Executive Briefings

Shippers and Carriers Make Nice at TPM, But Conflict Simmers

Are shippers and ocean carriers finally getting along? The atmosphere at this year's Trans-Pacific Maritime Conference was markedly calmer than in 2010. "Last year, a hockey game broke out," said Gary Ferrulli, president of Global Logistics & Transport Consulting LLC, invoking the old Rodney Dangerfield joke to note the change in tone.

You could chalk it up to any number of reasons. One is that the two sides are just tired. All that lurching from one extreme to the other - from incredible discounts to soaring rates, from severe overcapacity to no space at all - can give anyone a severe case of seasickness. Then there's the unanswered question of who will hold the upper hand in 2011. Indications are that supply and demand will be in rough balance, at least until carriers start flooding the market with another wave of mega-vessels. So neither side is in a position to engage in extreme behavior.

The two factions nevertheless took the opportunity to engage in what diplomats like to call "a frank exchange of views." TPM, staged each year in Long Beach, Calif., by the Journal of Commerce, rarely disappoints those looking for a shipper-carrier dustup. This time around, however, participants seemed just as eager to find a measure of common ground.

Eric Brandt, manager of global ocean transportation with Kraft Foods Global, Inc., said both sides have made mistakes. He faulted price-obsessed shippers who "miss the point by failing to consider other supply-chain costs." Proper inventory management and load optimization can deliver many times the savings of an up-front discount, he said. But he was equally critical of carriers who foster an environment of rate volatility, making it tough for shippers to plan their freight flows. Kraft is a big believer in long-term contracts, even if that means missing out on spot discounts. This year, it has negotiated deals with carriers extending between 36 and 50 months - an unthinkable span of time to most shippers.

Corey Jones, general manager of international and network operations for Williams-Sonoma, Inc., wants from carriers the three things that are essential to any shipper's Christmas stocking: predictability, reliability and accountability. The first two aren't possible without the third, he said. Ocean carriers shouldn't have to bear the full burden of shipper no-shows. Why, he asked, don't they follow the example of truckers by imposing penalties for phantom bookings? At the same time, he said, carriers must adhere to their commitments of space and equipment. Too often shippers are having their freight "rolled" onto later voyages during the peak shipping season, a practice that plays havoc with retailers' merchandising plans.

Agricultural exporter Cargill, Inc. has been working within a shippers' forum sponsored by the Westbound Transpacific Stabilization Agreement to address these issues. Duncan McGrath, Cargill's container freight manager for the Americas, said the problem stems from a lack of respect for the fundamentals of a contract. "The rules of the game aren't clear. Contracts aren't contracts so much as guidelines, and neither [party] is held accountable."

U.S. exporters might be the biggest victims, since they can lose millions of dollars in sales on the difference of a penny per ton. Duncan complained that carriers often don't reveal the true rate for moving a commodity until it's too late to lock down a deal with buyers. Either the shipper loses out entirely, or opts to move its product in large quantities on a bulk vessel. If the latter occurs, the demand for capacity disappears for months. Worst of all, the shipper might double- or triple-book to ensure space, causing those dreaded phantom bookings.

Not so with Duncan's company. "Once Cargill has made a deal," he said, "we will honor that deal. Unfortunately, carriers haven't." He was referring to the practice of raising freight rates in the middle of a service contract, an action that carriers last year deemed necessary to their survival, but which sowed mistrust and resentment among shippers.

Siva Narayanan, corporate process manager for North America with chemical manufacturer Rhodia, Inc., was blunt about the way things work - or don't - in the trans-Pacific trades. "The current model we have is broke. If we don't accept that, we will not be able to change."

Narayanan is mystified as to why the same ship can be deemed full for an exporter out of Chicago, but not out of Houston. (He found that out by experimenting with multiple bookings through different freight forwarders.) He called for more transparency of information by carriers and shippers alike. Shippers, he said, need to let carriers know which cargoes are the most sensitive to lost sales if they don't arrive on time. Carriers need to respond with promised capacity, even if that means charging a bit more for the highest-priority freight.

