A few months ago we had a post about how shipping containers have impacted supply chains and global trade. Today we have a longer piece from Nautilus on the history of shipping containers as well as some current trends in global shipping (The Box That Built the Modern World, Jul 25). I have three take aways from reading the article. First, everyone should read The Box by Marc Levinson because (a) it’s a good book and (b) it seems that no one can write about containerized shipping without more-or-less admitting that Mr. Levinson saved them a lot of effort in researching the topic.

The second point is that the article provides a nice illustration of how slapping stuff in containers can dramatically drive down shipping costs.

To get a sense of how the system works, imagine one of the containers aboard the Hong Kong Express, which is owned by German shipping giant Hapag-Lloyd. Asked to trace a product through a typical container voyage, Hapag-Lloyd spokesman Rainer Horn suggests a T-shirt sewn at a factory near Beijing, the kind you might buy at H&M. Tagged, folded, and boxed, the T-shirt would be “stuffed” into a container with 33,999 identical shirts at the factory. Once sealed with a plastic tag and listed on a computerized manifest, the merchandise could pass through nearly three dozen steps before arriving at a discount clothing retailer’s distribution center near Munich. There’s the trucker who moves the box to a waiting ship in Xinjiang, the feeder ship that moves it to Singapore to be loaded onto a bigger Europe-bound freighter, the crane operator in Hamburg, customs officials, train engineers, and more. Yet the container’s uniformity smooths each step of the way. Trucks and trains are fitted to haul the identical boxes; cranes are designed to lift the same thing over and over. The total time in transit for a typical box from a Chinese factory to a customer in Europe might be as little as 35 days. Cost per shirt? “Less than one U.S. cent,” Horn says. “It doesn’t matter anymore where you produce something now, because transport costs aren’t important.”

OK, that last line may a bit of an exaggeration. Having shipping costs under a penny per item is really a function of jamming 34,000 t-shirts into one box. Have something bulkier so that you can only fit, say, 100 units in a box and shipping costs will be more relevant. It also matters that the cash tied up in the box is fairly small. If each unit in the box is worth, say, $100 instead of $5, then 35 days end to end may not be fast enough. Which is to say, it easy to come up with examples in which shipping time and cost will matter somewhat more than it does for t-shirts, but the economies of scale inherent in moving large volumes through a standardized process are still pretty amazing.

The final point has to do how current shipping patterns are introducing supply chain risk.

With the timely arrival of each container dependent on dozens of things going right, there’s a lot that can go wrong. “Right now, we’ve got too many eggs in too few baskets,” says Muller. In the U.S., two adjacent ports—Los Angeles and Long Beach—handle nearly half of the nation’s container traffic. MIT’s Rice recently set about calculating the capacity of U.S. ports, and set up an online utility, called Port Mapper, to help operators figure out how to respond if a port were taken out of commission. The nightmare scenario: an earthquake, a terror attack, or a labor strike in southern California. “If something bad happens in L.A. [including Long Beach], every other container port in America would have to have approximately 25 percent extra capacity to absorb all those containers,” Rice says. “That could not be done.” Delays as ships were re-routed to ports in Canada and the Gulf Coast of the U.S. might hold up cargo for weeks. … The solution, Rice says, would be more ports operating below their peak capability to create a buffer in case of disaster or unexpected delays. But port operators have no interest in building inefficiency into the system, essentially paying for space and equipment they’re not using just in case of an emergency. “There’s an incentive to work at maximum capacity,” Rice says. “You know port operators aren’t working at 50 percent.”

This is an interesting observation. It is also related to the economies of scale that follow from containerized shipping. Loading and unloading a ship is now all about cranes and specialized equipment as opposed to longshoremen hauling stuff. All of that equipment takes capital and capital hates being idle. Hence, there is little or no incentive to build excess capacity. That creates a very fragile system with little ability to absorb shocks.

It is not clear whether there is an easy solution to this. In effect, buffer capacity is a public good. The port of LA would benefit if Seattle or Oakland intentionally operated under capacity. Shippers would then have fewer qualms about routing goods through LA since there would be an obvious back up plan available should a disruption arise at LA. But self-interested parties are going to under-provide a public good. Indeed, I suspect the folks in LA would be nervous if anyone up the coast had significant idle capacity since that raises the possibility that they might undercut LA’s prices to actually get something for their investment.