Despite a challenging economy and uncertainty about future business conditions, the outlook for container shipping volumes remains surprisingly positive. Several major trends in the shipping industry, however, should compel shippers to re-evaluate the rates that they are paying ocean carriers.
Currently, we are seeing overcapacity in the global fleet and fierce competition on major trade routes. These two trends, which are putting downward pressure on rates, are tempered somewhat by consolidation in the industry and the fact that a few of the largest carriers are dominating key lanes with large vessels. Overall, however, these dynamics present opportunities for shippers to reduce costs. Shippers can use the overcapacity and increased competition to their advantage, taking the time to diversify their portfolio of carriers and thus avoid becoming captive to the largest global shipping lines.
Article Figures
[Figure 1] Freight rates have fallen for high-volume trade lanesEnlarge this image
More capacity, lower rates
Overcapacity in the global container-ship fleet tips the supply/demand balance in shippers' favor. According to the World Trade Organization and the International Monetary Fund, the value of world trade is expected to grow by 19 percent from 2011 to 2014, to $19.3 trillion. That represents an increase of nearly 90 percent from 2005. Over the same period, maritime analysts say, the container fleet will expand to a capacity of 19.3 million twenty-foot equivalent units (TEUs)—a 24-percent increase from today's fleet size. From 2005 to 2014, the global container vessel fleet will have expanded disproportionately relative to trade value by as much as 144 percent. For every two containers of predicted trade growth, nearly three slots will be available on ships. There is also significant shipyard overcapacity globally, and prices for new ships are very low, indicating that this trend toward excess carrier capacity will continue.
As a result of this increase in capacity, prices dropped, leading to cutthroat competition for volumes among carriers on key trading routes. Recently carriers have tried to manage their capacity, and spot prices on major routes rose rapidly in the first half of 2012. Most shippers, however, have managed to keep their contract rates at the 2011 levels, according to reports from Drewry Shipping Consultants Ltd.
The most striking example of the rapid fall in rates in 2011 can be seen in shipments from Southern China to Northern Europe. At the start of 2010, the average cost of shipping a 40-foot container from Hong Kong to Hamburg was $4,830; by August 2011, those rates had dropped by 59 percent, according to Drewry (see Figure 1). Despite their rise earlier this year, spot rates on this lane remain 24 percent below the 2010 high.
Rates on other trade lanes—such as between Southern China and the U.S. West Coast—have behaved similarly, albeit less dramatically, as illustrated in Figure 1. In the commodity-like container shipping business, price remains the key differentiator, and the supply-demand imbalance favors shippers that are able to negotiate longer-term contracts.
The industry is also becoming more consolidated, with the leading carriers increasing their scale and dominating key lanes. Although the overall industry remains relatively fragmented, the top five players now own 45 percent of market share, up from 35 percent in 2004, according to the research firm Alphaliner.
Consolidation is likely to continue for several reasons. Persistent overcapacity during a period of little economic growth has weakened some operators, making them potential acquisition targets. The move toward "megaships" of more than 12,000 TEUs, moreover, favors larger operators that are able to exploit economies of scale. Large carriers are also continuing to expand their portfolios, serving multiple markets with global networks. Such diversification allows them to soften the impact of poor returns on particular routes with revenue from other markets that perform well.
Despite the trend toward fewer, larger carriers, opportunities do exist for shippers to successfully work with smaller carriers that align well with their supply chain network. Those opportunities are likely to multiply as the big, global carriers rely more on megaships on some routes. Although megaships provide major economic advantages in terms of fuel, capital, and manpower costs per container, these ships have limitations. In order to achieve high utilization, large vessels operate between a limited number of ports, and they must be supported by a dense network of feeder services that requires multiple handling of containers. Nimble carriers operating smaller vessels may be able to achieve lower costs on a point-to-point basis than the "market leaders" by calling directly at ports not served by the megaships, thus eliminating extra handling of containers.
Diversify your portfolio
Given these trends, now is a good time for shippers to re-evaluate the ocean freight portion of their supply chains to take advantage of current dynamics and position themselves for the future. Shippers should take advantage of the supply/demand shift that is driving down rates even on traditionally high-demand trade lanes. They should also look for opportunities to diversify their portfolio of carriers to include smaller, more nimble shipping lines with competitive point-to-point service.
The combination of volatile financial markets, continued turbulence in the euro zone, and stagnating growth in the United States presents a daunting challenge for most companies, particularly those with global supply chains. By understanding the current dynamics in shipping, however, supply chain professionals can find opportunities to both drive down the cost and increase the competitiveness of their operations.
We may be living in a world full of technology, but strategy and focus remain the top priorities when it comes to managing a business and its supply chains. So says Roberto Isaias, executive vice president and chief supply chain officer for toy manufacturing and entertainment company Mattel.
Isaias emphasized the point during his keynote presentation on day two of EDGE 2024, a supply chain conference sponsored by the Council of Supply Chain Management Professionals (CSCMP), being held in Nashville this week. He described Mattel’s journey to transform its business and its supply chain amid surging demand for Barbie-branded items following the success of the Barbie movie last year.
