Shipping Container Logistics and Allocation

Author(s): K. K. Lai, Kokin Lam, W. K. Chan

Source: The Journal of the Operational Research Society, Vol. 46, No. 6 (Jun., 1995), pp. 687-
697
Published by: Palgrave Macmillan Journals on behalf of the Operational Research Society
Stable URL: http://www.jstor.org/stable/2584305
Accessed: 26/11/2010 09:31

Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at
http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless
you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you
may use content in the JSTOR archive only for your personal, non-commercial use.

Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at
http://www.jstor.org/action/showPublisher?publisherCode=pal.

Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed
page of such transmission.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact support@jstor.org.

Palgrave Macmillan Journals and Operational Research Society are collaborating with JSTOR to digitize,
preserve and extend access to The Journal of the Operational Research Society.

http://www.jstor.org
Jounal of the OperationalResearchSoiety (I995)46,687-697 ? 1995Operational
Research
SocietyLtd.Allrightsreserved.
0160-5682/95
$12.00

Shipping Container Logistics and Allocation

K. K. LAP, KOKIN LAM1and W. K. CHAN2
1CityUniversityof Hong Kong and 2OrientOverseasContainerLine Ltd

A majorshippingcompanyin Hong Kong is faced with severallogisticaland allocationproblems.It

needs to find a better way to allocateempty containersthat are transportedfrom the MiddleEast to
ports in the Far East, subjectto vessel schedulesand capacities.It needs to know what to do when
the supply of empty containersis less than the demand, and it needs to determine the mix of
containertypes that the companyshould maintainin the long run. To deal with these challenges,a
simulationmodel of the shippingcompany'soperationalactivitieswas developed. Heuristicsearch
was employedto identifythe policies that yield the lowest operatingcost in termsof leasing, storage,
pick-up,drop-offand other charges.What makes the problemdifficultis that the forecastsof future
exportmovementas well as the demandfor emptycontainerschangecontinuallyand the companyis
faced with the possibilityof lost sales if containersare not availablewhen requestedby customers.
This study provided insights that resulted in substantialsavings to the shipping company while
increasingcustomers'satisfaction.

Key words:allocation,heuristics,logistics,planning,sea transport,simulation

INTRODUCTION

Since the 1970s, containerizationof cargo transportationhas been the norm in the worldwide
maritime services. Nowadays, shipping companies compete around the world to provide
containertransportationservices. Two ways of increasinga company'scompetitiveedge are to
have a better control of its expenditureand to be more responsiveto customerdemands.
A major component of a shippingcompany'stotal operatingcost (TOC) is associatedwith
relocatingempty containersaroundits many ports. Therefore, it is criticalto have an efficient
policy to manage the movementof containers.To be more customerresponsive, the company
must also find ways of preventinglost sales due to unavailabilityof empty containerswhen
requestedby customers.
The shipping company under study, for the past ten years, has been providing fixed-
schedule maritime carrier services in its Europe-Middle East-Far East routes. Due to the
imbalance of internationaltrading, some areas are export dominant and some are import
dominant.This imbalancehas created certain logistic challengesin the managementof empty
containers. In fulfilling customers' demands at a given Far East port, several options are
availableto a shippingcompany. First, it can ship surplusempty containersfrom the Middle
East. Second, it can lease empty containers, if available, at the demand port. Third, it can
refer its customersto the competitorwhen no empty containersare available. However, this
is not a common practice since this last option would result in lost sales (and lack of
responsiveness)for the shippingcompany in question. In practice, the shippingcompanywill
attempt to persuade the customer to wait until containers become available at the next
shippingcycle.
In the event that surpluscontainersshipped from the Middle East cannot completely meet
the demand, the company needs guidelines to determine the allocation of the shipped
containersamong its many demandports. In this case, some ports will be faced with shortages
that may or may not be met by short-termleasing of empty containers.
Containers come in two sizes (20 and 40 feet long). There may be situations when a
customer will accept one large (40 feet long) container instead of two small (20 feet long)
containersor vice versa. However, since these situations are rare, we will assume that these
two sizes of containersare not interchangeable.There exist three types of containers.

