Maritime Logistics: Staying Afloat
Ocean carriers toss out lifelines to help shippers navigate economic riptides.
The maritime industry, like every other transportation sector, is sending out an SOS.
Unprecedented challenges such as slowing economies in Europe and the United States, fuel cost inflation of 60-plus percent, and a steep decline in the value of the U.S. dollar are having far-reaching effects on ocean shipping. The cost of moving a container from China to the United States, for instance, has tripled since 2003.
In the face of these challenges, ocean carriers are throwing out lifelines to shippers, working with them to solve problems, create solutions, and address the difficulties of cost inflation and business slowdowns.
These new shipper/carrier partnerships focus on collectively saving money and operating more efficiently, keeping all boats afloat.
LIFELINE #1: Keep fuel prices in check
"Our biggest challenge is the cost of fuel," says Michael Wilson, vice president, equipment and logistics, for Morristown, N.J.-based ocean carrier Hamburg Sud North America.
At the beginning of 2007, fuel cost less than $300 a ton. In mid-summer 2008, prices hit $750 a ton before dropping to about $600 a ton at press time.
To address the fuel issue, liner companies and their U.S. importer customers agreed in contract negotiations earlier this year to floating bunker fuel surcharges that adjust monthly over the contract term to reflect world fuel price fluctuations.
These contract negotiations were a stressful time for shippers, according to Ali Hosein, vice president, international freight and merchandising for Rooms to Go, a regional furniture retailer headquartered near Tampa, Fla.
Last year, Rooms to Go imported 25,000 containers from Asia into distribution centers located in Arlington, Texas; Suwannee, Ga.; Charlotte, N.C.; Mobile, Ala.; and Tampa and Lakeland, Fla.
Rooms to Go uses a mini-landbridge (an intermodal system that transports containers by ocean, then by rail or truck to a port previously served as an all-water move) out of the ports of Los Angeles and Long Beach to serve the Texas distribution center.
The retailer relies on all-water/East Coast port routings to Savannah and Tampa to serve its other DCs.
"Until this year, we had consistent ocean carrier contracts with rate stability for the year," Hosein notes. "Now we have to accept fuel cost adjustments. Because we sign contracts directly with the steamship lines, however, we've been able to hold our rates. We negotiate our own destiny, and that works well for us."
Carriers are doing their part to cut fuel consumption by slowing down their ships.
"A 10- to 20-percent drop in vessel speed significantly reduces fuel consumption," says Peter Keller, president, NYK Line (North America) Inc.
LIFELINE #2: Add Ships
To maintain service levels for shippers, carriers are adding ships to their route rotations.
"That it costs less to add a ship than to operate at higher speed shows how significant the impact of fuel is," says Wilson. Because new sailings offset slower speeds, carriers can continue to give shippers the service they need.
"Today, shippers care about consistency and reliability more than speed," Wilson notes. "Adding two days of transit time for a shipment moving from Sydney to Philadelphia doesn't make that much difference.
"Speed is an issue only when you can reasonably afford to do something about it. But with the cost of fuel today, that's not possible."
LIFELINE #3: Adjust Routes and Services
In response to fuel cost increases, U.S. shippers have been routing more freight through the Panama and Suez canals to East Coast and Gulf ports to reach Midwest, Gulf, and East Coast markets.
The Transpacific Stabilization Agreement (TSA), a group of 14 container shipping lines serving the Asia-U.S. trade, reports that demand for East Coast all-water services grew by 10 percent for the maritime trade as a whole, and more than 15 percent for TSA lines in 2007.
"Importers are re-thinking their supply chain strategies to reduce their inland trucking and rail fuel costs," says Wade Elliott, senior director of marketing at the Port of Tampa.
"They are asking carriers to provide more service to Atlantic and Gulf ports, and carriers are responding. Shippers are doing more long-term inventory planning to accommodate longer transit times."
From all indications, the shift to all-water routes in the United States will continue to escalate, particularly as the Panama Canal expansion comes online in 2014 or 2015.
