After many years of hands-off regulation in ocean, rail and air cargo the U.S. agencies are getting wake-up calls from Congress and shippers.
The Federal Maritime Commission (FMC), a part of the U.S. Department of Transportation, was handed orders by the federal government via the Ocean Shipping Reform Act of 2022 (OSRA-22) to staff up and start examining critical metrics in capacity sharing, demurrage fees and the recent rash of “blank” sailing schedules by major carriers.
While shippers have been clamoring for rate reasonableness, these were a step too far for the post-rate regulation era we’ve been in since the early 1980s. To get bipartisan agreement to do anything, the focus is on improving service to shippers and increasing competitiveness to encourage moderation in charges.
There has been some recent action, as the FMC assessed fines on carriers for excessive empty container demurrage fees when returning containers was impossible due to lack of space at storage locations. Again, not a challenge to the rates charged, but simply that charges were issued in a force majeure situation.
The principle cause of sharply higher rates, increased in tandem by major carriers, is the formation of major “alliances” about six years ago. These capacity-sharing agreements were supposed to be revenue-neutral with each carrier soliciting cargo for space independently.
But as we have seen on other modes here and in Europe, this supposedly innocent practice has lead to obviously coordinated action to curtail service and raise prices to favor alliance members. During the pandemic, carriers argued that this was needed to avoid collapse of the “too-big-to-fail” majors. With a slowing economy, shippers have a few options in a market dominated by oligarchies.
First, shippers are scrambling to cancel high-priced agreements forced on them in the past couple of years and renegotiate to save their own companies from losing trade deals. The spot market for domestic and international container movements is easing, but rates are still higher than 2019. Logistics managers are under intense pressure to reduce costs. Ocean carriers need to fill new ultra-large containers ships.
Second, a strategic review of supply and distribution networks is a must as long-term costs are expected to be higher for importers, and supply lanes are increasingly subject to disruption.
The government and many retail customers are encouraging producers to find regional and even local suppliers. Even when product costs are nominally lower in the Far East, for example, the transport cost and risk of stock-outs can make domestic supply strategically more attractive.
Third, make some noise. Let your elected representatives and regulators know about what service providers are doing well and not so well. Carriers spend millions on lobbying government and loaning executives to government agencies as industry-friendly monitors. It takes public pressure to get government’s attention about excesses.
Last, but perhaps most important of all, is to get to know your suppliers and customers at an operational level. Forging ties and improving knowledge of the daily workings of suppliers and customers will nearly always yield ideas for innovation and mutual benefit. Shippers and carriers need to connect on multiple levels and think long term about how they will jointly serve the end customer. This takes time and effort. It takes data analysis and modeling skills.
I have told many an executive that a good logistics analyst is worth two times to three times their salary. I would add that investing in deep operational knowledge of your own businesses and your partner’s businesses, as well as the regulatory environment for supply chain buyers and sellers, will yield even more.