Correspondence:K. K. Lai, Departmentof Applied Statisticsand OR, City Universityof Hong Kong, Tat Chee
Avenue,Kowloon,Hong Kong
688 Journalof the OperationalResearchSociety Vol. 46, No. 6

* Company-owned. When not in use, they are stored in third-partydepots. The depot
chargesfor daily storage.
* Short-termleased. When not in use, they may be returnedto the leasing company subject
to a monthly return limit, which is port dependent, or they may be kept in third-party
depots to await customerdemandfor them.
* Long-term leased. Similar to company-owned since no returns are permitted within a
specified time period of usually3 to 5 years as set by the lease.

From a logisticalpoint of view, the company-ownedand the long-termleased containersare

treated the same since the company will be unable to return them to the leasing company
when there is a surplus of long-term leased containers. So, from now on, company-owned
containerswill also include long-termleased containers.
The challenge is to determine the proportionof company-ownedversus short-termleased
containersthe shippingcompanyshould maintainin the long run. In other words, it needs to
know the financial impacts of increasingthe proportion of company-ownedcontainers since
short-term leasing costs have increased in recent years. However, as the number of
company-ownedcontainersincreases, the companymay be faced with increasedcarryingcosts
in additionto the initial capital expenditure.The companywill also begin to lose the ability to
drop-offcontainers.Droppingoff containershelps the companyreduce its carryingcosts.
We employed simulation and heuristic search techniques to identify ways to reduce
operationalcosts.

LITERATURE REVIEW

A review of the OR/MS literaturewas conducted for our problem. It was found that the
standardformulationof the transportationoptimizationproblem is inadequate to solve the
problem at hand since it requires that the number of goods transportedfrom source i to
destination j be known in advance. The trans-shipmentformulationwould appear to fit our
problem1.However, our objective is not to determine the best route that minimizesshipping
costs. In our problem, the shipping routes are fixed and we are asked to find a policy that
determinesthe number of goods (empty containersof two sizes) to be shipped from various
ports (sources) in order to meet the demand at other ports (destinations) subject to vessel
schedules and capacity constraints,which are dynamic in nature. Another complicationnot
addressedby the trans-shipmentproblem deals with the case when the total demand (from all
ports) is greaterthan the supply and we must decide how to allocate the containersamong the
ports. The difficultieshere are the randomnessof containerdemand and supply at each port,
and the fact that the handlingdischargingcosts are differentfor each port.
While there is a good amount of literature on the subject of container terminal opera-
tions2-4, work on relocationof empty containersin the shippingindustryhas been scarce. The
work of Crainic et al.5 appears to be only work on the allocation of empty containers, and
they formulated a dynamic stochastic network model. Simulationand heuristic search6were
chosen for our study.

CURRENT OPERATIONAL STRATEGIES

Definitions
To describe the various entities in the containeroperations, the following terms need to be
defined.
Terminal. The area where full or empty containers are loaded to, or dischargedfrom, the
vessel. Containerscannot occupy the terminalfor any extended period of time, instead, they
must either be loaded onto vessels or truckedto storage depots.
 K.K.Laiet al-Shipping ContainerLogisticsandAllocation 689

Depot. There are two types of depots: leasing depots, where the shipping company goes to
pick up short-termleased containers, and storage depots where the shippingcompany stores
its inventoryof empty containers. In practice, however, the two types of depots may be the
same location.
Ports. Place of vessel visit. Demand from many customers at a given location is added
together to arrive at a total port demand. Note that we are interested in the allocation of
containersat the port level. The allocation of containersto each customer is not the focus of
the paper.
Customers.Those who need to ship containers of goods from port to port. The shipping
company is responsible for trucking full/empty containers from customer sites. A port may
serve many customers.Thus, the demand at a given port is the sum of all customerdemands
at that port. Customerdemandsfor containersare stochasticin nature.

