Strategic Choices

Strategic Choices

Watching the shipping industry wander around in search of meaning — solutions seem a bit ambitious at this point — to the collapse of order and normality in trans-Pacific trade, it seems there are two ways for shippers and beneficial cargo owners to go from here. Amid developments that include the “rolling” of cargo, the need for longer lead times that eat away at working capital, the slowing of ships leading to scarcity of containers in Asia, and the growing anger of customers, the market has hit something of a crossroads.

It seems shippers and carriers have a choice to make. They can decide to deal with each other on a strategic basis, building into their relationships the type of predictability and partnership both sides say they want, or they can surrender to the commodity impulses of the market and approach the buying and selling of capacity as a farmer would pork bellies. The unstable mix of those two extremes, a feature of so much of the shipping business across the world and across modes, is no longer working.

What does it mean to have a strategic relationship? It means several things, all of them hard to execute and many with significant and special questions for individual shippers and carriers.

But for most it will mean that shippers will not only share forecasts with carriers but also agree in contracts to be held accountable for the accuracy of their forecasts, allowing carriers to rely on them when planning capacity. In other words, it means shippers getting real about knowing what is going on with their business.

It means signing multiyear contracts and living by the terms. For carriers, that means not doing the cardinal disservice of driving rates down to unsustainable levels only to drive them straight back up at the first shift in spot market conditions. It means carriers will not bury themselves so deep in red ink that they have to beg shippers for additional revenue even when contracts don’t allow it.

It means shippers will stick to their real business, whether that’s apparel, toys, electronics or building supplies, rather than trying to outsmart the freight rate market. It means shippers will hold to negotiated rates rather than giddily accepting a lower rate unilaterally offered by a carrier. It means logistics directors will not always try to look like momentary heroes within their own companies but instead look for long-term relationships with their carrier partners.

Why? A retailer that cites lower ocean rates as a help to earnings may deliver a nice quarter for Wall Street but really has created no long-term shareholder value. In fact, it may have helped tee up a situation that will hurt the company’s supply chain, and profitability, a quarter or two down the road. It’s one thing to benefit from a sudden drop in costs, but something else if price volatility leads to instability in services and long-term expenses.

What does it mean to approach container shipping as a commodity? It means finally accepting that carefully mapped out calculations of cost and service will simply be left to the shifts of each day’s or week’s supply and demand. It means accepting that protection or enhancement of market share rather than profitability will always guide carrier pricing decisions. It means accepting that carrier senior management teams will never gain control over their sales forces. It means predictability in pricing may be found not through contracts but through emerging derivative markets.

If you are a carrier or non-vessel-operating common carrier and your success is fundamentally tied to the level and direction of freight rates, treating the market as a commodity might have some attraction. It also might have attraction for certain exporters who could lock in final product pricing with freight rate certainty. For a direct shipper, ocean transportation represents a fraction of overall costs. But a carrier or NVO gets much if not all of its revenue through freight rates, and so the idea of creating some certainty through derivatives might make sense.

But the act of moving cargo is not the primary business for Nike, Wal-Mart, Sears or any other beneficial cargo owner — or it shouldn’t be. The spot market is not a core interest to them. The freight rate level is less important than certainty of capacity and comfort that the rates are competitive with the costs of similar companies.

For the shipper, there should be no choice here: Its relationship with the carrier must be strategic. It must find a way to work through the issues. The beneficial cargo owner is not generally at fault here; it did not ask for the rates to collapse and then rebound without warning. Some may have taken advantage of the volatility, but they certainly have paid the price for that this year.

Now it’s time for both sides to recognize what the real, fundamental costs are over time.

Peter Tirschwell is senior vice president of strategy at UBM Global Trade. He can be contacted at ptirschwell@joc.com.