"Opening a third set of locks in the Panama Canal will remove an infrastructure constraint and create more transit capacity for Asia-U.S. all-water containerships," notes Drewry Supply Chain Advisors in a report on U.S.-Transpacific intermodal trade.
On a straight ocean-rate basis, Drewry expects container services from Asia to the U.S. West Coast to continue to be more cost-competitive than Asia-U.S. East Coast (USEC) or Asia-Gulf Coast—even if post-Panamax 8,000-TEU vessels (ships that are too large to fit through the current canal system) are employed after the opening of the enlarged Panama Canal.
Panama authorities recently indicated that the Canal will be able to handle vessels of more than 13,000 TEUs, however, a development that would change the West Coast routing economic equation.
If you factor in U.S. inland transportation costs and eastern U.S. consumption market demographics, this equation has already changed.
"For most final destinations in the eastern United States, all-water services via the USEC and Gulf cost less than the West Coast intermodal routing," Drewry reports. "If ship sizes through Panama increase to 6,400 TEUs, most places east of the Mississippi will fall out of the West Coast's sphere of influence. Push canal capacity up to 8,000 TEUs, and the 'border' shifts across the Missouri for 40-foot import cargo."
If the Panama Canal Authority succeeds in getting 13,000-TEU ships through its new locks, then Denver, Albuquerque, and El Paso will be the "border towns" for West Coast hinterlands, the Drewry report says.
Drewry expects shippers to divert 25 to 30 percent of the U.S. West Coast's current cargo to East Coast and Gulf ports over the next decade.
LIFELINE #4: Add Capacity
In response to these dynamics, carriers have added considerable capacity and services to Gulf and East Coast ports.
For example, ZIM Integrated Shipping Services, an Israeli ocean carrier with North America operations based in Norfolk, Va., added an Asia-Gulf express service at the Port of Tampa.
"ZIM saw a huge opportunity to expand Asia-Gulf container service at the Port of Tampa—and predicted that shippers would embrace this service—but we needed to buy cranes and build a proper terminal," recalls Elliott. "No sooner had we installed gantries than ZIM began weekly Asia-Gulf service using 2,800-TEU ships."
ZIM's service enables shippers to access the dense Florida population with minimal inland transportation, a fact that companies such as Rooms to Go appreciate.
LIFELINE #5: Form Alliances
Carriers are also using alliances to beef up service on high-demand routes. For example, the Grand Alliance, formed in 1998, includes members Hapag-Lloyd (Germany), MISC Berhad (Malaysia), NYK (Japan), and OOCL (Hong Kong).
Hapag-Lloyd, NYK, and OOCL have upgraded their Atlantic Express service on the North Europe-North U.S. Atlantic Trade, in cooperation with ZIM. It offers weekly, fixed-day sailings between northern European ports and New York, Norfolk, and Charleston.
The service consists of four 4,000-TEU capacity vessels, one of which will be provided by ZIM and the other three by the Grand Alliance. The larger ships significantly reduce bunker consumption per slot-mile, providing more cost-effective service to shippers.
LIFELINE #6: Bulk Up Landside Operations
Carriers are working to make landside operations more efficient.
In May 2008, for instance, APL Logistics completed a two-year reconstruction at its Oakland, Calif., marine terminal. The $68-million renovation, which was jointly funded by APL and the Port of Oakland, doubles cargo-handling capacity without expanding the terminal's physical footprint.
"That's a dramatic productivity gain," notes John Bowe, president of the Americas for APL.
The project improves terminal operating efficiency, permitting future cargo volume growth in Oakland while minimizing environmental consequences.
Truckers can get in and out of the facility faster, resulting in quicker turnaround time on cargo processing, which helps get goods to market sooner. The increased productivity attracts shippers to Oakland as a West Coast gateway.
LIFELINE #7: Adopt Collaborative Planning
Communicating with carriers helps shippers manage ocean freight effectively in these turbulent times.
