Moore on Pricing: Waves of change in ocean freight

Busy transportation managers are dealing with lots of news on a daily basis in the areas of domestic and international freight. For most U.S. shippers, the focus is on domestic issues of dimensional freight rates and hours-of-service (HOS) rule changes. For many shippers, it’s only when new regulations or process changes require action that they stop and look at their ocean freight costs, processes and business partners.

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Busy transportation managers are dealing with lots of news on a daily basis in the areas of domestic and international freight. For most U.S. shippers, the focus is on domestic issues of dimensional freight rates and hours-of-service (HOS) rule changes. For many shippers, it’s only when new regulations or process changes require action that they stop and look at their ocean freight costs, processes and business partners. 

Well, today there are continuous changes taking place in many aspects of ocean freight operations. In fact, there are three in particular that U.S. shippers need to better understand, as each represents a wave of change in the world of ocean freight and will have an effect on cost and service over the long term.

Verified gross mass
On July 1st of this year, a new mandate from the United Nations International Maritime Organization (IMO) under the Safety of Life at Sea (SOLAS) convention becomes law in 170 countries.

Under this new regulation, all containers must be accompanied by a shipping document signed either electronically or in hard copy by the shipper and must be with or on the bill of lading listing the verified gross mass (VGM) of a container. This is required in order for the container to be loaded onto a ship. However, it’s not yet clear what fines or delays shippers will experience for failure to comply. 

This regulation would seem to be a response to several dramatic accidents that were traced to overweight containers in the past 10 years. But there is a larger issue at work here. The VGM regulation is part of a trend to shift the burden of operations risk associated with the carrier back on to the shipper—a shift that shippers have seen coming both domestically and internationally for several years. 

Pod drives with direct electric propulsion
Azimuthing electric podded propulsion systems provide both vessel propulsion and steering in a single “pod” unit attached under the stern of a vessel. These pods are fed electric power from onboard generators and replace the steam and diesel engines that use propeller shafts and rudders—the mode of propulsion that’s been used for centuries. 

The rotating pod design first appeared in the 1990s and quickly evolved to achieve a 9% better fuel efficiency than the conventional propulsion systems. Since then, fine retrofits and dynamic computer optimization of the units are yielding overall efficiency improvements in the range of 18% according to ABB, the maker of the Azipod brand of propulsion units. 

ABB also reports that they now have orders for over 200 new and retrofit vessels. Added to the dramatic fuel savings are reduced tugboat expenses in port, as even the largest vessels become much more maneuverable with the pod drives. 

For shippers, this development means that while the news on oil prices is ushering in short-term savings, they need to keep in mind that carriers are quietly investing in structural cost reductions that they may not be talking about. It’s appropriate to ask about the state of technology and if there could be further room to maneuver on rates in your next carrier discussion.

Co-opetition through capacity sharing
The third wave of change is represented in the many capacity sharing agreements that are happening among the major ocean carriers. After years of trial and some pushback by governments, an increasing number of operational alliances have gone ahead. 

This development increases carrier and shipper flexibility and provides a buffer against tightening capacity. Shippers should be tracking these announced co-opetition agreements. As volume eventually catches up with capacity, these agreements will increasingly influence service and cost. 

These are just three waves of industry change making an impact on the ocean carrier industry. Armed with this advice, savvy shippers will take note and take action to capture improvements in cost and service where possible.


About the Author

Peter Moore
Peter Moore is Adjunct Professor of Supply Chain at Georgia College EMBA Program, Program Faculty at the Center for Executive Education at the University of Tennessee, and Adjunct Professor at the University of South Carolina Beaufort. Peter writes from his home in Hilton Head Island, S.C., and can be reached at [email protected]

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Article Topics

February 2016 · Ocean Shipping · All Topics
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