Great Interview picked up from Logistics Management: Drewry Maritime Research reflects on state of ocean cargo
Editor’s Note: Interview with Philip Damas, Director – Supply Chain Advisors, Drewry Maritime Research.
Logistics Management (LM): In this era of fading differentiation in carrier service, how do supply chain managers determine which provider is best for them?
Philip Damas: It depends partly on the objectives of each exporter and importer, which vary. For most companies, we typically expect from carriers 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 4 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. Drewry provides comparative schedule reliability metrics by carrier and industry publications like yours publish independent carrier rankings, which are used by shippers to assess potential new carriers. For some shippers, what matters most is the ability of carriers to meet their company-specific KPIs and work with the shipper to resolve issues. Unfortunately, today, the only way to determine which carriers have these capabilities is to try them or to leverage relationships developed with carriers earlier in your career.
LM: What will be the ultimate impact made by new carrier alliances? What is the upside for shippers, and what are the negative consequences?
Damas: The positive impact 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. For example, after MSC joined an alliance with Maersk, its previously poor schedule reliability improved. So, provided documentation and intermodal services are good enough, you can basically pick the lowest-cost carrier in any one alliance and gain access to the entire network of the alliance. Some critics say that mega-alliances will manipulate capacity, resulting in higher freight rates – an argument which Drewry has always refuted. On the contrary, the evidence of our freight rate benchmarking club and our analysis of capacity, comparing the situation in early 2014 (before the mega-alliances) and now is that rates have decreased and (over)capacity has increased.
LM: Is slow steaming a trend that will continue on all trade lanes? If so, is that good for all ocean carriage stakeholders…or only the carriers?
Damas: We expect slow steaming to continue on all trade lanes, but we see moves by some carriers, such as Matson, to offer one “fast” shipping loop to the market targeting very-time sensitive products. Most of the other services will continue to be slow-steaming, due to high oil prices. Of course, slow steaming is bad for exporters and importers, as it results in longer transit times and in higher inventory in transit. For a company like Toyota, which spent decades shortening its lead time and manufacturing time by a few days, longer ocean transit times was a retrograde step. How many exporters and importers will be ready to pay a 30% or 50% freight costs premium to go back to the previous fast transit times? In our opinion, there are too few companies willing to pay much more and therefore the ships will sail at the slower speed.
Logistics Management: 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?
Philip Damas: The cost and the pain of the U.S. West Coast congestion were so high that many shippers will definitely re-route a portion of their Asian freight volume to the Gulf, East Coast ports and the Canadian ports. For imports to and exports from California, there is no real alternative to the big West Coast ports (without spending a huge amount of money on extra freight costs), but the “discretionary cargo” previously moving via the West Coast to or from inland destinations is at play. Our customers have told us that they expect a long-term, not a short term, risk diversification impact from this year’s West Coast port problems.
LM: What 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 5,000teu Panamax ships (the current limit) to 13,000teu ships (the new maximum), but they will immediately deploy more vessels on the all-water East Coast routes, not least because shippers have asked them for more capacity this route. Carriers are already jokeying for position on the Asia-U.S. East Coast route via Panama.
LM: Carriers continue to invest in capacity, but see little return on that strategy. How can shippers contribute to a sustainable ocean carriage industry?
Damas: As carriers continue to over-invest in new ships, they are largely to blame for the chronically low profitability of their industry and there is not much shippers can do about that. But savvy shippers build relationships with ocean carriers aimed at helping both parties work together and reduce costs on both sides. From the BCO side, 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…
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 which do not have in-house freight procurement experts, of course, NVOs are the natural one-stop-shop for a range of services, including consolidation service and personalised customer service (neither of which is provided by ocean carriers to small shippers). For larger shippers, NVOs perform different roles, including sometimes (as forwarders or 3PL) doing the shipment execution for BCOs who have contracts direct with ocean carriers. In my view, the role or roles of intermediaries will increase and ocean carriers cannot replace them. But the uncertain question is whether the role of helping small shippers organize freight shipments and find ship capacity will remain with the traditional NVOs or be taken over by electronic marketplaces and online brokers.
Source: Patrick Burnson, Executive Editor, LogisticsManagement.com