Here, Narayanan voiced the mantra that shippers have been chanting for years: "We need to put service elements into service contracts." What carriers offer today, he charged, is nothing more than a "rate sheet." If a shipper books two weeks in advance but doesn't produce the freight at the time of sailing, it should pay a penalty. If the carrier promises the space but rolls the booking, it should pay. Binding contracts: what a radical concept.

Of course, when you're talking about a global supply chain with multiple partners, it's seldom that simple. But Narayanan insisted that shippers take responsibility for their subcontractors in ensuring the on-time tendering of freight. And carriers need to ride herd on their store-door deliverers to prevent late arrivals.

You won't be surprised to hear that carriers have their own list of concerns, especially about shippers who don't live up to their side of the bargain. What's more, the lines can't stop talking about the money they lost in 2009 from steep discounting and plummeting demand - between $15bn and $17bn, depending on whom you ask.

C.C. Tung, chairman and chief executive officer of Orient Overseas (International) Limited, said the key to a stable trade lies in the "free flow of information" and "maximum visibility in the supply chain." That's the only way carriers can respond intelligently to trends in the market, he said.

Tung faulted his own side of the negotiating table for fixating on market share at the expense of compensatory rates. Carriers have been beating themselves up on that particular practice for decades - while continuing to offer discounts well below targeted rate levels. They've attempted to offset the ensuing losses by laying up some ships and slowing down others - actions that have ended up on shippers' ever-growing list of grievances.

All of which has caused some shippers to seek an end to carriers' antitrust immunity, which permits them to meet and establish rate targets collectively. One could conclude that this is what Tung's version of "the free flow of information" is really all about. Carriers are trying to hang on to a privilege that has been whittled away over the years, and might finally be up for revocation. Much depends on who holds the power in the coming months, as shippers and carriers struggle to cope with soaring energy costs and unpredictable demand. Should the balance tip too far in one direction, expect both sides to break out the hockey sticks.

Next: TPM's annual look at the coming year.

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Are shippers and ocean carriers finally getting along? The atmosphere at this year's Trans-Pacific Maritime Conference was markedly calmer than in 2010. "Last year, a hockey game broke out," said Gary Ferrulli, president of Global Logistics & Transport Consulting LLC, invoking the old Rodney Dangerfield joke to note the change in tone.

You could chalk it up to any number of reasons. One is that the two sides are just tired. All that lurching from one extreme to the other - from incredible discounts to soaring rates, from severe overcapacity to no space at all - can give anyone a severe case of seasickness. Then there's the unanswered question of who will hold the upper hand in 2011. Indications are that supply and demand will be in rough balance, at least until carriers start flooding the market with another wave of mega-vessels. So neither side is in a position to engage in extreme behavior.

The two factions nevertheless took the opportunity to engage in what diplomats like to call "a frank exchange of views." TPM, staged each year in Long Beach, Calif., by the Journal of Commerce, rarely disappoints those looking for a shipper-carrier dustup. This time around, however, participants seemed just as eager to find a measure of common ground.

Eric Brandt, manager of global ocean transportation with Kraft Foods Global, Inc., said both sides have made mistakes. He faulted price-obsessed shippers who "miss the point by failing to consider other supply-chain costs." Proper inventory management and load optimization can deliver many times the savings of an up-front discount, he said. But he was equally critical of carriers who foster an environment of rate volatility, making it tough for shippers to plan their freight flows. Kraft is a big believer in long-term contracts, even if that means missing out on spot discounts. This year, it has negotiated deals with carriers extending between 36 and 50 months - an unthinkable span of time to most shippers.

Corey Jones, general manager of international and network operations for Williams-Sonoma, Inc., wants from carriers the three things that are essential to any shipper's Christmas stocking: predictability, reliability and accountability. The first two aren't possible without the third, he said. Ocean carriers shouldn't have to bear the full burden of shipper no-shows. Why, he asked, don't they follow the example of truckers by imposing penalties for phantom bookings? At the same time, he said, carriers must adhere to their commitments of space and equipment. Too often shippers are having their freight "rolled" onto later voyages during the peak shipping season, a practice that plays havoc with retailers' merchandising plans.