"We provide our ocean carriers with accurate forecasts, and commit to them," says Christian Corrado, director of global logistics for Princeton, N.J.-based Tyco International, a provider of electrical and metal construction materials, pipes and valves, and safety products.
"If we can commit to a volume forecast, then our carriers can guarantee the capacity we need. That gives us stability.
"For our exports, we used to share forecast information with our freight forwarders and work through them," Corrado continues. "But we found that dealing directly with select carriers produced better results. The more we collaborate, the better service levels the carriers provide, such as space commitments on vessels and block commitments for loading containers."
LIFELINE #8: Forge Closer Relationships
Maritime shippers and carriers are nothing if not resilient. They have to be because the maritime industry is cyclical, rising and falling with world economies.
The additional dynamics at work in the sector today are putting companies' resiliency to the test, however. Carriers and shippers are responding by tweaking their networks, re-thinking their operating strategies, and re-negotiating relationships.
Greater transparency has brought shipper-carrier relationships closer within the past several years.
"Information technology provides greater visibility into how supply chains work," Wilson notes. "It offers greater transparency into the dynamics of the global market. Shippers and carriers better understand each other's business, enabling them to conduct business more intelligently and collaboratively. There's more empathy between parties today; more discussion on how to solve issues."
Working together more closely is the only way for shippers and ocean carriers to not only stay afloat, but also to move forward.
Shippers Eye Clean Trucks Program
Ocean freight shippers are closely watching the Clean Trucks Program, launched Oct. 1, 2008, at the Port of Long Beach, Calif.
The Clean Trucks Program is designed to reduce air pollution from harbor trucks by more than 80 percent within five years.
The program calls for drayage truck owners to scrap and replace about 16,000 polluting trucks working at the ports, with the assistance of a port-sponsored grant or loan subsidy.
Under Long Beach's "concession" plan, truckers can lease-to-own a new truck for as little as $500 a month, including pre-paid maintenance.
They can choose to work as employees or owner/operators, and need a federal Transportation Workers Identification Credential (TWIC).
Originally, the plan called for banning 1988 model and older trucks beginning Oct. 1. There are not enough clean diesel and liquefied natural gas-powered drayage trucks to fill the need, however, so the port has pushed back the ban dates for certain trucks to Jan. 1, 2009 for diesels and April 1 for LNG vehicles.
To finance the $2-billion truck replacement program, the Port of Long Beach will levy a fee on loaded containers.
The port was hoping to collect the fee through the PierPass program, but at press time had not yet worked out the details of that arrangement with the non-profit organization that administers the program.
The California state legislature passed a measure that would assess a fee on all containers moving in and out of the ports of Los Angeles, Long Beach, and Oakland—$30 for TEUs, $60 for FEUs—for environmental mitigation and infrastructure development.
At press time, the bill was sitting on Governor Schwarzenegger's desk awaiting signature.
The Clean Truck program fees "increase our cost of doing business, but we recognize we have to be part of the solution to clean up the air," says John Isbell, director of corporate delivery logistics for Nike.
Will the Clean Truck fees and other such costs drive freight away from California ports?
"Shippers will have to determine what their model is," Isbell says. "There's always discretionary cargo that will move to ports that are the most efficient and least expensive in which to operate."
The California fees will make some beneficial owners of cargo reconsider their routings.
"This is not to say that shippers will abandon southern California entirely. It is still a huge consumption and logistics center," says Peter Keller, president of NYK (NA) Lines. "But discretionary cargo definitely will be affected."
The LCL Option
Not all shippers import or export in full containerloads. Those shippers that require less-than-containerload (LCL) service typically use freight forwarders or other third parties to consolidate their cargo into containerloads and arrange for both inland and ocean transportation.
Several ocean carrier logistics companies—such as OOCL Logistics, Maersk Logistics, and APL Logistics—offer LCL services.
For instance, OOCL Logistics' LCL services tap the ocean carrier's dedicated trunk and feeder services to "provide reliable weekly sailings with fixed-day cargo and vessel cut-off times," according to the 3PL.
