concept is that one size does not fit all. A differentiated distribution strategy may be applied to products, sales volume or customers. Some consumers are willing to pay more for premium service while others are just interested in the lowest price. A standard level of service dissatisfies the “quality-sensitive” customers and has attributes for which the “price-sensitive” customer will not pay. Similarly, some products have high margins and are very popular; others may be offered more as a service than a profit center. Providing the same level of logistics service in both cases is not warranted.
Bulk handling favors a push, rather than a pull system of marketing. Large stockpiles are created and deliveries are made in boatload quantities. If the customer wants lowest cost, average quality and will accept these volumes, the bulk handling system is ideal. Not every customer needs or wants the volumes that are most “economic” for bulk delivery. Some buyers process volumes that could be handled on a Just-In-Time basis using containers.
The fourth concept of logistics theory used to argue why the grain handling system should be re-engineered to containers is to delay commitment to the final product until the last possible moment.
This strategy is used to lower finished inventory costs and increase customer service. The classic example is the distribution of paint. Only untinted paint is shipped to retail outlets. Tints are added after the customer chooses the desired color. This reduces inventories held at retail and eliminates obsolescence while improving the selection of colors available.
Bulk handling reduces the foreign miller's opportunity to tailor processed grains to the exact specifications of the buyer; commitment is made to the quality of the final product, as soon as the grain is commingled at the country elevator. Containerized grain would delay commitment and give the foreign processor a multitude of options. Each container would be bar-coded with information on grain variety and exact quality attributes. The foreign processor could blend grain with different quality attributes from a small inventory of bar-coded containers to fit a wide spectrum of finished product specifications.
The final concept is that it's the total cost that matters. In traditional supply chain management, each participant views the next agent in the marketing channel as the “customer.” Great efforts may be made to reduce costs and improve the service to this customer without considering the impact on the entire supply chain. Only system changes that lower total costs to the end consumer make everyone better off.
The principal of the total cost concept is that producers need to be as concerned about their customer's customer. Some companies have found that getting their immediate customer to bear more costs is possible, if they can lower the total costs to the ultimate customer.
The North American grain handling system is designed as if all the important transportation and handling costs ended at the port of export. Most grain exporters have no idea of the total costs to the processor in the foreign country. Reducing the costs of the domestic portion of the system may shift costs to foreign buyers.
For example, large bulk shipments may be the lowest cost method of moving grain from farm to port, but this method imposes high inventory holding and storage costs on importers. A just-in-time container system could have higher transportation costs than bulk, but would virtually eliminate the storage, inventory holding and shrinkage costs for the foreign processors.
Intangible costs, such as reliability, also are important. The greater uncertainty of the bulk handling system adds to costs. Foreign buyers must have contingency plans and additional inventories to guarantee service to their customers.
A rough comparison of the shipping time for the bulk handling system and the proposed container system can be seen in the table on Page 14. The comparison is only approximate because no informed opinion could be obtained of the unloading time and storage of grain in foreign import terminals.
These data show that the bulk handling pipeline is four times longer than a container system. A 25% variation in delivery time of the bulk system would equal the time required for a container movement.
The costs of the relatively slow bulk system are reminiscent of the sacks of grain it replaced. Assuming FOB sales contracts, producers are financing inventories up to 10 times longer in the bulk system than in a containerized system. These costs are generally absorbed in the basis or, in the case of the Canadian Wheat Board, in final payments to producers.
FACTORS FAVORING CONTAINERS.
A range of technological and economic factors, including freight and communication costs and price and quality considerations, favor the containerization of grain.
Container rates for grain to the Asia Pacific are about 10% to 30% higher than the direct costs of bulk handing but several improvements are likely to narrow this difference. The container fleet has nearly doubled in size since 1985 and the capacity of container ships has doubled. In 1980, container ships carried from 2,000 to 3,000 T.E.U.s (twenty foot equivalent unit). The new 6,000 T.E.U. container ships operate with the same crew complement and same fuel consumption as their smaller predecessors. Freight rates for grain are being bid down as steamship lines compete for cargo to fill these new ships.
