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DISRUPTIVE FORCES ARE DRIVING NEW THINKING IN INTERNATIONAL LOGISTICS: A 14-POINT GUIDE TO HELP YOU PREPARE

It goes without saying, but these really ARE unprecedented times. Importers are facing not only historic levels of surge, congestion and bottlenecks but also the frequency and duration of these market disruptions are increasing, as well. Everyone would agree that we are not in a typical market and that there will not be a return to normal anytime soon. In fact, we should be prepared for a “new normal” and that is challenging as it will be hard to predict what that will be. As the past year has demonstrated, it is obvious that “standard” approaches to the market and management of international supply chains will not be sufficient and can even be disastrous as we enter 2021, and beyond.

So, how can you prepare for 2021? To assist in preparing, we have created this 14-point guide.

Overcoming today’s market challenges requires importers to become even more nimble and resilient, and to understand carrier strategies and underlying market conditions to navigate turbulent times.

1) Ocean carriers are learning how to make money

Nimble ocean carriers?

Nimble is not a word that most would typically associate with ocean carriers. However, over the last year or two they have actually demonstrated their ability to be just that. In 2021 we have seen a record number of blank sailings and, during the same market, deployment of extra loaders.

Today, many carriers are introducing unique service products that guarantee space and equipment, provide an express-only service, and guarantee chassis and availability at destination upon arrival.

Many of these services are coming at a significant premium. Some carriers, like Maersk, are offering online booking portals to provide choice to shippers, all at different levels of service, guarantees, and of course, price. All of this is in reaction to customer demand as well as their own ability to understand forecasts and data, and react quickly.

How are carriers managing capacity differently?

Historically, ocean carriers managed their capacity poorly which led to wild fluctuations in available capacity and related dynamic swings in market ocean freight rates. One root cause of this was that carriers always managed their capacity from a maximum capacity deployment perspective: deploy all available capacity and then, based upon current market conditions, attempt to remove capacity if vessels were not sailing at 100%. What was different last year and expected to continue into 2021, is that carriers have changed that philosophy completely.

Carriers are now demonstrating their skill and desire to manage their capacity from a minimum deployment strategy—deploying only what is considered a bare minimum to satisfy demand and adding extra vessels when and only they see fit to maintain 100% utilization.

Furthermore, with only three major alliances in the Transpacific trade, and with only three or fewer partner carriers in each alliance, making decisions across carrier ownership on deployment is much easier and faster. It’s two phone calls instead of five!

Record profits.

The carriers have adapted to the marketplace and this adaptation has accelerated because of COVID-19 and US tariffs on Chinese imports. With the number of carriers, freight forwarders, consolidators, and NVOCC specialists, there’s still a tremendous amount of competition in the market space. However, in terms of actual asset owners, there are only nine significant players left in the Transpacific trade. In 2000 there were over 20. Consolidation has put them in a position to be more nimble and to quickly adapt to the current evolving market conditions. Bottom line—they are getting a taste of what it is like to make money!

2) Need for speed? E-commerce and speed-to-market premiums

The need for speed is a fundamental change that we saw in 2020. It is really a combination of two things related to the overall effect of the COVID-19 pandemic:

The immediate need in early 2020 for PPE sourced from Asia
Changes in consumer buying behaviors and the acceleration of e-commerce

Instead of spending money on experiences, travel or restaurants, consumers are spending money ordering stuff while seated on the couch, and stuff is made in Asia. Both of these changes created an immediate need for faster ocean transportation services from Asia to the United States—even at a hefty premium.

What has happened in the marketplace as a result of those two changes, is the introduction of the premium and express ocean services that we think are here to stay—especially to Southern California. Historically, the market has always had Matson, which for years has been the gold standard for offering a premier service. Many carriers over the last five to ten years have tried to copy it but they have been unsuccessful; the market was simply not ready for more than one.

Recently, this type of premium offering has gained momentum. We now have numerous services in the marketplace that offer a similar 11 to 12-day service from between one or two ports in Asia—primarily into Southern California. These services come at a premium, and that premium is significant.

Carriers are learning that, as they offer different tiers of service, they can charge a tiered ocean freight rate.

As a result, customers now have a menu of services available to them. As importers plan and strategize for 2021 and 2022, they are going to need to be able to react to those changes and flex up, flex down, speed up or slow down within their supply chains. And each carrier can have completely different programs. You may have a contract with one carrier for a specific service, but if you need to venture out and use an express service on that same carrier, you may not have access to that within your contract. Importers will have to know what their options are as they go into 2021 and 2022, because these speed-to-market premium services are here to stay. If you can create a strategy to incorporate that and, ultimately, be nimble, then you will be in a position to have a really strong and resilient supply chain.

