CSCMP's Supply Chain Quarterly
Ocean
December 17, 2017
Supply Chain Executive Insight E-Newsletter
Each week the Supply Chain Executive Insight e-newsletter will include brief articles about developments that are often overlooked by other supply chain publications. We will present you with summaries of the latest research as well as new ideas on how to make your supply chain operations more effective. And we'll offer commentary that sheds light on what's happening in supply chains today.
Sign up now!

Most Read Articles

News from our sister publication
DC Velocity
Ocean

Improving economy demands flexibility

Comment
To succeed in the recovery, shippers need to take advantage of the tactics ocean carriers will employ as demand increases. That means changing their own strategies.

The 2008-2009 recession had devastating effects throughout the world economy, and the container shipping industry was among those hardest-hit, suffering losses that have been estimated at between US $15 and $20 billion. This steep downturn was the product of a combined lack of demand and significant excess shipping capacity. The ocean carriers' initial response was to slash rates, with prices on some lanes dropping by more than 50 percent.

The world economy now appears to be entering a recovery phase, with U.S. container volumes predicted to increase 5 to 7 percent over the next year. Carriers should be adjusting to this change by employing four main tactics to ensure profitability: demand matching, contract rate increases, slow steaming, and enhanced routing options. Shippers need to understand these tactics and their impacts if they want to maintain a cost-effective and high-performing supply chain through the recovery.

Demand matching: Carriers are now adjusting their capacities to meet the new level of demand. In 2009, even though worldwide container traffic declined by 10 to 13 percent, ocean carriers actually expanded their capacity because they were receiving ships they had ordered before the recession began. The result was excess global container-shipping capacity of nearly 20 percent. To combat this situation, carriers have begun to postpone ship orders, cancel ship orders, and/or scrap ships. Even after carriers employ these tactics, shipping industry analysts AXS-Alphaliner forecast that available capacity will grow by 8.3 percent annually over the next three years. As a result, carriers are artificially tightening the container supply to match demand by idling significant portions of their available capacity. As demand increases with an improvement in the economy, carriers will be able to bring more capacity online to match higher demand levels.

Contract rates increases: By idling ships, carriers have created artificially tight capacity, which has caused spot rates to soar over the last several months. For example, on key eastbound and westbound Pacific routes, carriers have increased prices between US $300 and $400 per TEU (20-foot equivalent unit). As previously established pricing contracts expire, shippers should anticipate a rise in long-term contract rates similar to those seen in spot rates. While shippers were able to negotiate low rates in 2009, even the largest shippers may see contract-rate increases of 10 to 20 percent this year. A recovering economy will only add additional upward pressure on freight rates.

Slow steaming: In the short term, carriers are focusing on reducing their operating costs. One way that carriers are cutting costs is by expanding the use of "slow steaming" techniques, which reduce shipping speeds by up to 40 percent. Slower speeds mean lower operating costs for the carrier, primarily due to reduced fuel consumption. The implication of this policy for shippers is that their supply chain cycle times have grown. As a result, shippers should expect to see an increase in their working-capital requirements (that is, more product inventory in transit) and will need to expand their forecasting window to accommodate the longer time at sea.

Enhanced routing options: Anticipating an increase in demand, carriers across all modes have been in a race to develop infrastructure to ease congestion, support larger ships, streamline access to major markets, and improve their ability to attract cargo. While this provides a wider range of routing options for shippers, it also increases the potential for supply chain complexity. On the U.S. West Coast, several capacity-expansion projects are currently under way. When these projects are combined with reduced container volumes, it should ease congestion for the foreseeable future, even as the economy improves. Meanwhile, East Coast ports have begun infrastructure projects to handle the larger ships on all-water routes from Asia that they expect to see as a result of the Panama Canal expansion. Several Gulf Coast ports are also building or considering large expansions with the goal of becoming an alternative route to Southern and Midwest U.S. markets. Shippers that can adjust their supply chains to navigate this changing set of routing options and shipping patterns will be well-positioned to find good deals even though freight rates are expected to rise.

Three shipper responses
How well shippers address these four trends will determine whether they can maintain cost-effective and high-performance supply chains. To position themselves for success in the new environment of increased demand, shippers should consider the following multipronged strategy:

1. Increase the level of collaboration with carriers. Shippers should allow carriers to see more of their forecasts. This would enable carriers to offer creative routing options. Shippers should also incorporate more service-level requirements in their ocean-shipping contracts, with an understanding that while speed may be in the shippers' interest, it may not be in the carriers' interest. Finally, they need to develop supplier relationship management programs with carriers to ensure free-flowing information and rapid decision making.

2. Take advantage of supply chain volatility. Shippers should review their routing decisions frequently so that they can adjust to carriers' rapidly changing set of routing options. As they do this, shippers should employ advanced modeling techniques to measure the true landed cost of all routing options. They should also consider conducting a constraint analysis to quantify the cost and importance of internal and external constraints (such as delivery time, routing, and frequency) to their business.

3. Plan for the future. Shippers should engage with railroads, ports, and carriers now to determine the impact of the Panama Canal expansion on their distribution networks. Finally, they should review how effectively their current supply chains meet the demands of their businesses given the changes in the industry and economy.

By incorporating these three techniques into their supply chain strategies, shippers will be well positioned to adjust to the changing dynamics in the ocean freight sector. The result will be more flexible and cost-effective supply chains that continue to meet their business requirements, even as an expanding economy drives up demand and uses up more of the existing capacity.

Chris Matthews is a principal in A.T. Kearney's Transportation practice.

Join the Discussion

After you comment, click Post. If you're not already logged in, you will be asked to log in or register.


Want more articles like this? Sign up for a free subscription to Supply Chain Executive Insight, a monthly e-newsletter that provides insights and commentary on supply chain trends and developments. Click here to subscribe.

We Want to Hear From You! We invite you to share your thoughts and opinions about this article by sending an e-mail to ?Subject=Letter to the Editor: Quarter 2010: Improving economy demands flexibility"> . We will publish selected readers' comments in future issues of CSCMP's Supply Chain Quarterly. Correspondence may be edited for clarity or for length.

Want more articles like this? Subscribe to CSCMP's Supply Chain Quarterly.