Since the shipping company in our case study is based in Hong Kong, the scope of our
study is limited to the empty containers'movement from the Middle East to ports in the Far
East. The Middle East is considered a single supply point while the Far East is composed of
11 demandpoints (see Figure 1).
A containertrip cycle is made up of an export and an importevent set. The cycle originates
and terminates at the depot with the container being empty. This trip cycle is depicted in
Figure 2. As mentioned earlier, the departurerates of empty containersfrom the depot to the
customer and the arrival rates of empty containers from the customers to the depot are
random. These two events are marked with a star (*) in Figure 2. The full export containers
departingfrom the customer may go directly to the terminal and vice versa. That is, in both
cases, containersmay bypass the (storage or leasing container)depot.
The allocation of empty containers to ports is based on 10-20 days projection figures.
These figures suffer from wide variabilitydue to the dynamic nature of the demands and
supplies for containers. As a result, in Hong Kong, the decision maker (known as the
container controller) makes adjustmentsto these projections before allocating the available
empty containersto the variousFar East ports.

Full/
Full Empty FrEs
Europe MiddleEast of 11 Ports)
~~(Total

Full

FIG. 1. Predominant flow of full and empty containers.

Customer Depot Terminal Vessel

I Empty~ I

Export Fuu l
(Event set 1) FullTriptoEurope
Full >FullI

l ' Full F< Ful Trp fromthe

Import v E V Empty I< Empty MiddleEast
(Eventset 2),Empty }El -yl d-

FIG. 2. The two event sets that forms a container trip cycle.
690 Journalof the OperationalResearchSociety Vol. 46, No. 6

The shippingcompany incurs storage space charges on unneeded company-ownedcontain-

ers. If the unneeded containers are short-term leased, the controller has the choice of
'off-hiring'them, that is, to return them to the leasing company. These returned containers
may not then be availablewhen needed by customersof the shippingcompanysince they may
have been leased to another company. Therefore, the controller must balance the average
rental charge against the storage charge and the risk of not having the containers when
needed during the next demand period. Three containersmoothing decisions are availableto
the controller.
(1) Relocate empty containers from the Middle East. Given that leased containers may not be
returned in the Middle East, the controller uses information from the weekly demand
projection reports, together with the schedule and capacity of each vessel and the
container surplus status, to produce the relocation plan which specifies the number of
containersto be carriedby each vessel to each of the 11 ports.
(2) Return containers to the leasing company. If the projection reports indicate that a surplus
of empty containers will occur in a given Far East port, the controller may arrange to
return all surplusshort-termleased containersto the leasing depots in order to minimize
storage and leasing charges. Currently, surplus short-term leased containers from the
Middle East are not considered. One reason is that the shippingcompanydoes not have a
reserve policy that allows the Far East ports to build up a safety stock of empty
containersbroughtfrom the Middle East.
(3) Pick up containers from the leasing company. If the number of containers relocated to a
Far East port cannot meet the demand, the controllerwill first reduce the allocation, then
arrange to short-termlease the balance, if available, at the said Far East port to avoid
lost sales. Relocation of containerswithin Far East ports is not feasible owing to its higher
costs comparedwith leasing.

Operational constraints
Four constraintswere identifiedthat make the job of the containercontrollerdifficult.
(1) Space limitation.When the vessel space cannot carry all the empty containersneeded to
meet the demand in the Far East, the controller will resort to leasing. The empty
containersthat the vessels are able to transportwill be allocated using an eliminationor
reduction procedure. The procedure sequentially reduces the allocation into half of the
demand on the ports with the highest dischargingand handlingcosts per container. Also,
if the demand for a particularlocation is less than 20 containers(the criticalpoint), then
delivery to that port will be eliminated completely. If there are containersavailable after
applying the reduction procedure, then the allocation is revised in order to allocate
completelythe left-over containers.
(2) Drop-off limitation.The total number of containersreturnedper month is limited by the
leasing contract.Different locations may have differentreturnlimits.
(3) Pick-up uncertainty. Although the company has the option of picking up short-term
leased containersat any time, there is a chance that either containersare not availableor
are not sufficient, especially duringthe peak season or when a large numberof containers
are required.
(4) Deviationof projecteddemand. Since the agent's projectionreportsare usuallygiven 7-25
days before the actual arrival date of the vessel at each port, there is a discrepancy
between the projection demand and the actual requirement. The major causes of the
deviation are the fluctuationof interportcargoes exported at the variouslocations and the
unexpecteddemandchanges requestedby the customers.

