Subscribe | Advertise | Contact Us | About Us |    

Think Tank

Bookmark and Share

Are Ocean Carriers and Shippers Focused on Service - Or Just Lip Service?

It's been the same drill for years: Ocean carriers and shippers talking service, then fixating on price. Is this disconnect finally about to be disrupted?

The two sides would love you to think so. This year's Trans-Pacific Maritime (TPM) conference in Long Beach, Calif., presented by JOC and its parent, IHS Markit, saw the usual vows of fiscal responsibility and concern for one another's welfare. Carrier executives once again bemoaned their failure to maintain freight rates at compensatory levels (even though their own pricing departments were responsible for the concessions that put them in the red). Shippers insisted that they value good service over getting the lowest possible rate (even as they continued to beat down carriers on price in contract negotiations, and resort to the spot market to undercut contract rates).

This time around, however, the two parties were meeting under a looming shadow — that of the bankruptcy of Korean carrier Hanjin Shipping Co. Ltd. The failure last fall of the world’s sixth or seventh largest container line had a devastating impact on shippers and carriers alike, generating some $6bn of outstanding debt and stranding millions of dollars worth of cargo on ships that couldn’t be unloaded for weeks. Hanjin’s plight delivered an inescapable message to the container-shipping industry: maybe there really is a price to be paid for endless rate wars, chronic overcapacity and sub-profitable operations.

So while the message hasn’t changed, its urgency has. Judging from the comments of shippers, carriers and other parties at this year’s TPM, the era of giving mere lip service to sound business practices might be coming to an end.

One of the big changes on the horizon is the reshuffling of vessel-sharing arrangements (VSAs) in the major container trades into three big groups: The Ocean Alliance (CMA CGM, COSCO Container Lines, Evergreen Line and Orient Overseas Container Line), 2M Alliance, (Maersk Line and Mediterranean Shipping Co.) and THE Alliance (“K” Line, Mitsui O.S.K. Lines Ltd., NYK Line, Yang Ming Marine Transport and Hapag-Lloyd AG). Carriers claim the new groupings will lead to better, streamlined service that consolidates calls at fewer marine terminals.

Of course, the lines have been playing this game of musical ships for decades, gaining and shedding partners at a dizzying rate. But Howard Finkel, executive vice president with Cosco Shipping Lines (North America) Inc., claimed the new arrangements are more than a reshuffling of deck chairs on a metaphorical Titanic. He said the alliance members will be financially strong (in an industry where many players today are anything but that). The reliance on fewer terminals will result in a new level of coherence and compatibility among the participants’ services, he added.

Will the coming of the new alliances really bring about a better — and saner — brand of service? Speakers at TPM admitted that it’s too early to tell. David J. Arsenault, former president and chief executive officer of Hyundai Merchant Marine America and now president of Logistics Transformation Solutions, observed that the latest rearrangement promises to bring about an unprecedented degree of change in the container trades. “It’s the first time we’ve ever seen all the alliances reshuffle with a shotgun start,” he said. “It’s the big bang of 2017.”

Amidst this fog of confusion and uncertainty, shippers and carriers continue to push for better cooperation. The persistent volatility of rates and service “are not good for carriers, shippers or forwarders,” said Frank Hercksen, regional chief executive officer for the Americas with freight forwarder and logistics service provider Panalpina. He stressed the need for more strategic relationships, whereby carriers create actual value for customers instead of just slashing rates.

Shippers took vows of responsibility as well. “We want to be a good shipper to do business with,” said Michelle Livingstone, vice president of transportation with The Home Depot, Inc. She, too, expressed a desire to pursue more strategic deals with key carrier partners, based on their level of performance.

Among shippers’ biggest beefs is the high level of uncertainty caused by carriers abruptly cancelling sailings, leaving contracted cargo on the docks and pulling vessels from service to relieve situational overcapacity. Glenn E. Berger, vice president of global transportation with Restoration Hardware, said his company takes great pains to understand carriers’ sailing schedules, then plans its inventory deployments accordingly. “Changes that occur are disruptive to our internal buying community,” he said.

The Home Depot is taking a similar tack. Livingstone said it maintains a five-week rolling forecast by date, vessel and other criteria. It needs 30 days’ notice of any schedule changes in order to make appropriate adjustments.

Jochen Gutschmidt, head of global logistics procurement with Nestlé, complained of being suddenly shut out of bookings in Europe for six weeks, following a series of cancelled sailings and a shortfall of equipment. “That’s not acceptable,” he said. “It needs to be brought under control.”

Jensen noted that bad winter weather — hardly an unexpected development — can cause ships to be a day or two late. Issues of port congestion can also result in schedule lags that are beyond carriers’ control. For the most part, however, he said 30 days’ notice of any change “is very reasonable.”

Hercksen said shippers themselves need to do a better a better job of preparing for contingencies. Many lack a “Plan B” when things go awry. “Everybody hopes that everything goes according to plan,” he said. “But if something goes wrong, all hell breaks loose.”

The problem, ventured Hercksen, is that “we build highly complex supply chains right on top of a very fragile system.” It should come as no surprise to anyone when that edifice collapses.

Both shippers and carriers can mitigate the impact of glitches by living up to their commitment of favoring service over price. Shippers can agree to pay a penalty for failing to tender cargo under contract. (Jensen said “no-shows” make up 25 percent of Hapag-Lloyd’s bookings.) Carriers can take steps to compensate shippers when cargo is “rolled” to a later sailing, or otherwise not delivered as promised.

Service contracts, in other words, can be fitted with “teeth” that dictate consequences when either side fails to perform. Only then will price take a back seat to considerations of service quality.

How can such measures be enforced? That’s yet to be settled. But in the wake of the Hanjin bankruptcy, carriers and shippers at TPM displayed a renewed determination to do something about it. “We’re not only here to get a price,” said Rodolphe Saade, chief executive officer of CMA CGM. “For 2017, let’s try and see what additional value and service we can offer you.”

Next: The warning signs of the Hanjin bankruptcy.

Comment on This Article

No entries

Nothing found in the guestbook.

Message *

CAPTCHA image for SPAM prevention

SCB TRANSLATOR (Over 60 languages)
Sponsored by: