Ocean shipping strategies: Risk versus reward
To cut costs from China without sacrificing supply chain reliability, BSI Door Hardware took a chance on a new ocean service. The gamble paid off, and just may signal a shift from air to ocean for many other top tier shippers in the future.
By Patrick Burnson, Executive Editor -- Logistics Management, 9/1/2007
Alexander Graham Bell once noted that “when one door closes, another opens.” For BSI Door Hardware, a leading provider of a wide range of patio and entrance door hardware, that’s just what happened when it decided that air cargo was simply too expensive for the company to use when sourcing components from China.
“Even our CFO told us we were spending way too much,” recalls BSI’s purchasing manager, Lance Dvorak. “Transportation costs were in excess of $250,000 using air freight from China, and it became clear that this problem had to be addressed with an alternative mode. Everyone in senior management was on the same page.”
Choosing the right time for such a move, however, was another matter. As the Sioux Falls, S.D.-based manufacturer was preparing to launch its newest products at a major industry trade show last February, the executive team would be taking on considerable risk.
For in addition to displaying the latest products, BSI had to be ready to sell stock off of the show floor. “Because we source from four different sites in China, this is a pretty big undertaking,” Dvorak notes.
Complicating the situation was the fact that there might be considerable “buyers remorse.” “It was not that we were unhappy with the service of our air carrier,” allows Dvorak. “They were very reliable, and always made the deadline.” With the bottom line taking precedence, however, Dvorak began exploring his options. Naturally, the first candidates to evaluate would be existing freight forwarders who arranged the transport of goods by ocean carriage. “We have a very good relationship with some major global intermediaries,” he says. “And we were about to interview a couple of other 3PLs when one of our regular LTL carriers came knocking on our door.”
Alternative Options
It was then, says Dvorak, that he realized a new service offering was emerging just when he needed it most. Dvorak was told last September that a new partnership between Con-Way and APL Logistics had been formed to guarantee “port-to-door” delivery from Shanghai and Shenzhen within an 18-day window. In combining premium LCL service with proven LTL transport, OceanGuaranteed, the service offered by the partnership seemed like a good bet.
“I’m really out on a limb once the freight is on the water,” he says.
Mixed metaphors not withstanding, he noted that he “put a lot of faith” in the decision. Dvorak was told that the new service can deliver within 15-20 days, whereas his former air carrier could do it in 10-14 days. This caused Dvorak some apprehension initially, as he knew an abrupt shift in strategy might undermine his credibility. But with the contract signed last December, it was time to wait and see.
“We told the customers that we were putting it on a 'fast boat,’” he recalls. “We were cutting it close, but assured them that their plants would not have to shut down. Then we explained the cost savings…that won them over.”
Today, exploring similar options is being regarded as more commonplace. Many supply chain consultants are continuing to track the trend, observing that the move from air to water needs to be to be calculated carefully. “The challenges faced by shippers, and in particular manufacturers dependent upon a global supply chain, are varied,” notes Alan Davis, a partner at Strategic Solutions Partners, LLC. “Obviously, no supply chain manager wishing to keep his job will risk a 'stock out’ of a critical part. Consequently, most will mitigate this by carrying a larger inventory and safety stock.”
According to Davis, this paradigm was broken when Japanese manufactures adopted kaban, or just in time (JIT) inventory management.
The thesis was to select a few suppliers, collaborate with these suppliers, and depend exclusively on these supply partners. “The Japanese earthquake occurring in July, though, exposed some flaws in the kaban. Toyota had to close all of their domestic (Japan) automobile assembly plants for a day or more because of parts shortage from one supplier,” he says.
North American supply chain managers like Dvorak recognize the challenges of single sourcing, and customarily have secondary and tertiary supply sources. These additional sources give them greater flexibility in handling both forecasted as well as unforeseen problems affecting their supply chains.
Crisis management prevailed even when no such emergency existed, Davis adds, making BSI’s “thought leadership” even more impressive.
Making the Decision
According to Davis, services like OceanGuaranteed offer supply chain managers the flexibility to achieve much of the savings of ocean carriage, while enjoying a guaranteed service standard that they’ve become used to in the air.
“The guarantee ensures the supply chain manager of a regular scheduled flow of goods, while providing a primary or secondary modal option,” says Davis.
Shippers importing goods through U.S. West Coast ports are all too aware that dockside disruptions can occur, however. In 2004, prolonged labor negotiations between the International Longshore and Warehouse Union with management resulted in a major tie-up in Los Angeles and Long Beach. In many cases, vessels had to be redeployed entirely.
For good reason, then, Dvorak was concerned that ocean gateways might be less than wholly reliable. “We ship 95 percent of our goods through Seattle,” says Dvorak. “This a good port for us if we need product in 35-45 days. And if there’s a problem, there’s always Vancouver. But we knew that the new service uses LA/Long Beach, and we’d heard about bottlenecks there. So far, though, so good.”
While hardly on the scale of an earthquake, a slight scare also rippled throughout Southern California’s shipper community this past July when it appeared that the ILWU’s clerical workers wouldn’t come to terms in contract talks with carrier executives at the nation’s largest port. Fortunately, they reached an 11th hour agreement on a three-year labor deal.
Concerns about the outbound ports were expressed as well, says Dvorak, but OceanGuaranteed’s network of seven load centers has met his expectations. “We rely on Qingdao primarily,” says Dvorak, “but we also use Shanghai, Shenzen, and Hong Kong. We hope to soon use the port at Ningbo, where our factory is located.”
Safe Bet For the Future?
Dvorak started using the new ocean service late last year, and only one load (of more than 20) missed its deadline. “And that was only because of a bad storm,” he says. “It was not a big deal, anyway, since we hit the general time frame and factory conditions were not affected.
Dvorak, who is active with the Institute of Supply Chain Management and local Sioux Falls shipper associations, is also in a position to broadcast a horror story if things didn’t work out. But so far, so good, he says. The arrangement is simple, and accountability transparent.
“My hands are wiped clean once the shipment is sent,” he says. “It moves in bond and is fully insured. There aren’t any regulatory hurdles. We’re kept up-to-date constantly as it moves through the supply chain, and we don’t have to worry about any third parties.”
And the bottom line? “Housing sales have been softening, but demand for our products is still strong,” he says.
“With this new strategy in place, we expect to be doing very well over the long term. Our costs have come down to $180,000 and we expect still further reductions by 2008.”
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