Cost components
The total operationalcost of each policy is composed of the following five components. (1)
Empty container relocation cost, which is the cost associated with placing the empty
containersonto, and out of, the vessel (loading and discharging).They are different for each
 K.K.Laiet al.-ShippingContainerLogisticsandAllocation 691

port. The actual transportationcost of empty containersfrom the Middle East to the Far East
is not included since the vessel space is available and no major cost is incurred during
transportation.(2) Drop-off charges, which are incurredwhen containersare returnedto the
leasing company at certain ports. (3) Pick-up charges, which are incurredwhen the company
needs to short-term lease containers. (4) Daily storage costs, which are incurred by each
empty containerplaced at storage depots. (5) Daily idling or rental costs, which are incurred
whether the containersare utilized or not.

METHODOLOGY

There are several steps in our solution methodology. First, we will identify the parameters
that affect the operations of the company. Next, we determine feasible values for each
parameter. We then search for a combinationof values (labelled a policy) which yields the
lowest operating cost. While this last step seems straightforward,there are too many
combinations to test, therefore, a two-step heuristic search approach was devised for our
problem. To carry out the search, we developed a computer simulationmodel of the vessel
activities.

Parameters
Four parameters were identified that can affect the current operations of the shipping
company.
* Safety stocks or reserves (S). By incorporatinga certain level of safety stocks at each Far
East port, it is believed that the total operating expenditure of the company can be
reduced. These safety stocks would come from empty containersrelocated from the Middle
East, assumingthat the vessel space is able to meet this added 'adjusteddemand.'
* Allocation factors (F). The idea of the allocation factor is to minimize the effect of the
erratic demand forecasts originated from the weekly projection reports. The allocation
factor F is used as follows. Suppose the demand projectionfor a given port is 100 empty
containers for the coming period. If the allocation factor for this port is 1.2, then the
adjusteddemandwould be 120 containersplus the safety stock (S) requirements.
* Criticalallocationpoint (w). If the demand of empty containersat a given port is less than
or equal to w, then the rule is not to allocate any shipped empty containersto that port.
The value of the current critical allocation point, w, is 20 containers. Other critical
allocationpoints are tested in the simulationstudy.
* Priorityfor port allocation reduction (P). We define P to be the set of port indices sorted
by decreasing handling and discharging costs. For example, if P = {1, 3, 4, . . .}, then
allocationwill apply to port number 1 first, followed by port number3, then 4, and so on.
With 11 ports, there are 11! ways of sequentially reducing the allocations to the ports.
Since this numberis too large, we will select a small subset to test its operationaleffect.

To determine reasonable values for the above parameters,one year's worth of data from
the Far East agents' projection reports was collected and analysed. Table 1 gives the values
for the four parametersthat will be consideredin our heuristicsearch. Notice that the chosen

TABLE 1. Search range for each parameter (in the initial heuristic
search, the values of S and F may vary for each port but a) is held
constant over all ports)

Parameters Values
Safety Stock (S) 0, 10, 20, 30
AllocationFactor(F) 1.0, 1.2, 1.4,...,2.6
CriticalAllocationPoint (co) 20, 50, 2000
Priorityfor port allocationreduction(P) Heuristicbased
692 Journalof the OperationalResearchSociety Vol. 46, No.6

values of criticalallocationpoints are 20, 50 and 2000. Basically, the value of 2000 was chosen
to test the effect of not allowing the controllerto eliminate completely the allocation on any
demandport.

