2015 Ocean Cargo Roundtable: Crisis calls for collaboration

Collaboration between shippers and their ocean carrier partners has never been more important say analysts, who note that there are more logistics service options than ever before as fulfillment lead times continue to shrink across the globe.

Our 2015 Ocean Cargo Roundtable panel tells shippers that the trends worth tracking include vessel overcapacity; slow steaming; schedule integrity; and ever-shifting carrier alliances. Port productivity on all U.S. coasts, they say, is also receiving unprecedented scrutiny as shippers struggle to balance ocean cargo gateway choices.

This year’s open discussion features the views of two prominent global shipper association leaders: Bruce Carlton, president of the National Industrial Transportation League (NITL); and Jonathan Gold, vice president for supply chain and customs policy of the National Retail Federation (NRF). They’re joined by Philip Damas, director of the London-based consultancy Drewry Supply Chain Advisors, a provider of global perspective on shipper/carrier relationships and what needs to be done to improve them.

Logistics Management (LM): In this era of fading differentiation in ocean carrier service, how do shippers determine which provider is best for them?
Jonathan Gold: Many shippers still evaluate carriers by reliability, on-time performance, and price. Unfortunately, many believe that the carrier differentiators really have disappeared. We’re finding that shippers are now focused on evaluating what works best for their supply chain network, and how it matches up with a carrier’s network—and where the best relationship may exist.

Bruce Carlton: I’ll add that shippers still have a choice among service providers, but the menu is not infinite. Long-term loyalties to a select few carriers appear to be a fast-fading phenomenon. More shippers are instituting rigorous tracking of performance against objective standards, mimicking performance measurement practices across virtually all lines of business today.

Philip Damas: I agree. Today, shippers typically expect carriers to provide a combination of cost-competitive ocean transportation services with a good standard of reliability and transit times. We recommend choosing a couple of ocean carriers from any one of the four mega-alliances on the East-West routes and adding—where necessary—a few North-South or global carriers with a strong presence in a company’s relevant market.

LM: Along that line of thinking, what will be the ultimate impact made by new carrier alliances? What’s the upside for shippers, and what are the negative consequences?
Damas: The positive effect of mega-alliances is that they enable carriers to fill their increasingly large ships, reduce their costs, and provide more direct connections than before. But alliances also standardize and commoditize the service offering of carriers. Port-to-port ocean transportation services between all the members of a given alliance are now virtually the same.

Gold: Yes, and the alliances cannot be easily assessed in a vacuum. While they’re a significant influence on the market, the continuing expansion of capacity from the influx of so many very large vessels will continue to depress rates and returns. Shippers are enjoying an extraordinary environment of low rates, but they also know this is not a sustainable business model. It’s an aberration that has been remarkably long, but most shippers understand that a correction has to come eventually.

Carlton: Jonathan and Philip are right on in their assessment, while most shippers are still waiting to see how it will play out. While there are promises of better efficiency, those benefits have yet to be realized by the beneficial cargo owners—especially the small and medium-sized players.

LM: What about slow steaming? Is this a trend that will continue on all trade lanes? If so, is that good for all ocean carriage stakeholders or just the carriers?
Gold: It appears that slow steaming is here to stay, regardless of fuel costs. The carriers certainly believe it’s good for them and the environment. Unfortunately, the shippers haven’t seen or realized the benefits. For retailers, slow is not as critical as dependable and on-time, so some shippers would be willing to pay for faster service that provides best-in-class, on-time performance.

Damas: Indeed, we expect slow steaming to continue on all trade lanes. But at the same time, we see moves by some carriers—like Matson—offering one “fast” shipping loop to the market targeting very-time sensitive products. Most of the other services will continue to be slow steaming, given the uncertain energy scenario, however.

Carlton: Slow steaming was certainly not a universally welcomed event among shippers.  It forced many of them to reset and recalibrate their ordering and purchasing practices while adjusting inventory—and then explaining it to the C-level executives who were questioning all of the adjustments. Now it’s ‘normal.’

With the dramatic drop in oil prices there’s some natural speculation that carriers in certain lanes might increase vessel speeds. But working against that is the combined savings for carriers from lower oil prices and reduced fuel burn due to slow steaming. I don’t believe we’re going to see a widespread return to higher ship speeds. If carriers offer an ‘express’ service in some lanes, shippers should expect to pay a significant rate premium.

LM: U.S. West Coast congestion last year caused many shippers to rethink their distribution strategies. Will shippers mitigate risk in the future by sourcing through Gulf and East Coast ports?
Gold: A quick one word answer is yes. Shippers will continuously evaluate their supply chains to ensure that they’re mitigating risk as best as possible, especially after what we just went through during the West Coast port labor negotiations. The slowdowns and congestion made a significant impact on all stakeholders who rely on those ports. Many shippers adjusted their supply chains and shifted cargo to alternate ports, and some of those changes will be permanent. All options are now on the table, including not only the East and Gulf Coast ports, but also Canada and Mexico.