3) Are “premiums” here to stay?

We think so. There is a new menu of carrier services now available, where you have carriers and products that are “expressed,” which are guaranteeing equipment and space overseas at origin, as well as similar guaranteed service and equipment including chassis availability at destination in Southern California. This idea of premium has now expanded beyond transit time and also filtered into vessel and booking space, container equipment and chassis availability and—particularly in California but also increasingly elsewhere—free time availability. This year it’s critically important for importers to have options, especially as they react to market disruptions such as tariffs, PPE requirements, surge demand, and the increased demand for consumer products fueling the import surge. And as those demands and their own needs evolve over time, they need to be in a position at all times to be able to leverage and take advantage of that menu of services. So that’s a significant change for the market this year, and ultimately it comes down to adding flexibility and carrier selection, especially within your
forwarder or NVOCC model.

4) The NYSHEX effect

Historically, there has not been a lot of innovation in the logistics maritime marketspace, which may explain one of the reasons why so much money is now flooding into our industry recently. What has been a very traditional document-driven type of old school, asset-driven business is changing right now. One example of this innovation is NYSHEX (New York Shipping Exchange, Inc.). NYSHEX is a marketplace, and much like the New York Stock Exchange is the market to exchange stocks, NYSHEX is simply a marketplace that allows for carriers and shippers to agree on a rate, space and equipment, along with guarantees and penalties. The fact that NYSHEX even exists today and is growing very quickly is a testament to how things are changing within our industry.

A key component to this marketplace is the idea of a guarantee—both from the carrier for space and equipment, and from the shipper who is guaranteeing to not cancel or delay the booking reservation.

If one of the parties does not fulfill that commitment, they pay a penalty. So, for the very first time, there is a mechanism to penalize shippers for canceling or no shows, which is a huge problem in our industry. And for the very first time, you have a process in place to ensure that a carrier is going to provide space and equipment for you during that time frame if they guarantee it. This idea of penalties and guarantees is critical to understanding where the carriers in the marketplace are going today. Without these two ideas, we wouldn’t even have these premium services or guaranteed space services in Asia right now. The marketplace needed the culture and the mindset of the premium services and guarantees in order to create an environment and acceptance for penalties and real repercussions for nonperformance.

5) Cancellation fees—here to stay?

The cancellation fees that are now seen in the market as a condition for guaranteed express service, have heightened the importance of this issue for both shippers and carriers alike. Shipper no shows and canceled bookings are an issue that has plagued the industry for years. In the past carriers, like Maersk and Hapag Lloyd, have tried to issue cancellation fees to address this problem, but it has never worked. Just think how this works in the airline industry. Imagine if there was no booking cancellation fee. Passengers could book a ticket on a flight and then cancel at any time or not show up, and there would never be a penalty. With this type of arrangement, far more people would cancel their flights.

There’s something to be said about having a cancellation fee with any service; it represents and helps reinforce a commitment to perform as expected.

The industry is now beginning to accept the idea of cancellation fees and is making a firm commitment to fulfill both ends of a booking confirmation.

It’s a fundamental mindset shift that we think is here to stay, especially because of everything else that we’re seeing (the need for speed, the different premium services, carriers managing capacity differently), both carriers and importers are looking to get guarantees. Importers want to have a certain level of guarantees on which they can rely and on the carrier side, they also want guarantees. Importers will need to make time to talk through these issues with their providers and carefully study how this needs to be addressed during the upcoming 2021 and 2022 bid season.

6) Do MQCs matter anymore? How to make them matter in 2021

Minimum Quantity Commitment (MQC) is the mutual volume commitment a shipper and a provider make and commit to in an annual fixed-rate service contract. With carriers minimizing fixed-rate allocations in 2020 as a result of the market upheaval, the question is, do MQCs still matter? The answer is yes. MQCs absolutely do matter and are critically important. With the kind of rate markets we have been experiencing over the past year, most carriers will restrict importers to the defined weekly MQC, thereby forcing them to go to the spot market for any extra weekly volumes they would require.

In the last 90 to 120 days carriers have started to restrict that weekly allocation even more.

That’s become a big problem for importers because instead of counting on that minimum weekly commitment, they’re getting even less. They have restricted both NVOCC commitments as well as direct importer or co-beneficial cargo owner commitments. It will be interesting to see how carriers deal with it during this year’s contract negotiations. We expect importers to demand more clarity on weekly allocation than they have before. Both parties, but primarily importers, are going to be much more serious about understanding exactly what the carrier commitment is, or the non-commitment is on a weekly basis. Making sure that they’ve planned for that weekly commitment, they’ve firm commitments from their carrier or their NVOCC on their fulfillment of their MQCs. Likewise, carriers and NVOCCs will want equally firm commitments from the importers.