Container inventory simulation

The simulationmodel is designed to track the inventory level of containersat each of the
ports. The inventory level at each port is affected by: (1) the initial inventory; (2) the
probabilitydistributionof customerdemandsfor containers,which is equal to the distribution
of the number of containers to be loaded to the next departingvessel; (3) the probability
distributionof the number of containers dischargedby the previous arrivingvessel; and (4)
the number of short-term leased containers returned to, or picked up from, the leasing
company.
The probabilitydistributionof customer demands for containers at a port was empirically
fitted by using one year's demand history. It turns out that customer demand follows a
Gamma distribution. Gamma distributedrandom variates were generated using the accept-
ance-rejection method7. Three independent replicationsof each simulationexperimentwere
conducted to obtain the estimated performance for each of the policies. Each replication
simulated one year's worth of operations. To avoid initializationbias, 'real' initial inventory
data of each port (obtained from the shippingcompany'spast year's records) have been used
to start the simulation.
Before applying the two-step search heuristic, we checked the validity of the simulation
model by statisticallycomparingthe simulationoutput of inventorylevels for each port with
the historicaloutput by means of the two-sided t-test. The tests were conducted at the 95%
statistical level of significance. The simulation results were shown to be consistent with
historicalobservations,indicatingthe validityof our model.

THE TWO-STEPHEURISTIC

To reduce the search space, a two-step heuristicsearchwas employed, as describedbelow.

Step 1
Two parameters (S and F) were studied first, while the other two were fixed at their
'standard'levels. The standardlevel refers to the level that the shippingcompany employed
previously for c and P (more specifically, c = 20, and P = (1, 2, 3, . . ., 11)). The four levels
of S and nine levels of F that we considered produced 36 level combinationsof 'adjusted
demands' for each of the 11 ports. Each of the 36 simulation outputs consists of counts in
terms of the number of containersleased, returned, stored, loaded and dischargedover the
simulation period of one year. Operational costs were calculated for each of these initial
policies to identify those yielding the lower cost. Thus, Step 1 of the heuristicwas designed
(1) to narrowthe search region and (2) to help identify the region where potential savingscan
be found. Step 2 of the heuristic seeks to improve further the policies identified during Step
1.
The simulationwas implementedusing Turbo Pascal Version 5.5 runningon a 486 personal
computer. While lots of processing took place within the simulation, each run was usually
completed within 2 minutes of CPU time.

Step 2
Since the simulationresults from Step 1 providedus with some clues as to which ports have
tendencies to be in surplus and shortage conditions, we use this information to develop
additional policies based on a different critical point (w) and different priorities (P).
Specifically,Step 1 results are used as insightsto help us determinethe priority P, by placing
 K.K.Laiet al.-ShippingContainerLogisticsandAllocation 693

ports with a history of surplusat the top and those with a history of shortagesat the bottom.
In addition to this rule, we also continue to place priorityon those ports with high handling
and dischargingcosts. The results of our two-step heuristicare presentedbelow.

STUDY RESULTS

Table 2 gives the indices assigned to the 11 ports that were considered in the case study.
During the discussionof the results, we shall refer to each port by its correspondingindex.

TABLE 2. List of Far East ports

Index Port Index Port Index Port

1 Hong Kong 5 Yokohama 9 Singapore

2 Taiwan 6 Colombo 10 Bangkok
3 Osaka 7 Surabaya 11 Busan
4 Nagoya 8 Jakarta

Step 1 results
The total operatingcost (TOC) for the 36 policies are plotted in Figure 3. Recall that these
policies are based on the standard level of w = 20, and P = (1, 2, 3, . . ., 11). Each point in
the figure correspondsto a fixed combinationof safety stock level (S) and allocation factor
(F). Lines were drawn to connect the policies with the same value of S. There are two
importantobservations.First, since these lines do not intersect, they suggest that a policy with
a given S always dominatesother policies for all values of F. Specifically,the line for S = 30
gives the highest TOC and S = 10 gives the lowest TOC for the four values of S that were
considered. Secondly, the TOC is seen to be lowest for F = 2.2, thus the overall minimum
TOC is given by the pair (S, F) = (10, 2.2).
The minimumTOC (from Step 1) was 4.75% lower than the standard(base year) TOC.
The standardpolicy does not consider safety stocks and extra allocationsto reduce shortages,
that is, it uses (S, F) = (0, 1.0). Since we have identified a region in the search space where
furtherimprovementsmay be obtained, we begin (in Step 2) to look at the values of the four
parametersaroundthe initial improvementregion obtained from Step 1.