Shippers get direct connections between OOCL's Asian base ports and selected U.S. and Canadian destinations.
"Transit times are consistent, enabling shippers to plan their freight flows more effectively," the 3PL says. And shippers can monitor their cargo's progress online via OOCL's information management system.
One obstacle to LCL transport is that transit times still are not as reliable or efficient as containerload transport, according to Chris Corrado, director of global logistics for Tyco International.
LCL service is an offering that third parties—primarily freight forwarders—control.
"We work closely with freight forwarders to reduce our LCL transit times. But we find it still takes longer to get cargo into the container and out of the origin port," he says.
In many cases, the booking forwarder does not handle the actual physical consolidation and co-loading.
"They may give it to another freight forwarder, and those hand-offs add time," Corrado says.
"When we emphasize these issues to our forwarders, however, service improves," he adds.
Exports Float the Boat
The weak dollar has brought some good news to the U.S. maritime trade.
"U.S. exports have shot up dramatically, which helps steamship lines better balance their equipment," reports Michael Wilson, vice president, equipment and logistics, for Morristown, N.J.-based ocean carrier Hamburg Sud North America.
"Carriers are not shipping as many empty containers back to Asia, so exports ease the overall pain of the U.S. economic downturn and rising costs," he adds.
Many exported products are bulk commodities from the country's heartland. Bulk shipping rates have risen significantly as a result of high demand, and bulk vessels are scarce.
Consequently, a significant volume of freight that used to move on bulk ships has converted to containers.
Bulk shifting to containers does present a problem, however.
Because of high inland rail rates, liner operators have tried to keep their containers on the coasts.
"We didn't want to pay high rail rates to move our containers," says Peter Keller, president, NYK Line (North America) Inc., "so we managed our assets away from the interior of the country. But now, that region is producing the surge in agricultural and raw materials exports, creating a scarcity of containers available to move them."
Shippers can work with their carriers to mitigate this issue, Keller suggests, by trucking bulk products to a central accumulating point, where they can be loaded into containers.
Container scarcities don't just affect bulk exporters.
For example, Sysco International Food Group, a distributor of food, non-food plastics, and paper products, has to regularly scramble to locate export containers. T
he Tampa, Fla.-based company, whose business is 100-percent export, serves fast food and commercial restaurant chains all over the world.
The company is growing rapidly—from $76 million in revenue four years ago to more than $300 million today. It now ships to 110 different markets, from the Caribbean and Central America to the Middle East and Central Asia.
"We ship about 15,000 TEUs globally a year," reports Henry Jimenez, Sysco's senior vice president. "Half the cargo moves through our Tampa facility; the other half moves out of our office in Brazil and other sourcing locations, such as Argentina, Canada, and Australia.
"U.S. shipping lines weren't prepared for the boost in exports that resulted from the weaker dollar," Jimenez notes. "For a time, we had serious issues getting equipment. Our service promise is that no restaurant can run out of food. So we have to find equipment, whatever it takes. We had to reroute cargo, which added expense."
To address container scarcities, Sysco International works with its liner carriers to locate ports with a surplus of equipment.
"We can get equipment out of Miami but not Savannah, Jacksonville but not Dallas," says Jimenez. "Our inbound logistics team routes product into port areas that have equipment, then cross-docks it to its destination."
Because the company arranges a greater volume of its own inland transportation, it is negotiating more port-to-port contracts with its ocean carriers.
"We gain more control over inland supply," he says.
Sysco International also relies on niche ports such as Tampa to serve certain regions of the world.
"We use ZIM service out of Tampa to serve Asia both inbound and outbound," Jimenez says. "Because of ZIM's service and the port's proximity to our location, Tampa is an easy port for us to use."
Working closely with its carriers to find creative ways of locating export container equipment is an essential strategy for Sysco International.
"We are an export company," says Jimenez. "If we don't have the container, we can't make the sale."