7) Forecasts are gold

Every successful program in 2020 (and there were many) relied heavily on timely and accurate forecasts by PO, container volume, ship dates, supplier, and port pairs.

As an importer today, being able to provide your carrier or NVOCC an accurate, timely, and regular shipping forecast will make a significant difference in whether your program is successful or not.

Even allowing for minor changes, delays and fluctuations in volume flows, which always occur, forecasts act as a benchmark for allocations, demand and allow some additional flexing up or down as all stakeholders in the supply chain can plan and predict accordingly. If you are not providing forecasts today, start immediately. If you can’t get the information today to forecast effectively, figure out a solution so that you can do so as soon as possible.

8) Additional free time isn’t free—or even available

Specifically, what we are referring to here is detention free time—the free time that an importer or exporter would have once they pull that loaded container up from the terminal, use it and then return it back to the terminal. What you’ll begin to see more of is ocean carriers further limiting the amount of free time that they’re willing to provide, even in annual contracts. This is because they’re realizing that on a revenue-per-day type of arrangement, providing that free time is a huge loss for them. If a typical container, over the course of the year, is unused for 60 days while in “free time,” that is two and a half cycles today between Shanghai and LA and represents about $12,000 in lost revenue.

Carriers are getting smarter and they are realizing allowing extended detention free time is a money-losing proposition and negatively impacts their customers who are looking to book cargo with unused equipment.

It is unlikely that they will eliminate additional detention free time completely, but it is going to be very difficult to get anything beyond 7 to 10 days as many have enjoyed in the past.

9) Non-core IPI destinations are a “no go”

One characteristic of this new market that has been evolving for a number of years is increasing restrictions of IPI (inland rail ramp) points by the carriers. There are destinations that can be considered core inland IPI points such as Chicago, Memphis, Dallas, Kansas City. There are also second and third tier inland destinations such as Minneapolis, Detroit, Indianapolis, and Omaha which are considered less ideal for carriers. What we are seeing is that carriers are being much more selective in general, or simply no longer accepting cargo to these secondary and tertiary interior IPI destinations.

Over time, carriers are going to be shrinking their IPI footprint because they do not want equipment in some secondary or tertiary IPI locations; they need to turn around equipment and move the empties back to Asia as quickly as possible.

For ocean carriers, it’s much easier, cheaper and faster to bypass Indianapolis and just terminate the move in Chicago and have the importer pick up that container in Chicago and truck it to their warehouse in Indianapolis.

At different times of the year, we’re also seeing carriers simply embargo locations, based upon empty inventory and demand, and that puts importers at risk. Carriers typically embargo locations that are non-core IPI and that may be a result of the carrier already having too much equipment there, or they don’t want to move any IPI cargo—they want everything discharged on the West Coast, so they can return it quickly to Asia. Whatever the rationale by the carrier is, the net effect is that it puts a lot of supply chains at risk, and you’ve got to be prepared for that.

10) The Mythology of Transit Times. Consistency and predictability do not exist right now—added calls, cancelled services, ships at anchor in LGB delaying return, on-time performance lowest in last 20+ years, rail delays, congestion, embargoes—need we say more?”

Right now, there’s no way to trust carriers’ published transit times and future sailing schedules. With delays on the West Coast and ports throughout the US, shortages of truckers and drivers along the supply chain, the rerouting of vessels due to storms, blank sailings, extra unpublished loaders—schedule reliability has been on a steep decline over the past several months—falling as low as 35% in January. This is a 40% decline from the same period in the
prior year.

There’s no rhyme or reason for that from the importers perspective and it’s very, very difficult today to predict transit times or to get an accurate sailing schedule.

For importers planning today, it’s challenging because you’re used to expecting 14 days into Southern California from Shanghai.

In today’s environment you may not get your container available for more than ten days beyond published arrival. If you can’t predict container availability, you can’t anticipate things or communicate effectively to your customers.

11) Extra loaders are increasingly market rate only

We have seen, over the last year and a half, that when carriers introduce extra tonnage via extra loaders they do it through the use of smaller ships, typically around 3,600 TEUs.

When extra tonnage is introduced, carriers are promoting it first in the spot market, and that spot market is predominantly the only market for extra capacity and is primarily managed through the NVOCC community.

So, as you’re planning through 2021 you will need to be prepared to have ways to access this extra capacity when and where you need it.

