How will the industry react?

How will the industry react?

During the past three weeks, several "friends" at ocean carriers have called and asked, "Have you seen what Maersk is doing with its inland services?" The editor of an industry publication called with the same question. My reply was, Yes, but I was still assessing the implications and ramifications. An immediate and obvious observation is how much concern or influence Maersk generates with virtually any major decision.

Apparently, Maersk's analysis is that rates are not covering costs, and that dramatically reducing bill-of-lading points will reduce or eliminate non-compensatory moves as well as variables in the carrier's cost stream. Maersk might offer shippers a Chicago bill of lading and not East St. Louis; or a Birmingham, Ala., and not Jackson, Miss. It is focusing services on locations where its costs are more predictable and constant.

Now I've had time to think through the ramifications, or at least some of them. The first issues I considered were: What drove this decision? What would the impact be for shippers? Other carriers? Other service providers?

The drivers relate to costs - out-of-pocket expenses, how they've risen and how they were ignored or misjudged when they were initially injected into the carriers' operation. There's a realization that many decisions made years ago were not fully considered and have turned out to be bad ones. Or that some initially good decisions over time became costly and bad. One could argue that the initial decision to keep containers on chassis may have been sound, but that if you were going to start the industry with today's volume and infrastructure, you wouldn't do it that way.

When through rates for inland service were first offered, they were primarily marketing-driven efforts to price a specific movement for a specific customer to a specific location, to capture specific cargo. At the time, inland rates were lower and the ocean carriers were not sophisticated in capturing all costs associated with a specific movement. Fifteen years ago, many ocean carriers were just getting into inland movements and simply followed the competition, good, bad or indifferent. As conditions changed, trade imbalances increased, inland costs rose, and equipment use and empty positioning were recognized for what they are - costly.

So Maersk decided to do something about it. In simple terms, they eliminated many destinations that were non-compensatory. Some might ask, "Why not just raise the rates, make them compensatory?" Surely at some point, the rates must cover out-of-pocket expenses and leave a margin that contributes to fixed expense, overhead and profit. The answer is that costs are moving targets, based on load-empty balances, equipment needs and seasonality - a carrier's cost to and from thousands of destinations or origins can change from day to day, week to week.

How will other carriers react? If history is a guide, many competitors will mirror what Maersk has done. The discovery of bad decisions won't be confined to a few. But don't expect an exact replica of Maersk's action. Each carrier's circumstances differ. Some will see this as an opportunity to pick up cargo they've wanted but couldn't get until now.

What about the other service providers, the NVOs and 3PLs? If this is a "change in tailored services" as suggested by a carrier executive last week, might this be a further opening to these entities?

From the cargo interests' standpoint, it's too early to reach a conclusion on the impact of Maersk's decision. If Maersk's rivals don't follow, cargo interests will simply be able to select another carrier. Logic says, however, that other carriers will follow - they'll do their homework and find a few of their own 15-year-old mistakes.

So how do shippers protect their interests, get the service they want and not pay considerably more? One way is to explore transloading at ports. Multiple-container shipments can be transloaded from 40- and 45-foot equipment into the 53-foot equipment used in today's rail system. Rail equipment is often easier to obtain than the specialized equipment used by ocean carriers. And rails have an incentive to make those moves attractive to keep their equipment utilized.

Another alternative is to use the Chicago rates and accept the responsibility of moving the container to its destination. Or shippers could pay port-to-port rates and handle the inland movement themselves. Or use a broker or forwarder for the inland move. Or it may be as simple as seeing rates rise to reflect costs, which to some would be a novel approach.

Gary Ferrulli is president of Global Logistics Consulting in Chandler, Ariz. He can be contacted at