Container terminals are becoming highly automated. The new Deltaport container terminal at Vancouver that opened in June 1997 has the capacity to load two double-stacked trains simultaneously. The facility is aiming to load from 30 to 35 containers per hour from ship to railcar and to load a train within eight hours of starting. A 6,000 T.E.U. ship carries the equivalent of 15 double-stack container trains.
Railways are improving their container service. The first double-stacked container train service was introduced in 1984.The Association of American Railways estimates that double-stacking lowers line-haul costs by up to 40%.
Container volumes in North America have enjoyed a compound growth rate of 5.7% since 1988. Better service and lower costs are anticipated as railways upgrade their container terminals and add equipment.
Further cost improvements are likely as the container system matures. Steamship lines jealously guard their container fleets. The railways have invested in “domestic” containers that are larger and do not move overseas. The pooling of container fleets is beginning to gather support. Increasingly, the industry is pointing to “Gray Boxes,” which are owned by third parties, as a method of increasing vehicle utilization.
Communication costs also favor the containerization of grain. The revolution in communications can be summed up in one word: Internet. The information highway may be the most important innovation of this age, but it is still at a primitive state.
Proposals to launch a network of satellites that would create real-time access to the Internet are being planned. Visions of global commerce via the Internet are already taking shape.
The impact of the Internet on grain marketing in the 21st century could be akin to the changes that occurred in the 19th century when the telegraph was introduced. Just as the telegraph decentralized the physical transaction of grain, the Internet could decentralize the electronic transaction of grain. Information is replacing the need to store large inventories and reducing the economies of size in order processing.
Bar codes and computer data bases reduce the effort of tracking container shipments. Importer demand for identity preserved grains will lead the move to larger container volumes.
Quality premiums to farmers are encouraging the production of organically grown crops, specific varieties of mainstream crops and a variety of “special crops” that range from herbs to pulses. These products cannot move economically through the bulk handling system. As their volume grows, so will the containerized grain system.
Just-In-Time service to foreign grain processors is an advantage of containers that bulk shipment cannot provide. Given the success of J.I.T in manufacturing, it is only a matter of time before processors begin to demand J.I.T. grain shipments. If the benefits from delayed commitment can be added to the reduction of inventory costs, the volume of container movements will accelerate.
ELECTRONIC MARKETS FOR GRAIN.
The impact of communications technology and containerization could be far reaching for the grain industry. Electronic markets could shift some functions performed by grain handlers back to the farm.
Operationally, farmers could post container loads of products on an Internet site and field purchase offers via e-mail. Potential buyers could be sent grain samples by Federal Express. Transactions could be consummated with container shipments that never touch the current bulk handling system or use the services of grain handlers.
Naturally, some institutional arrangements must be developed for an electronic market. A computer-supported system must be used to search and negotiate the transaction. There must be membership rules, a method of quality checking and a system for settling transactions. Some elements of an electronic market for containerized grain are in place; the missing pieces present no significant barrier.
The need for containers could create a second electronic market for farmer-owned “Gray boxes.”
Essentially, producers would purchase containers and form a leasing pool. While the containers were at the farm, the producer would receive no payment. When the grain was sold, the container would enter a leasing pool that would return a payment to the farmers. In the next harvest season, the producer could request the delivery of a container and the cycle would begin again.
Containers last about seven years. Farmers would not necessarily receive the container they purchased, but would receive “rights” to a container for seven years.
Container leases could be traded electronically, with bids and offers entered by producers, grain handlers, carriers and buyers. This would encourage utilization of equipment and maximize producer returns.
|Approximate shipping time comparison for bulk handling|
| and containerization of Canadian wheat|
|Bulk handling system||Days||Container system||Days|
|Farm storage||Farm storage|
|Local delivery|| 1||Local delivery|| 1|
|Primary elevator|| 40||Intermodal terminal|| 2|
|Rail hopper cars|| 11||Double-stack train|| 2|
|Export terminal|| 19||Intermodal port|| 2|
|Bulk shipment|| 15||Container ship|| 11|
|Import terminal|| 10||Intermodal port|| 2|
|Local delivery|| 1||Local delivery|| 1|
|Final customer||Final customer|
|Total|| 97|| 21|