Isaias discussed the transformation on two fronts: Commercially, through the revitalization of its brands that began years ago, and logistically, through a supply chain strategy focused on effectiveness and cost leadership.
Today, Mattel makes millions of toys and is steadily moving beyond the toy aisle with its franchise mindset, becoming a major entertainment company as well. Isaias told the audience Mattel currently has two films in production and 14 others in development, and its television studios business has 13 series’ in production with more than 35 in development.
And as for those supply chain gains? The company has saved millions, increased productivity, and improved profit margins—even amid cost increases and inflation. For the full story on Mattel’s transformation, see our feature story from this past summer.
And Isaias left the EDGE audience with five lessons he learned from his experience in leading change:
The business is our boss;
Don’t delegate complexity;
Take bad news well;
Be fair and take care of people;
Lead the execution.
CSCMP’s EDGE 2024 conference runs through Wednesday, October 2, at Nashville’s Gaylord Opryland Hotel & Convention Center.
Confronted with the closed ports, most companies can either route their imports to standard East Coast destinations and wait for the strike to clear, or else re-route those containers to West Coast sites, incurring a three week delay for extra sailing time plus another week required to truck those goods back east, Ron said in an interview at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
However, Uber Freight says its latest platform updates offer a series of mitigation options, including alternative routings, pre-booked allocation and volume during peak season, and providing daily visibility reports on shipments impacted by routings via U.S. east and gulf coast ports. And Ron said the company can also leverage its pool of some 2.3 million truck drivers who have downloaded its smartphone app, targeting them with freight hauling opportunities in the affected regions by pricing those loads “appropriately” through its surge-pricing model.
“If this [strike] continues a month, we will see severe disruptions,” Ron said. “So we can offer them alternatives. We say, if one door is closed, we can open another door? But even with that, there are no magic solutions.”
Turning around a failing warehouse operation demands a similar methodology to how emergency room doctors triage troubled patients at the hospital, a speaker said today in a session at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
There are many reasons that a warehouse might start to miss its targets, such as a sudden volume increase or a new IT system implementation gone wrong, said Adri McCaskill, general manager for iPlan’s Warehouse Management business unit. But whatever the cause, the basic rescue strategy is the same: “Just like medicine, you do triage,” she said. “The most life-threatening problem we try to solve first. And only then, once we’ve stopped the bleeding, we can move on.”
In McCaskill’s comparison, just as a doctor might have to break some ribs through energetic CPR to get a patient’s heart beating again, a failing warehouse might need to recover by “breaking some ribs” in a business sense, such as making management changes or stock write-downs.
Once the business has made some stopgap solutions to “stop the bleeding,” it can proceed to a disciplined recovery, she said. And to reach their final goal, managers can use the classic tools of people, process, and technology to improve what she called the three most important key performance indicators (KPIs): on time in full (OTIF), inventory accuracy, and staff turnover.
The relationship between shippers and third-party logistics services providers (3PLs) is at the core of successful supply chain management—so getting that relationship right is vital. A panel of industry experts from both sides of the aisle weighed in on what it takes to create strong 3PL/shipper partnerships on day two of the CSCMP EDGE conference, being held this week in Nashville.
Trust, empathy, and transparency ranked high on the list of key elements required for success in all aspects of the partnership, but there are some specifics for each step of the journey. The panel recommended a handful of actions that should take place early on, including:
Establish relationships.
For 3PLs, understand and get to the heart of the shipper’s data.
Also for 3PLs: Understand the shipper’s reason for outsourcing to a 3PL, along with the shipper’s ultimate goals.
Understand company cultures and be sure they align.
Nurture long-term relationships with good communication.
For shippers, be transparent so that the 3PL fully understands your business.
And there are also some “non-negotiables” when it comes to managing the relationship:
3PLs must demonstrate their commitment to engaging with the shipper’s personnel.
3PLs must also demonstrate their commitment to process discipline, continuous improvement, and innovation.
Shippers should ensure that they understand the 3PL’s demonstrated implementation capabilities—ask to visit established clients.
Trust—which takes longer to establish than both sides may expect.
EDGE 2024 is sponsored by the Council of Supply Chain Management Professionals (CSCMP) and runs through Wednesday, October 2, at the Gaylord Opryland Resort & Convention Center in Nashville.
While the Council of Supply Chain Management Professionals' 2024 EDGE Conference & Exhibition is coming to a close on Wednesday, October 2, in Nashville, Tennessee, mark your calendars for next year's premier supply chain event.
The 2025 conference will take place in National Harbor, Maryland. To register for next year's event—and take advantage of an early-bird discount of $600**—visit https://www.cscmpedge.org/website/62261/edge-2025/.
**EDGE EARLY BIRD Terms & Conditions: Promotion is for the EDGE 2025 conference in National Harbor, Maryland. Offer valid for Premier and Basic Members only. Offer excludes Student, Young Professional, Educator, and Corporate registration types. Offer limited to one per customer. Offer is not retroactive and may not be combined with other offers. Offer is nontransferable and may not be resold. Valid through October 31, 2024.