Agricultural exporter Cargill, Inc. has been working within a shippers' forum sponsored by the Westbound Transpacific Stabilization Agreement to address these issues. Duncan McGrath, Cargill's container freight manager for the Americas, said the problem stems from a lack of respect for the fundamentals of a contract. "The rules of the game aren't clear. Contracts aren't contracts so much as guidelines, and neither [party] is held accountable."

U.S. exporters might be the biggest victims, since they can lose millions of dollars in sales on the difference of a penny per ton. Duncan complained that carriers often don't reveal the true rate for moving a commodity until it's too late to lock down a deal with buyers. Either the shipper loses out entirely, or opts to move its product in large quantities on a bulk vessel. If the latter occurs, the demand for capacity disappears for months. Worst of all, the shipper might double- or triple-book to ensure space, causing those dreaded phantom bookings.

Not so with Duncan's company. "Once Cargill has made a deal," he said, "we will honor that deal. Unfortunately, carriers haven't." He was referring to the practice of raising freight rates in the middle of a service contract, an action that carriers last year deemed necessary to their survival, but which sowed mistrust and resentment among shippers.

Siva Narayanan, corporate process manager for North America with chemical manufacturer Rhodia, Inc., was blunt about the way things work - or don't - in the trans-Pacific trades. "The current model we have is broke. If we don't accept that, we will not be able to change."

Narayanan is mystified as to why the same ship can be deemed full for an exporter out of Chicago, but not out of Houston. (He found that out by experimenting with multiple bookings through different freight forwarders.) He called for more transparency of information by carriers and shippers alike. Shippers, he said, need to let carriers know which cargoes are the most sensitive to lost sales if they don't arrive on time. Carriers need to respond with promised capacity, even if that means charging a bit more for the highest-priority freight.

Here, Narayanan voiced the mantra that shippers have been chanting for years: "We need to put service elements into service contracts." What carriers offer today, he charged, is nothing more than a "rate sheet." If a shipper books two weeks in advance but doesn't produce the freight at the time of sailing, it should pay a penalty. If the carrier promises the space but rolls the booking, it should pay. Binding contracts: what a radical concept.

Of course, when you're talking about a global supply chain with multiple partners, it's seldom that simple. But Narayanan insisted that shippers take responsibility for their subcontractors in ensuring the on-time tendering of freight. And carriers need to ride herd on their store-door deliverers to prevent late arrivals.

You won't be surprised to hear that carriers have their own list of concerns, especially about shippers who don't live up to their side of the bargain. What's more, the lines can't stop talking about the money they lost in 2009 from steep discounting and plummeting demand - between $15bn and $17bn, depending on whom you ask.

C.C. Tung, chairman and chief executive officer of Orient Overseas (International) Limited, said the key to a stable trade lies in the "free flow of information" and "maximum visibility in the supply chain." That's the only way carriers can respond intelligently to trends in the market, he said.

Tung faulted his own side of the negotiating table for fixating on market share at the expense of compensatory rates. Carriers have been beating themselves up on that particular practice for decades - while continuing to offer discounts well below targeted rate levels. They've attempted to offset the ensuing losses by laying up some ships and slowing down others - actions that have ended up on shippers' ever-growing list of grievances.

All of which has caused some shippers to seek an end to carriers' antitrust immunity, which permits them to meet and establish rate targets collectively. One could conclude that this is what Tung's version of "the free flow of information" is really all about. Carriers are trying to hang on to a privilege that has been whittled away over the years, and might finally be up for revocation. Much depends on who holds the power in the coming months, as shippers and carriers struggle to cope with soaring energy costs and unpredictable demand. Should the balance tip too far in one direction, expect both sides to break out the hockey sticks.

Next: TPM's annual look at the coming year.

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