Logistics economics and operations: voyages, rerouting, warehouses and the last mile
The cost of a container voyage, what a longer route costs, how warehouses and ports use space, and why density rules the last mile.
Industry brief, with a one-minute summary: Logistics and shippingKey takeaways
- Most logistics costs are driven by time and distance: the days a ship sails, the hours a driver works, the days goods sit in a yard.
- Network design: where to put ports of entry, distribution centers and hubs, trading off transport cost, stock held and delivery speed.
- Warehouse operations: receive, put away, store, pick, pack and ship. Picking is usually the largest labor cost; automation, better layouts and batching orders raise productivity.
- Inventory: more distribution centers give faster delivery but need more total stock.
Key idea
Most logistics costs are driven by time and distance: the days a ship sails, the hours a driver works, the days goods sit in a yard. Cut time, or fill each ship, van and warehouse more fully, and cost per unit falls.
Worked case
Economics of one container voyage from Asia to Europe
The prompt
Bluewake Lines (a fictional carrier) sails a 15,000 TEU ship from Asia to Europe, a 35-day leg. The ship is 85 percent full. The ship itself costs USD 60,000 a day (charter or capital), it burns 150 tonnes of fuel a day at USD 600 per tonne, port and canal fees are USD 3 million, and handling and container costs are USD 300 per TEU carried. What is the cost per TEU carried, and what would the voyage earn at a freight rate of USD 2,000 per TEU?
The structure
- Voyage profit = TEU carried x (freight rate minus cost per TEU)
- TEU carried = capacity x utilization
- Time costs = (daily ship cost + daily fuel cost) x days
- Other costs = port and canal fees + handling per TEU
Working it through
1. TEU carried
15,000 TEU at 85 percent.
TEU carried:15,000 × 0.85 = 12,7502. Total voyage cost
Ship 60,000 and fuel 90,000 a day for 35 days, plus 3 million of fees, plus 300 per TEU.
Total voyage cost (USD):60,000 × 35 + 150 × 600 × 35 + 3,000,000 + 300 × 12,750 = 12,075,0003. Cost per TEU
Total cost divided by TEU carried.
Cost per TEU carried (USD):12,075,000 ÷ 12,750 = 9474. Voyage margin at USD 2,000 per TEU
Revenue minus cost.
Voyage margin (USD):12,750 × 2,000 - 12,075,000 = 13,425,000
The recommendation
Bluewake should sail this leg, because it costs about USD 947 per TEU and earns about USD 13.4 million at USD 2,000 per TEU. First, the ship carries 12,750 TEU at 85 percent full against a total cost of about USD 12.1 million. Second, this margin must also carry the return leg from Europe, which usually moves less cargo at lower rates. The risk is that freight rates can halve within months. As a next step, test the voyage at lower rates and slower sailing speeds.
Risks: Freight rates can halve within months; Fuel prices move with oil prices.
The Bluewake ship must sail around the Cape of Good Hope instead of through the Suez Canal, adding 10 days. Each day costs USD 60,000 for the ship plus 150 tonnes of fuel at USD 600 per tonne. It saves about USD 500,000 of canal fees. What is the net extra cost per TEU carried (12,750 TEU), in USD? Round to two decimals.
Ports and warehouses: throughput, dwell time and space
Little's law links three numbers in any flow: the average amount of stock in a system equals the rate at which items flow through it, times the average time each item stays. For a port yard: containers in the yard = containers handled per day x average days each container stays (the dwell time). So a port can handle more containers in the same yard by cutting dwell time, for example with faster customs clearance or fees for containers that stay too long.
A terminal in Jebel Ali handles 20,000 TEU a day and containers stay 4 days in the yard on average. How many TEU are in the yard on an average day?
The last mile: density decides cost
Worked case
Cost per drop for a courier in Dubai
The prompt
A courier van in Dubai costs AED 250 a day for the driver, AED 150 for the van lease and insurance, and AED 60 for fuel. The driver attempts 100 deliveries a day, and 8 percent fail (nobody home, wrong address). What is the cost per successful drop? What happens if failed deliveries fall to 3 percent?
The structure
- Cost per drop = daily van cost divided by successful drops per day
- Daily van cost = driver + van + fuel
- Successful drops = attempts x (1 minus failure rate)
Working it through
1. Daily van cost
Driver, van and fuel.
Daily van cost (AED):250 + 150 + 60 = 4602. Cost per drop at 8 percent failures
92 successful drops.
Cost per drop (AED):460 ÷ (100 × (1 - 0.08)) = 53. Cost per drop at 3 percent failures
97 successful drops.
Cost per drop at lower failure (AED):460 ÷ (100 × (1 - 0.03)) = 4.74
The recommendation
The courier should cut failed deliveries, because lowering them from 8 to 3 percent cuts cost per successful drop from AED 5 to about AED 4.74, about 5 percent. First, the van costs AED 460 a day whether a drop succeeds or not. Second, each failed parcel also needs a second trip later, so the true saving is larger. The risk is that delivery time slots or lockers cost more than they save. As a next step, test delivery time slots and pickup points on a few routes.
Supply chain operations, step by step
- Network design: where to put ports of entry, distribution centers and hubs, trading off transport cost, stock held and delivery speed.
- Warehouse operations: receive, put away, store, pick, pack and ship. Picking is usually the largest labor cost; automation, better layouts and batching orders raise productivity.
- Inventory: more distribution centers give faster delivery but need more total stock. Safety stock protects against delays; long or unreliable transit (for example after rerouting) needs more of it.
- Transport planning: consolidate small shipments into full loads, choose the mode (sea, air, rail, road) by cost and speed, and plan return loads to avoid driving empty.
- Customs and compliance: correct documents, duties and product rules. Delays at customs often cost more than the freight itself.
- Visibility: tracking shipments across many companies, so problems are found early.
An e-commerce warehouse in Mumbai has fixed costs of INR 20 crore a year and a variable cost of INR 15 per order. It ships 1 crore orders a year. What is its cost per order, in INR?
Sources for this lesson (2)
- Recognized public explanations of case-interview concepts and frameworks
- Drewry, World Container Index
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