5.8
5.75

5.7

5.65
52 5.6

5.55

5.35 . S=10
5.4.
5s33
es= =20

5.35. l

21 1.2 1.4 1.6 1.8 2 2.2 2.4 2.6

AllocationFactor(F)
FIG. 3. TOG results from Step 1 of the heuristic.
694 Journalof the OperationalResearchSociety Vol. 46, No. 6

Step 2 results
In determiningadditionalimprovementsin the TOC, we analysedthe simulationresults for
each port to detect any differences among ports. It was observed that three ports (ports 2, 6
and 9) were most frequentlyproved to be in need of short-termleased containers. This was
an indicationthat these three ports have demand projectionsthat are consistentlylower than
actual demand, which was confirmedby the high demandvarianceson these ports. Therefore,
Step 2 of the heuristicis constructedto search for improvementswith a special focus on these
ports when assigning safety stocks and allocation factors. We first construct five sets of
prioritiesfor port allocationreduction(P), based on the total idling, handlingand discharging
cost from Step 1 results. Table 3 shows the values of the four parametersinvestigatedin each
of the resultingpolicies.

TABLE 3. Policies derived from Step 1 of the heuristic

Policy S(a, b, c) F(a, b, c) P o

1 (10, 0, 0) (2.2, 1.0, 1.1) (1, 2, 3, 4, 5, 11, 7, 8, 10, 9, 6) 20 Units

2 (20, 0, 0) (1. 0, 1.0, 1.1) (11, 3, 5, 4, 2, 7, 8, 10, 1, 9, 6) 20 Units
3 (20, 0, 0) (1. 0, 1.0, 1.1) (11, 3, 5, 4, 1, 2, 7, 8, 10, 9, 6) 20 Units
4 (20, 0, 0) (2.2, 1.0, 1. 1) (1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11) 2000 Units
5 (20, 0, 0) (2.2, 1.0, 1.1) (11, 3, 5, 4, 2, 7, 8, 10, 1, 9, 6) 50 Units

The notation used in Table 3 is as follows. S(a, b, c) denotes the safety stock level assigned
to groups a, b and c ports. Group a ports are ports numbers2, 6 and 9, group b ports are
ports 3 and 11, while group c ports are the 6 remainingports. These groups were selected
from analysisof Step 1 results. Similarly, F(a, b, c) denotes the allocationfactor assigned to
groups a, b and c ports. For example, S(a, c) = (20, 0, 0) implies that the safety stock for
ports 2, 6 and 9 will be 20 units, while for ports 1, 3, 4, 5, 7, 8, 10 and 11 it will be zero.
It is quite importantto realize that the above five policies were not selected all at once.
This is where the principleof heuristicsearch plays an importantrole. The five policies were
progressivelychosen (i.e. in a stepwise fashion) after a thoroughexaminationof the previous
simulationresults. For example, we arrivedat policy 1 when we wanted to compare the Step
1 results with a change in the allocation priority. Next, policy 2 was determinedby observing
the simulationresults from policy 1. Then, policy 3 aimed at studying the impact of moving
the priority for port 1, as specified in policy 2, from the 9th position to the 6th position.
Policy 4 studied the effect of a large criticalpoint, which would essentiallyprevent any ports
from allocationelimination.Policy 5 differedfrom policy 3 in the allocationfactor for group a
ports and the criticalallocationpoint for all ports.
Table 4 summarizesthe total operating cost (TOC) and the percentage change compared
with the standardTOC. As before, these results were obtained from simulationand are based
on three independent replications. The minor variability of the results for the three
replications did not suggest any immediate change to the values of the parameters. For
simplicity, only the TOC is reported here, however, during our analysis of results, the
variabilityof each componentof TOC for each run was carefullystudied.
Table 4 shows that the first three proposed policies reduced the standardTOC between
4.97% to 5.59% while the last two policies increased the TOC between 0.75% to 11.78%.
These results suggest that the best value for the critical point is 20 units. Now that we have
further narrowed the search region where TOC reduction may be obtained, we proceed to
look at the first three policies in more detail to see if further improvementscan be obtained
aroundthis narrowedsearchregion.

