Demurrage and detention costs are charged by ocean carriers to ensure that consignees send back their containers as soon as possible. However, sending back an emptied container at an import destination precludes the re-use of this container in the immediate vicinity to fill it with export products. Typical demurrage and detention (D&D) rates give a few days of free D&D; after the free period the consignee needs to pay a fixed rate per day which may increase over time.

For a while now, I have wondered why this strange mechanism is in place. The most likely answer is that this has probably grown “historically”, as it does not make sense from any perspective: ocean carriers encounter extra costs by sending empty container for loading to export destinations, and consignees encounter paying additional fees to the carrier, even if they are trying to optimize hinterland operations. My former PhD student Stefano Fazi, now at the University of Groningen, has shown in his PhD thesis that the current D&D fee structures in the port of Rotterdam lead to higher cost for the supply chain as a whole, and moreover lead to favoring road transportation over barge, thus leading to higher emissions and congestion.

Recently, Benjamin Legros, Yann Bouchery, and I completed a very interesting theoretical study, in which we show – using a fairly simple mathematical line of reasoning – that all of this D&D does not make much sense: the supply chain cost go up and unnecessary container movements increase. It would make sense to keep a small number of empty containers in each hinterland area, void of any D&D payment structure. In our paper (warning: the paper is mathematical!) we show that with a simple threshold policy (essentially agreeing how long to keep a container in an hinterland area – or alternatively how many containers to keep in the hinterland – , depending on the total flow of containers to and from that area) we can reduce costs by 20-80 (!)% compared to a common policy where a container is returned immediately upon unloading – see the figure above taken from our paper. Interestingly, I recently heard that a number of deepsea terminals now have contracts with carriers where free demurrage is no longer expressed in the number of days, but in the total number of containers kept. This idea is very similar to ours, but as far as a I know this has yet to be deployed in the hinterland.

Of course, the question is then in the end whether the ocean carrier’s real objective is to have the supply chain work best, to have the containers back in their yard as quickly as possible, or to maximize its revenue from D&D fees. I leave it up to your imaginination to guess the answer. In the paper, we however show that it is possible for the carrier to devise a pricing structure such that its own profit margin remains unchanged. Hence, for a carrier there is no reason not to switch to such a new pricing structure. Curious to learn how carriers would be prepared to take next steps.