Supply Chain Automation: Mind Your (Shipping) Business

Summary of a presentation made at the inaugural session of the Port Technology International Container Terminal Automation Conference in London on March 14, 2018.

The fourth industrial revolution: The big picture of value chains

Before going into the specifics about the potential impacts of automation of maritime shipping, it is important to underline that although automation can be solely considered at the port terminal level, it also takes place across entire supply chains. Actors usually optimize the systems they can control and benefit from, but a common mistake is not to consider the larger impacts of the technologies they are using, both upstream and downstream of their value chains. The impacts of automation on port activity may be more significant on the activities that drive port volumes, such as manufacturing, than on port operations.

For instance, on the above figure terminal automation is but one change taking place within the fourth industrial revolution framework. Looking at logistics, there are also significant changes in procurement, fabrication / manufacturing, other elements of distribution (e.g. warehousing) as well as marketing (e.g. e-commerce). The question remains in which way all these changes are going to impact the demand structure of global freight distribution and how terminal automation fits into this picture.

E-commerce (the automation of retail): Lessons for maritime shipping and ports?

The impacts of e-commerce, a form of supply chain automation, on the retail ecosystem have been far reaching. Using e-commerce as an analogy, the following impacts can be expected over maritime transport systems:

• Shipping networks. E-commerce changed the pattern of freight distribution with the growth of parcel deliveries and the resulting shift in last mile logistics (urban deliveries). For maritime shipping, would (terminal) automation lead to a segmentation of services between highly automated terminals that can handle the high volumes and frequency requirements of mega-ships and less automated terminals focusing on secondary services? This could be particularly significant for transshipment hubs.
• Terminal footprint. E-commerce reduced the real estate footprint of retail as some of this footprint switched to distribution centers. Could terminal automation lead to a declining global footprint of container terminals, particularly if we enter a low growth environment? This could incite a rationalization of terminal assets and in some cases the closure of terminals, particularly in multiterminal ports where automation leads to higher capacity than required.
• New types of terminal facilities. E-commerce resulted in the creation of entirely new types of freight distribution facilities, such as e-fulfillment and sortation centers to coordinate its logistical requirements. Automation is changing operations and the configuration of container terminals, which is likely to lead to new terminal designs and interactions such as terminal / satellite facilities pairs.
• Vertical integration. Large e-commerce firms are trying to get involved in several segments of their supply chains, particularly to have a better level of control on the performance of their distribution. Since terminal automation results in a higher level of integration along the transport chain, particularly through the information technologies it relies on, in which way this will shape the formation of new relations between carriers and their customers and even the possibility of new entrants?

E-commerce is thus a relevant analogy in trying to assess the potential impacts of automation on ports and maritime shipping. While safety and performance improvements are the focus, automation can lead to unintended consequences such as a segmentation of shipping networks, the decline of terminal footprint and the devaluation of terminal assets.

The automation ceiling: In which context further automation makes sense?

Port terminals are particularly prone to automation since it provides direct benefits in terms of cost, efficiency, safety and reliability. Still, this automation takes place at different rates depending on the technology involved and how easy it is to implement it in a cost effective fashion; the low hanging fruits are picked up first. Ports and maritime shipping are an asset dependent activity, underlining the complexity and risk of their automation.

Risk mitigation underlines that there is an automation ceiling representing what level of automation can be implemented at a terminal effectively from a cost / benefit perspective. Any automation that is too capital intensive and that does not lead to significant benefits such as lower operation cost or higher throughput is a risk and should be treated with caution. It also underlines that automation can be phased in an asynchronous fashion, creating disruptions of the flows and processes within terminals. This asynchronism is linked with the cost and ease of implementation of an automation segment. For instance yard management and automated gates are the most prevalent forms of automation since they are mainly software-based as opposed to automated yard equipment (cranes or horizontal transport), which are much more capital intensive.

Blockchain and supply chains: Revealing how the sausage is made?

The current discourse about Blockchains as a form of supply chain automation is surprisingly vague, underlining expected benefits, but these benefits are rarely explained in a structured fashion. This is very reflective of an hype phase where the expected benefits of a technology are exaggerated and the complexities of its implementation undermined. Still, Blockchain technology shows promises particularly over bills of lading and automated payment systems. A paradoxical issue is that a segment of transportation and maritime shipping is based on a capitalization of inefficiency. To what extent the application of Blockchain technology would reveal inefficiencies within supply chains and force a pricing readjustment in an already tight profit margin sector? In simplistic terms, does the industry really want to reveal how its sausage is made?

Automation changes processes but also locations

The current port automation discourse tends to take place in a vacuum, focusing on the processes (management, equipment, information technologies, engineering) that could be automated in a port terminal. What remains rather unnoticed is that although automation changes the processes within value chains, more importantly for the shipping business, it also changes locational requirements.

The true extent to which each economic sector is prone to automation is uncertain. Those with the highest potential tend to be in the manufacturing and distribution sectors; the main customers of ports and shipping lines. Less considered are the impacts of automation on input requirements, particularly labor. This could be far reaching in consequences since labor becomes a more secondary non-material input factor, inciting supply chains to change their locational preferences accordingly. Under this evolving environment, sourcing strategies can shift to locations that are either closer to markets (distributional efficiencies) or to material inputs such as resources (procurement efficiencies). The outcome is a change of the derived demand for ports and maritime shipping, potentially with less long distance shipping and a modal shift to other regional modes.

The prospects for trade and shipping: Back to absolute advantages?

The above trend underlines challenging trade prospects since automation impacts the factors of production. An important demand driver for maritime shipping in recent decades has been the exploitation of comparative advantages with the related outsourcing and offshoring of many activities in lower labor cost locations. This convenience may be drawing to an end, inciting a readjustment of international trade more along absolute advantages in terms of markets, capabilities and resources. Incidentally, this was representative of the global trade environment prior to its recent acceleration; trade was more a matter of necessity than convenience. What if globalization was just a transition phase?

Terminal automation must be considered in a wider context that affect both the technical aspects of terminal operations, but also the derived demand of maritime shipping. While one aspect (terminal automation) is under the control of terminal operators, the other (value chain automation) is outside their control. It would be paradoxical to transition into a fourth industrial revolution with efficient (automated) terminals and supply chains supported by Blockchains, but with lower anticipated shipping demands. For the shipping industry, this would be an unwelcome development as the array of technologies from which it would benefit would also be the drivers of its stagnation.