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November 18, 2017
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Ocean

Analytics: The next wave

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The adoption of advanced data analytics is already reshaping the ocean shipping industry, bringing transformative improvements in information management, operational efficiency, and decision-making.

The past year has seen an unprecedented amount of change in the ocean shipping industry. Carrier bankruptcies, mergers, and large-scale reconfiguration among carrier alliances have reshaped the container industry at an astonishing pace. While the pace of acquisitions is unlikely to slow soon, there are even bigger changes afoot, some of which will lead to greater transformations than those we've seen this year.

After riding out a turbulent first half of 2016, rates steadily recovered from dismal levels for ocean container carriers. Drewry's World Container Index, a composite of container freight rates on eight major routes between the United States, Europe, and Asia, dipped below $700 in March of 2016 before turning around to peak at over $1,800 in January of 2017. (See Figure 1.) For most of this year, by contrast, rates on the index have been rangebound between $1,400 and $1,600—more than double the rates seen in the previous year.

Article Figures
[Figure 1] Container rates rebound in 2017
[Figure 1] Container rates rebound in 2017 Enlarge this image

Ports are seeing volume increases compared with the previous year. The news organization Reuters, looking at U.S. government data, reported that export shipments of coal have risen more than 60 percent this year. Container volumes are also up, and inbound volumes have risen in every major U.S. port; in June, Houston, Savannah, and Charleston all reported double-digit growth. Exports were also up in every U.S. port except Long Beach for that same month.

For the first time in many years, capacity is keeping pace with demand. Scrapping and newbuilds are expected to net out to around 3 percent in 2017 per Drewry, and capacity is forecast to grow 3 to 5 percent over the next couple of years. The current overhang in capacity remains, and competition for business is likely to keep rates steady for the next few years.

Ocean shipping is one of the oldest industries around, and you can see that today in the way its business is managed. Transactions are manual, data is distributed across parties and geographies, and many basic processes have remained the same for centuries. However, all of that is about to change as transformative ways of analyzing data quickly make their way into the industry.

Data moves front and center
Over the past few years, shippers have become much more savvy regarding the application of digital solutions to the management of their supply chains. Yet many have found that, though they have ample logistics data, it is siloed between geographies, transportation modes, or business units and is seldom available on a real-time basis.

To solve this problem, many shippers now are building advanced "data lakes" (storage repositories for raw data) to help them combine different types of information across functions, borders, and modes. While there are commercially available tools to coordinate visibility of assets in transit, shippers frequently find that non-transportation data is siloed across functions, making it difficult to make global planning and inventory decisions, implement them, and measure their impact. Accordingly, industry leaders are applying data science techniques to join data across functions into single data sources. This enables these organizations to implement metrics for measuring network performance in real time.

Innovation by key players in the ocean shipping industry like Maersk may soon ease shippers' difficulty in managing global transactions. Cloud-based ledger (also known as blockchain) platforms, essentially new and more secure ways of sharing data within and across the shipping ecosystem, will enable seamless and secure virtual document workflows that support real-time collaboration between trade partners as well as governmental, financial, and commercial stakeholders. Successful implementation will require alignment across a very wide array of stakeholders, but conceptually this nascent technology could drastically simplify complex processes and data flows that shippers and carriers struggle with daily.

Another area of analytical transformation is in container ports themselves. For a variety of reasons, ports have developed a reputation for inefficiency and opacity. In the United States, everything from labor agreements to lack of investment can be cited as root causes of this issue. However, the tide has begun to turn toward automation and digital transformation in port operations.

For example, the immediate benefits of this shift, such as lower costs and faster throughput, are already being realized at port facilities like the Middle Harbor terminal in Long Beach and the highly automated TraPac terminal in Los Angeles. Another example is the increasing use of technology to help manage terminal congestion. Truck appointment systems are becoming more prevalent on both coasts. In Los Angeles and Long Beach, an initiative with GE Transportation to create a portal for sharing information on container availability will help the ports better handle the large container volumes associated with bigger vessels. Artificial intelligence will enable greater control and flexibility in loading and unloading ships. Coupled with decentralized ledgers, this will enable shippers, carriers, and ports to plan across entities and provide differentiated service offerings such as expedited discharge.

But port automation is not universally welcomed. As the labor slowdown in response to a new automated gate system at the Port of Charleston in early 2017 showed, actions by labor unions concerned about the impact of automation on their members will increase the cost of investing in automated technologies.

Partnerships go digital
Even the ways in which shippers and carriers do business together are going digital. Traditional negotiation processes have been in place in bulk shipping since the 1950s. Negotiating a spot tender has required shippers to maintain a panel of brokers who communicate pricing from their ship owners via phone, text, or even fax and telex. Given the more dynamic market environments for both commodities and shipping, there has been a move away from longer-term contracts of affreightment to reliance on spot charters to address last-minute changes in demand. This has led to the oversimplification of procurement processes (especially compared with what is seen in other modes, like trucking) and brute-force application of resources to manage manual processes.

The metals, mining, and petroleum company BHP Billiton changed that earlier this year by launching a freight portal to communicate directly with ship owners, enabling them to reach a broad audience in a short amount of time. Reportedly, this happened at rates below the market and without the need for brokers as intermediaries. BHP is not alone; others are experimenting with new platforms designed to speed up a process that has long sapped a considerable amount of shippers' attention and resources.

Analytics help to manage risk
In the container world, shippers are employing advanced analytics to manage costs, service, and risks. The Hanjin Shipping bankruptcy in 2016 was a reminder to shippers that host countries are increasingly reluctant to bail out failing ocean carriers. In the face of accelerating merger and acquisition activity and realignment among carrier alliances, shippers are using predictive modeling in addition to cost optimization tools to balance carrier financial risk, network disruption potential, and service performance to determine the best overall value of a carrier contract portfolio, rather than narrowly focusing on linehaul cost.

Simply stated, the amount of change the industry has recently experienced is staggering. Rate variability and the restructuring of the market through mergers, bankruptcies, and carrier realignment has arguably never been greater. However, like many other industries, ocean transportation is in the early stages of a digital transformation that will lead to even greater change. Successful participants can expect to deliver increased visibility, efficiency, and value. While the carriers and shippers that are able to adapt the fastest in this new environment will yield the best results, this promises to be a time in which all parties can benefit.

Joshua Brogan is a vice president in the Analytics practice of A.T. Kearney, a global strategy and management consulting firm.

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