12) Unless you have Walmart or Home Depot buying capacity, does it even make sense for medium-sized importers to sign contracts with carriers now as carriers push more allocation to the NVOCC community?

It is a philosophical question, and we are always struck by how many importers, with 400, 500 or even 800 containers annually from Asia, sign with two or three ocean carriers. Importers used to feel if they signed directly with a carrier, perhaps they would get better allocations or a better commitment. That may have also made sense when there were fixed, reliable schedules. There was not the level of complexity in the supply chain that we have today, nor the need to flex up or down, access express services, access extra loaders and premium capacity—all that is different now. In order to be nimble and resilient today, an importer must have as many options as possible and keep their cargo flowing to maintain their inventory and satisfy their customer needs.

And we believe carriers are realizing that, too, which is why more are pushing these types of importers to the NVOCCs. Carriers alone simply do not allow any level of flexibility.

If an importer doesn’t have a process to manage available options, someone managing the booking information for them, communicating with their suppliers and carriers, and reviewing allocation, then how do they access the spot market when they need it?

How do they access extra loaders, and access the express services that are available? They must be able to flex and retrench a little bit during an offseason. The carrier direct model is probably the least nimble in our industry. So, with a need for importers to be especially nimble this year we don’t see those strictly carrier direct arrangements as advantageous to midsize importers anymore. It’s why NVOCCs are gaining market share. As a result of these changes in the marketplace (the need for speed, the need for nimbleness, the need for a resilient supply chain) it makes sense for a medium-sized importer to migrate to the NVOCC model in which one ecosystem can help mitigate challenges.

13) Visibility is more important than ever

It is critically important to have options when trying to be nimble, resilient, and adaptable.

Executive Working on Tablet in Warehouse

An importer must have visibility across their entire supply chain, all the way from booking through to delivery.

When you have these options and you know what they are you can make strategic decisions faster—as you intend to do. There’s no point in trying to build a nimble or resilient supply chain if you can’t see into it. It all starts with incredible visibility.

It is surprising how many importers today still don’t have a great visibility tool that they can access to monitor flow within their supply chain, make strategic decisions, use it to communicate to their customers, and predict landed cost, etc. Regardless of the changes in the marketplace that we have pointed out—carrier attitudes, consolidation, extra loaders, express services or blank sailings to certain locations—the one constant is the need to have visibility of the supply chain. Without that, everything else is for naught.

14) How do you stay nimble and resilient in your supply chain in the current environment and when no two seasons are the same?

The one key thing that importers need to learn if they haven’t already, is they need to have an internal strategy to understand their options and how they will be deployed, how to prioritize key trade lane volumes, and how to align a process internally to allow for fast decision-making. In today’s market, there’s not a very high level of predictability, so if you have to get five approvals prior to accepting a market rate on an extra loader or capacity that you’re desperate for, and that approval process takes two to three days, by then it’s too late. By the time it’s been approved that capacity is no longer available.

The ability to “green light” quickly and to make sure that everyone is aligned to fast-track decisions is another crucial thing that importers must learn this year, and this has to be incorporated into their strategy for 2021.

Importers need to have a checklist of critical items and ask questions such as, “Will I have adequate, fast and competitive access to all extra capacity introduced in the market? What’s my strategy to do that? Does my NVOCC or forwarder have that access? Are they able to secure capacity, and are they able to effectively communicate to me when that capacity becomes available? Is that capacity competitively priced?” In 2021, that needs to be the goal; it’s not about getting the lowest price at all times; it’s about keeping your product moving and reducing friction in your supply chain. It’s absolutely critical to have the ability to be nimble and having that decision-making process really understood within the organization. And secondly, to align on your go-to-market strategy that has been shared with your partner forwarder and all key stakeholders.

Over the last six to nine months, many importers were caught unprepared.

Often, when they were asked internally—“Hey, what’s at risk here? What do we have flowing within our pipeline that is arriving in the next three weeks that are at risk? Which P.O.s, going to which customers, will be delayed or impacted? Which P.O.s can we expedite? What is the next express service we can get space on?”—many of them were unable to answer. How can this be avoided? Ask the questions beforehand, find the answers, prepare and work with the right partners. Resilience and nimbleness are not born or implemented overnight. Take time, though not a lot of time, to review these points within the context of your own supply chain and choose which, if not all, will apply. One thing for certain, this year will be a year unlike any other, and those that have taken time to prepare will be in the best position to weather these conditions and thrive.

Let’s start a conversation.

For over 70 years, Laufer Group has been helping customers prepare for the unexpected. Contact Michael Van Hagen, VP, Sales and Marketing, or your Laufer sales representative today.