Step 2.1 searchresults

Additional simulation experiments were conducted by varying the allocation factor for
group a ports on each of the first three policies. We will denote these three groups of
 K.K.Laiet al.-ShippingContainerLogisticsandAllocation 695

TABLE 4. Results for policies given in Table 3

Policy TOC* Percentage

1 5399 (5.59)
2 5435 (4.97)
3 5406 (5.47)
4 6392 11.78
5 5762 0.75

*TOC is given in thousandsof US dollarsand the

percentagecolumn representsthe policy percent-
age reductionin TOC comparedwith the TOC of
the standardpolicy (i.e. the one employed prior
to our study).

additionalexperimentsas policy group la, 2a and 3a. Table 5 summarizesthe results in terms
of percentage change relative to the standardTOC when F(a,*,*) is varied from 1.0 to 2.6.
F(a,.,.) represents the allocation factor for group a ports to be those given by the table
below, while the allocationfactors for groups b and c are fixed to the previousvalues given in
Table 3.
The largest percentagereductionin TOC relative to the standardTOC for policy groups la,
2a and 3a are 5.59%, 4.97% and 5.47%, respectively. In Table 5, these have been marked
with a star (*). These 'best' policies will be used in Step 2.2 below to see if the TOC of these
policies can be further improvedby changingthe value of the safety stock. We denote these
newly generatedpolicies as la*, 2a* and 3a*.

TABLE 5. Results for policies la, 2a and 3a when

F(a, *, ) is varied

F(a, *) Percentagechangein TOC

Policy la Policy 2a Policy3a

1.00 (2.46) (4.97)* (5.47)*
1.20 (3.11) (4.72) (5.02)
1.40 (4.04) (3.98) (4.24)
1.60 (3.75) (3.83) (4.15)
1.80 (3.96) (3.78) (3.68)
2.00 (5.24) (4.28) (4.04)
2.20 (5.59)* (4.82) (4.51)
2.40 (5.17) (4.46) (4.46)
2.60 (5.08) (4.20) (4.00)

Step 2.2 search results

In this final round of simulationexperiments,we vary the safety stock levels with F fixed
according to the minimum TOC specified above. That is, for policy la*, let F(a, *, *) = 2.2
and vary the safety stock level for group a ports from 0 to 30 units. For policies 2a* and 3a*,
we fixed F(a, *, *) = 1.0 since they yielded the lowest TOC.
Results in Table 6 show that further improvementscannot be achieved along the chosen

TABLE 6. Results for policies la*, 2a* and 3a*

when S(a, ) is varied

S(a, *) Percentagechangein TOC

Policy la* Policy2a* Policy 3a*

0 (4.65) (4.60) (5.19)
10 (5.59)** (4.72) (5.30)
20 (5.11) (4.97)** (5.47)**
30 (3.26) (1.13) (5.46)
696 journalof the OperationalResearchSociety Vol. 46, No. 6

search path. It was then decided, and the shipping company management agreed, that our
heuristic search has identified a policy with potential savings of 5.59% over the standard
policy. Therefore, policy la* (with S(a, b) = (10, 0), F(a, b, c) = (2.2, 1.0, 1.1), P = (1, 2,
3, 4, 5, 11, 7, 8, 10, 9, 6), and wo= 20 units) was recommended to the shipping company
management. The 5.59% savings represented a potential annual saving of US$320 000 to the
company.

CONTAINER MIX ANALYSIS

This section addresses the container mix problem described in the introduction. The
simulationmodel was modifiedto experimentwith variouscombinationsof containermixes.
The proportion of small (20 feet long) company-ownedcontainerswas varied from 0.4 to
1.0 while the proportionof large (40 feet) company-ownedcontainerswas varied from 0.2 to
1.0. These were feasible ranges of investigation suggested by management. Sixty-three
different simulationexperimentswith three replicationseach were conducted. We let S(x) be
the mix of small containers while L(x) is the mix of large containers. The fraction of
company-ownedcontainers is given by x and therefore the fraction of short-termleased is
(1 - x). For each S(x) and L(x) combination,a percentagechange in TOC over the standard
TOC is calculatedand entered into Table 7.
We have boxed the region in Table 7 where the percentage change in TOC is considered
stable. Thus, the results suggest that the fraction of company-owned (small and large)
containersshould not exceed 0.7 since we observe that the TOC begins to increase when x is
greater than 0.7. For example, the simulation results suggest that if the company employs
100% company-owned (and long-term leased) containers, then the TOC will be 16.35%
higher than the present policy. We attributethe TOC increase to the substantialincrease in
idling cost since no containerscould be off-hiredin this case.

