Operations in Panama Case study

Submitted by: Amit Tilak

Prof. Harry G. Chernoff & Prof. Kristen A. Sosulski

Date: 03/08/2013

1) Prepare a process flow diagram that tracks the service flow of a ship through the
canal. It will be necessary to estimate the cycle times at each stage.
Ship Arrival @

Q-1

Ships piloted to locks Marine

Pacific Side

Pilots/Tug boats, Gulf of

Panama 8.2 miles @ 7.5
mph: Cycle time = 1.09 hr

Miraflores Locks (2 Stage)

Miraflores Lake

1.1 miles @ 1.5 mph

1.1 miles @ 7.5 mph

Cycle Time = 0.74 hr

Cycle Time = 0.15 hr

(Elevation 54)

Q-2

Pedro Miguel Locks

(1 Stage)

Move through Channels

Chagres River &

0.87 miles @ 1.5 mph

7.8 miles @ 7.5 mph

Gatun lake

Cycle Time = 0.58 hr

Cycle Time = 1.04 hr

20.3 miles @ 7.5

(Elevation 85)

mph
Cycle Time =

Gatun Locks (3 Stage)

Q-3

2.71 hr

1.2 miles @ 1.5 mph

Cycle Time = 0.80 hr
(Elevation Sea level)

Total throughput time = 1.09+0.74+0.15+0.58+1.04+2.71+0.80+0.99 = 8.1 hrs

Departure
@ mph)
Atlantic Speed
Side Channel
& Limon Bay= 7.5 mph, SpeedShip
(Assume
in river/channel
in locks
= 1.5
7.4 miles @ 7.5 mph

Atlantic Side

Cycle Time = 0.99 hr

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Operations in Panama Case study

Submitted by: Amit Tilak

Prof. Harry G. Chernoff & Prof. Kristen A. Sosulski

Date: 03/08/2013

2) How many ships can pass through the canal in one 24 hour period?
Assumptions:

Multiple ships can pass through and/or wait in the channels & rivers

Only one ship can pass through the locks at any given time

The cycle time for the system is the cycle time for the bottleneck. Since multiple ships
can stand/wait in the channels and rivers, the bottleneck would be before the locks. It can
be seen from the process flow diagram above that the bottleneck would be before
Miraflores locks with a cycle time of 0.74 hrs. Thus, in 24 hour period, we will have
24/0.74 or 32.43 ships or about 32 ships pass through.
Approximately 32 ships can pass through the canal in one 24 hour period (Assuming
a continuous process; if we are starting from a shut down about 23 ships can pass through
in the first 24 hour period).
3) Describe briefly, the mechanism of the locks that allows the ships to be raised or
lowered over 80 feet.
1

The lock chambers are 110 ft. wide by 1,050 ft. long, with a usable length of 1,000 ft.

These dimensions determine the maximum size of ships which can use the canal; this size
is known as Panamax. The total lift in the three steps of the Gatun locks is 85 ft.
Each lock chamber requires 26,700,000 US gal to fill it from the lowered position to
raised position and the same amount of water must be drained from the chamber to lower
it again. Embedded in the side and center walls are three large water culverts, which are
used to carry water from the lake into the chambers to raise them, and from each chamber
down to the next, or to the sea, to lower them. These culverts start at a diameter of 22 ft.,
and reduce 18 ft. in diameter large enough to accommodate a train. Cross culverts
branch off from these main culverts, and run underneath the lock chambers to openings in
the floors. There are fourteen cross culverts in each chamber, each with five openings;
seven cross culverts from the sidewall main culverts alternate with seven from the center
wall culvert. The water is moved by gravity, and is controlled by huge valves in the
culverts; each cross culvert is independently controlled. A lock chamber can be filled in
1 http://en.wikipedia.org/wiki/Panama_Canal_locks
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Operations in Panama Case study

Prof. Harry G. Chernoff & Prof. Kristen A. Sosulski

Submitted by: Amit Tilak

Date: 03/08/2013

as little as eight minutes; there is significant turbulence in the lock chamber during this
process.
4) If the average Panamax container ship is charged approximately $300,000 to
pass through the canal, how can the shipping companies justify this large toll?
If the Panamax takes the longer route around the horn of Africa, it adds about 8,000 extra
miles or about 12 days, which add 12 days to the trip and increase the total costs
tremendously. This option is a definite no-go.
Alternatively, the ships can take the Suez Canal, which takes about 22 days (Avg. time
from China to US East coast through Panama Canal takes about 21.3 days) and roughly
costs slightly less amount of money than Panama Canal tolls. 2 This option does not
provide any significant cost savings as an alternate to using Panama Canal.
About 70% of product bound for East coast of US from China comes to the West coast on
ships (Avg. time of 12.5 days) and then travels through train or trucks to the East coast
(Avg. time of 5 days). 18.5 days is by far the fastest travel time for products from China
to East Coast but it comes at a considerable increase in cost due to high costs for train and
truck transportation.
Thus, the shipping companies justify the large toll because the alternative to the Panama
Canal either has similar costs with no time savings or very high cost of transportation
with significant time saving.
5) Identify the alternatives for a shipping company to send product from China to
the east coast of the US without using the canal.
The shipping company has following alternatives to send product from China to the east
coast of the US without using the canal:

Ship the product to West coast of the US and then ship to East coast using Train or
Trucks

2 www.pancanal.com/esp/plan/estudios/0284.pdf
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Operations in Panama Case study

Submitted by: Amit Tilak

Prof. Harry G. Chernoff & Prof. Kristen A. Sosulski

Date: 03/08/2013

Ship the product to the East coast by using the Suez canal

Ship the product to the East coast by taking the longer route around the horn of
South Africa

6) What factors affect the costs of these alternative routes described in question 5?

Ship the product to West coast of the US and then ship to East coast using Train or
Trucks: Average distance to West coast is 7,000 miles and @$0.25/mile/TEU cost,
equals to about $7 million for 4000 TEUs. The average cost for 1 TEU for truck
is about $2/mile, and for 4000 TEUs (Panamax capacity with 80% utilization)
going 1500 miles, comes to around $12 million. Thus, the total cost comes to
around $19 million. Comparing the alternative route with Panama Canal route, we
have 12000 miles x $0.25/mile/TEU x 4000 TEUs +$300k toll comes to around
$12.3 million.

Ship the product to the East coast by using the Suez Canal: The travel through the
Suez Canal takes about 22 days (Avg. time from China to US East coast through
Panama Canal takes about 21.3 days) and roughly costs slightly less amount of
money than Panama Canal tolls. 3 This option does not provide any significant
cost savings as an alternate to using Panama Canal.

Ship the product to the East coast by taking the longer route around the horn of
South Africa: If the Panamax takes the longer route around the horn of Africa, it
adds about 8,000 extra miles or about 12 days, which will add up to extra 12 days
and about $7.7 million ($0.25 x 4000 x 8000 - $300k) in additional fuel costs.
This option is a definite no-go.

3 www.pancanal.com/esp/plan/estudios/0284.pdf
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Operations in Panama Case study

Submitted by: Amit Tilak

Prof. Harry G. Chernoff & Prof. Kristen A. Sosulski

Date: 03/08/2013

7) It is estimated that Panama is making about $2-$3 billion per year from the
canal revenues. Why do you think that the US lost money each year while it
controlled the canal (and hence wanted to get rid of it)?
4

Before the Second World War, the vast majority of the cargo transiting the Panama Canal

consisted of oil and lumber from the West Coast headed to eastern ports, with a smaller
flow of manufactured goods and agricultural products headed the other way. The Panama
Canal provided US with massive cost savings to intercostal commerce. The canal
supercharged the growth of the West Coast and generated economic benefits several
times greater than its cost. By keeping the Panama Canal in American hands, the United
States ensured that transit rates would remain low. An independent Panama or private
canal operator would have charged profit-maximizing rates and captured much of that
surplus of itself. Under US public ownership, however, low tolls ensured that most of the
surplus would flow to American producers and consumers.
In the post WWII era three big changes in technology greatly reduced the canal's
economic value to the United States: the dieselization of the railroads, the Interstate
Highway System, and the rise of California as a market for its own natural resources. The
first two meant that by the 1970s, a Midwestern farmer faced an almost even cost
between transporting Asia-bound exports down to the Gulf and through the canal and
shipping them out to Seattle by land. Conversely, eastern-bound cargoes no longer
consisted of strategic raw materials from California but inexpensive manufactured goods
from Asia. A rise in Panama Canal tolls, therefore, would no longer hurt American
interestsits incidence would fall on Japanese, Korean, and Taiwanese manufacturers
trying to sell into the highly competitive American market. The US interest in the Canal
declined since it no longer had any need to control Panama Canal tolls. There was no
longer any reason to prevent a Panamanian canal operator from trying to charge as much
as the market would bear. Additionally, the Panama Canal had become a fiscal drain by
1970. On one end, the canal was squeezed by rising costs due to American
mismanagement. Panama Canal employees in essence captured canal management and
ran it for their own benefit: salaries escalated, along with costs and accident rates, and the
4http://hbswk.hbs.edu/item/6402.html
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Operations in Panama Case study

Prof. Harry G. Chernoff & Prof. Kristen A. Sosulski

Submitted by: Amit Tilak

Date: 03/08/2013

administration didn't even bother to do simple things such as deepen shallows or install
lights. In this, canal employees were greatly aided by the peculiar place the canal held in
America's national mythology. Conservatives who would have been horrified at
employee capture of other public enterprises such as, say, the Tennessee Valley Authority
or National Aeronautics and Space Administration not only tolerated but applauded the
phenomenon in the Canal Zone. The result was that American aid transfers to Panama
soon began to overshadow the revenues from the canal. American end users no longer
needed to ensure that Washington kept tolls low and American taxpayers no longer
gained from the canal's profits.

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