Carlton: A lot of shippers, both importers and exporters, are angry. They understand the congestion and slow throughput could not be attributed to just one issue, like the nine-month labor contract negotiations. However, they feel like they got burned because others were not doing their jobs well enough. Big importers in particular are heavily invested in warehouses, distribution centers, and contractual obligations with a host of service providers—and they can’t simply pack up and leave. 

However, prudence dictates a very thorough examination of what they can do differently down the road, and we should expect some degree of new sourcing patterns to reduce or at least spread their risk. Meanwhile, the pressure is on the ports, terminals, carriers, alliances, chassis pools, unions, railroads, and just about every other element of the supply chain to get it fixed.

LM: What then will the Panama Canal expansion mean for most U.S. shippers? Will there be an immediate shift in carrier deployment schedules, or have those already been determined?
Damas: The Panama Canal provides another catalyst to re-route containers from the U.S. West Coast to the East Coast, particularly for products moving to or from the Southeast. Carriers will not switch overnight from 5,000 twenty-foot equivalent (TEU) Panamax ships, the current limit, to 13,000 TEU ships, the new maximum, but they will immediately deploy more vessels on the all-water East Coast route. That’s mainly because shippers have asked them for more capacity on this route. Meanwhile carriers are already scrambling for position on the Asia-U.S. East Coast route via Panama.

Gold: I think many retailers are still trying to evaluate what the impact of the expansion will be. The vast majority of the East Coast ports are not yet prepared to handle the increased cargo flows that are expected when the canal expansion is finished. We continue to see congestion issues at key ports including New York/New Jersey as well as Norfolk. 

Carlton: I’m more comfortable with a ‘wait-and-see’ approach. Gulf and East Coast ports are understandably eager to capture some additional vessel calls, but the canal is only one piece of the puzzle and one variable in the total transportation cost calculus.  This is one of those events that will illustrate the expanding complexity of the supply chain.

LM: Carriers continue to invest in capacity, but see little return on that strategy. How can shippers contribute to a sustainable ocean carriage industry?
Gold: Partnership is critical to ensure a sustainable ocean carriage industry. However, carriers are going to have to focus on differentiation and service before shippers would be willing to pay higher costs. Right now, shippers are not seeing the service levels that they desire, especially as we see congestion issues continue to increase. 

Damas: As carriers continue to over-invest in new ships, they’re largely to blame for the chronically low profitability of their industry—and there’s not much shippers can do about that. However, savvy shippers build relationships with ocean carriers aimed at helping both parties work together and reduce costs on both sides.

From the shipper perspective, this may include providing reliable volume forecasts to the carrier, giving early notice of bookings when possible, transferring data and instructions electronically, and rewarding the more reliable, high-quality carriers with additional business. This will make ocean carriers more efficient, but may not necessarily make them profitable.

Carlton: A carrier’s decision to invest in more capacity appears to be driven almost entirely by its desire to reduce slot costs. The problem is that the supply of shipping capacity is outstripping global demand by a considerable margin. And the great unknown is whether this is a short run or long run problem. 

Let’s just list some key headwinds that will affect the global ocean shipping market in the years ahead: lukewarm consumer demand in key consumption markets; near-shoring of manufacturing; the growth of middle-class consumer demand in China and India; and a bit further ahead maybe 3-D printing. Carriers need some good offsetting tailwinds.

LM: With that in mind, how can shippers better work with their carriers?
Carlton: They can help at the margins by establishing and maintaining solid long-term relationships with quality carriers. That’s a good solution for both, but it’s not enough to overcome the carriers’ own downward pressure on rates and returns from continued overcapacity.

LM: How important are non-vessel operators (NVOs) in today’s marketplace? Will we see more reliance on these middlemen or less?
Damas: NVOs are increasingly important in an ocean market characterized by ocean carriers generally offering only a basic commoditized service. On some routes, NVOs are incredibly powerful. For small shippers who don’t have in-house freight procurement experts, this is especially true. NVOs are the natural one-stop-shop for a range of services, including consolidation and personalized customer service. For larger shippers, NVOs often serve as forwarders or 3PLs. In my view, the roles of intermediaries will increase—and ocean carriers cannot replace them.

Gold: Many retailers regard NVOs as being extremely important in today’s marketplace. They believe that the NVOs are global thinkers and are invested in the customer who can quickly come up with creative solutions for some of the issues that shippers are facing.  As Philip alluded to, many believe that they will become more important in the future.  

Carlton: I’ll add that like everyone else in the logistics arena, NVO’s will have to continue to improve in their menu of services, including pricing and expertise. No one is immune. That said, I think NVO’s have a very good opportunity to expand their role as more companies turn to third-party sources while they focus on their own core business.