Do BCOs have incentive to speak up on chassis?

Do BCOs have incentive to speak up on chassis?

Chassis shortages can cause quite a hassle for cargo owners, but building a business case to upend the status quo isn't so easy. Photo credit: Shutterstock.com.

The supply chain disruption in January resulted in thousands of dollars in demurrage and detention penalties because of a chassis shortage in parts of Southern California; Chicago; and Memphis, Tennessee. But it doesn’t make financial sense for many upset cargo owners to radically change chassis operations, a JOC analysis of the trade-offs has found.  

There was plenty to be angry about: beneficial cargo owners (BCOs) were penalized for not picking up containers, even though it was impossible to do so. After the allotted free window expired, BCOs incurred between $75 and $150 per day in penalties. Not every cargo owner felt the pain, but those using busy terminals in Southern California and Union Pacific Railroad’s yards in Chicago and Memphis were hurt.

However, it’s more expensive to disrupt the status quo with higher rental rates, even an at-cost model, according to a JOC calculation of an average importer of 2,500 containers annually. Even saving $5 per day builds up so quickly that it would take a lot of demurrage, detention, and per diem to offset the savings.

The math doesn’t always tip toward the chassis savings. There are many BCOs incurring six figures in penalties each year, but a well-run, efficient logistics operation should not.

Let’s examine a traditional carrier haulage contract. An ocean carrier charges $1,580 on a door rate from Shanghai to the Port of Los Angeles. Most likely the haul is $1,500 and the chassis costs $80 for up to 10 days, or $8 per day, even though it’s not a separate line item.

If the BCO were responsible for the chassis — merchant haulage — a daily short-term rental is $20 to $25 per day with Direct ChassisLink, Inc. (DCLI), Flexi-Van Leasing, and TRAC Intermodal. The price is about $13 to $15 per day with the North American Chassis Pool Cooperative (NACPC) under its at-cost model.

DCLI, Flexi-Van, and TRAC can offer this attractive $8-per-day bargain because the $20 to $25 per day on merchant haulage is an above-cost rate. But even disrupting the status quo by implementing a universal $13 per day doesn’t necessarily make financial sense for shippers.

 

Jettisoning status quo difficult

An importer moving 2,500 containers per year through the West Coast, or 50 containers per week, represents about 4,000 to 4,500 TEU. Let’s assume the BCO uses its chassis for 10 days on each occasion.

 

On carrier haulage, the chassis costs $80 for each occurence. A short-term rental from DCLI, Flexi-Van, or TRAC would cost at least $200, and NACPC’s at-cost model would begin at $130. The savings range from $50 to $120.

 

Multiply this number by 2,500 containers annually and the costs of abandoning these low rates would be $125,000 to $300,000. Even cutting this in half, five days of chassis use saves $62,500 to $150,000. If all the containers flow through Southern California, raise the number at least another $15,000 because the short-term rental rate will be higher than elsewhere.

 

Only a BCO paying more annually in demurrage, detention, and per diem year after year could make a business case if an $8-per-day fee were eliminated.

 

Even if penalties escalated to $200 and $350 per day over time, it would be nearly a month before penalties reached $10,000. This would need to happen at least six to 12 times per year, every year, to negate the savings on an $8-per-day chassis. 

 

Are there BCOs who incur more than $100,000 in detention and demurrage/per diem every year? Yes, there are shippers paying $500,000 or $1 million on 2,500 to 3,500 containers per year. These BCOs have larger problems, however, in their logistics and warehousing operations worth addressing first.

 

There are other variables such as lost business when the container is inaccessible. There are also chassis splits when a trucker needs to make a trip to exchange units, so a true analysis varies greatly by BCO and supply chain.

 

The math is most favorable toward a long-term lease. An average BCO can garner a rate less than $10 per day on a one-year agreement, according to Milestone Equipment Holdings. Without maintenance and repair coverage, it can cost as low as $6 per day. For that rate, demurrage, detention, and per diem should go down substantially. The same is true for using trucker-owned chassis.

In Los Angeles-Long Beach, grabbing a pool chassis increases the likelihood a drayman will take more than 90 minutes in the terminal, according to Harbor Trucking Association CEO Weston LaBar.

“If you’re using a private chassis, the assumption is you’ll get out of the terminal faster, whether it’s a BCO’s chassis or trucker-owned chassis. If you’re using a pool chassis, you have to assume you’re going to have to pay $75 in [trucker] detention per transaction,” he said.

Many BCOs don’t spend the time doing this math, but as the discussion heats up on the chassis shortage, it behooves them to uncover how much money they spend in each category. The status quo might be a hassle a few times each year, but would BCOs save more by throwing out the system or by asserting greater control over its chassis supply?

As transportation managers face growing pressure on their transportation budgets, pulling out a calculator might be one way to save cash going forward.

Contact Ari Ashe at ari.ashe@ihsmarkit.com and follow him on Twitter: @arijashe.

Comments

Well done article pointing out the business approach to these issues. In most cases it isn't a math contest, it is emotional, some shippers simply don't want to pay for anything; Chassis, detention, or demurrage. And at times they are enabled by carriers.

What the above article does not address are the serious problems caused by and lack of sustainability of the current model. Certain BCO's may well enjoy usage of chassis provided by ocean carriers through their chassis providers at well below cost. When chassis are provided below cost, there is no incentive for the providers to ensure adequacy of supply, quality of assets, or any assurance that money will be spent for chassis to be in the right place at the right time. These are exactly the problems we are seeing in many parts of the country today., To have the difference made up by charges to motor carriers at three or four times the rate level of the carrier haulage is to say the least unreasonable and not fair to the motor carriers, and further incentivizes a spiral of ever-more below-cost carrier haulage and pressure on the economics of the providers. Under this model, one might only expect further shortages, poor qualtiy of equipment, dislocations and disruptions to the supply chain. An 'At Cost' model under a neutral pool operator can ensure quality and quality of chassis assets in a given region. Further, there is room in the model for rate differentiation based on volume or other criteria that can provide for a smooth transition and minimize the impact to parties currently benefiting from chassis usage at well below the cost of those assets. Dave Manning President and Chairman NACPC