TABLE 7. Percentage change in TOC under different container mixes

S(O.4) S(O.5) S(0.6) S(O.7) S(O.8) S(O.9) S(1.0)

L(O.2) 0.05 0.13 0.32 0.49 1.28 2.45 3.63

L(0.3) (0.02) 0.06 0.24 0.41 1.21 2.37 3.56
L(O.4) (0.04) 0.04 0.23 0.40 1.19 2.36 3.54
L(O.5) (0.07) 0.01 0.20 0.37 1.16 2.33 3.51
L(O.6) (0.03) 0.05 0.23 0.40 1.20 2.36 3.55
L(O.7) 0.09 0.17 0.35 0.52 1.32 2.48 3.66
L(O.8) 1.18 1.26 1.44 1.62 2.41 3.57 4.76
L(0.9) 4.91 4.99 5.17 5.35 6.14 7.30 8.49
L(1.0) 2.77 12.85 13.03 13.20 14.00 15.16 16.35

SUMMARY AND CONCLUSIONS

The result of this work provided annual savings of approximately US$320000 to the
companyin question. The savings are attributedprimarilyto the introductionof safety stocks
as well as a revised allocation priority (which takes into account a new cost component, the
idling cost) in addition to the previous handlingand dischargecosts for each port. While the
above saving estimates are promising, it was understood by management that more data
should be collected after the policy is implemented so that the robustness of the proposed
policy can be tested as the pattern of demandbetween the ports changes.
This work provided insights into improvedlong-term shippingcontaineroperations for the
company. For example, the simulationexperimentsconducted during Step 1 of the heuristic
identified ports with a tendency to surplusand deficits. This informationwas then employed
by Step 2 of the heuristic to smooth out or relieve these ports from surplus and deficit
situations.
 K.K.Laiet al.-ShippingContainerLogisticsandAllocation 697

This paper also helped the shipping company investigate, through simulation, the cost
impact of various container mixtures. The company managementconfirmedthat it was much
easier to accept a simulationmodel they can manipulateand conduct sensitivityanalysiswith,
ratherthan an elegant but complicatedanalyticalformulationthat they cannot work with on a
regularbasis.
This paper demonstratedthe use of simulation and heuristic programmingin a real case
application.The simulationmodels and the approachdescribed in this paper can be used by
the shippingcompanyanalyststo explore many other operatingoptions in the future.

REFERENCES

1. F. S. HILLIER and G. L. LIEBERMAN (1989) Introductionto OperationsResearch. McGraw-Hill,Oakland,

California.
2. V. HEE and R. J. WIJBRANDS (1988) Decision supportsystemfor containerterminalplanning.Eur. J. Opl Res. 34,
262-272.
3. S. P. CHAN and D. N. YONG (1987) A port simulation model for bulk cargo operations. Simulation 48 (6),
236-246.
4. A. SHEIKH, L. PAUL, A. HARDING and D. BALMER (1987) A microcomputer-based
simulationstudy of a port.
J. Opl Res. Soc. 38, 673-681.
5. G. T. CRAINIC, M. GENDREAU and P. DEJAX (1990) A dynamicstochasticmodel for the allocation of empty
containers. Projection Report, University of Montreal.
6. L. R. FOULDS (1983) The heuristic problem-solving approach. J. Opl Res. Soc. 34, 927-934.
7. S. V. HOOVER and R. F. PERRY (1989) Simulation- A Problem Solving Approach. Addison Wesley, Reading,
Massachusetts.

Received August 1993; accepted October 1994 after one revision