Container Shipping Optimization Problem

OVERVIEW:

In July 2007, Young, regional manager of Container Transportation Company (CTC), and his colleagues were looking for a new strategy to allocate containers for transportation from Korea and China to the Middle East. Challenged by top management, which had urged all business departments to optimize their revenues and profit, Young considered whether he could improve pricing or apply other revenue management (RM) techniques to improve revenues.

The following summary explores the results of analyzing development opportunities for container trade in Eastern/Southeastern Asia to the Middle East, while enabling stable growth during cyclical downturns. The analysis aims to align with CTC’s top three priorities:

1. Increase profits by maximizing revenue,

2. Maintain competitiveness

3. Maintain high customer satisfaction

Objective of Analysis: Maximize CTC’s total revenue using historical port and vessel data.

Based on the findings from the model, and considering CTC’s priorities, our team recommends reducing planned load factors, changing container ratio constraints, and testing a variable pricing strategy in order to increase future revenue streams.

Linear Optimization Model

Model Structure

Decision Variables:

Number of 20’ & 40’ containers (ctrs) across all ten ports

Constraints: 

Port: potential demand, container ratio

Vessel: weight (tons), volume (TEU)

Assumptions & Considerations

• Separate models for low & high season

• Fixed prices ($/TEU)

• Unit of analysis: single vessel

• Weight constraint based on planned load factor

• Constrained optimal number of containers to integers

• Container ratio is pegged to demand for each type of container per port

Model Insights

Low season optimal revenue: $1,264,230

Key insights:

• No demand for 20’ ctrs out of Thailand: shipping even one decreases revenue by $77/ctr

• Actual demand maxes out at all ports for both sizes (except Malaysia and Thailand)

• Vessel weight limit is a bottleneck; volume to spare

High season optimal revenue: $1,372,604

Key insights:

• Barely any potential demand for 20’ ctrs out of Korea, Singapore, Malaysia, and Thailand: shipping even one Thailand ctr decreases revenue by $122/ctr

• Actual demand maxes out at most ports except those listed above for 20’ ctrs

• Vessel weight limit is a bottleneck; volume to spare

Summary & Recommendations:

Adjust planned load factor - Consider running a pilot and only reduce planned load factor for a single vessel versus the full fleet; measure impacts to revenue and test for possible negative side-effects, such as a reduction in customer satisfaction 

Initial analysis indicates that increasing planned load factor in high season may result in an increased revenue of ~2.8%

Change ratio of 20’:40’ containers as demand varies - The container ratio is dependent on demand at each port due to the type of cargo and the container weight limits, as well as the vessels’ weight limit. In order to adjust the ratio, CTC may influence demand through variable pricing by container type. Initial analysis indicates that increasing actual demand by 1 unit at the highest revenue port, Japan, can increase revenue by $555. Consider running a pilot to test how demand reacts at each port to ensure this is a viable path forward and results in meaningful revenue increases.