Can the Container Industry Achieve Its Agenda of Greater Productivity?

A Trio of Elements That Can Improve Earnings for the Container Industry

Many companies face challenges, and a number of them are just systemic and beyond anyone’s power to fix or deal with, be it swings in demand or imbalances in supply and demand. However, many of the rest are quite manageable. Container lines who want to improve their performance can and should deploy three different sets of actions. The first is commercial. The second is operations, and the third is the network and fleet.

When handled collectively, this trio of elements can usually improve the earnings of a shipping line by 10 percent, and sometimes even as much as 20 percent. Every company in the industry has tremendous incentive to be the first one to act, because once the entire industry advances to new levels of productivity, then the overall benefits wind up getting passed down to customers just due to competition. A number of lines are already well on their way to achieving greater productivity, so a smart line can beat out its competition by going through its own implementation faster and more thoroughly.

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Commercial

In terms of marketing and sales, a lot of shipping companies need to move away from the older cost-plus approach to a new strategy where value is emphasized. Lines deserve to get paid the full value of any services which they provide. A robust and total commercial program that covers everything from uptake management and contracting strategy to even the pricing strategy can usually result in an instant impact on the bottom line. Doing this usually lets shipping lines improve their return on sales, or ROS, by a percentage point or two in less than a year.

Even though this approach has a number of elements to it, there are three that stand out. First of all, using a ‘model ship’ style of analysis can help a shipping line understand just which of their customers are contributing the most to their profits. One particular global container line already used its marketing information in the development of its model. Based on the results of their analysis, the company was able to customize focused sales campaigns in order to pursue and then capture more high-contributing customers. The campaigns were successful enough to boost ROS by 2 percent in a number of trade lanes and regions.

Another element is doing a better job of commercializing what’s known as the ‘last mile’ of customer services, which can include both demurrage and detention.

A lot of shipping lines have already made significant strides in this area, but there’s more that can be done. One global carrier came up with a robust performance-management system designed to make sure that invoicing was accurate as well as to quicken the pace of demurrage and detention collection. While doing this, they even standardized their tariffs across several trade routes and countries. In doing all of this, they boosted their revenues from demurrage and detention by 15 percent.

The third and possibly most crucial element is the fact that shipping carriers can enhance their overall pricing discipline to make sure that they are reaping the entire benefit of any value-selling approaches that they are already taking. Most shipping lines have clear potential for improvement in every facet of their pricing processes, be it transactional pricing or strategic pricing to the very tools and systems they use to support their front line.

There are times when it’s right to just follow the market, putting prices close to just marginal cost so that the ship can be filled. However, carriers also need to identify when peak prices are happening, and they do, even in the modern market of oversupply, as well as times where they might have a privileged capacity. Both events need to have appropriate charging to capture revenue. However, this approach does call for contract flexibility, so that when peaks happen, carrier ships aren’t getting stuffed with low-yield cargo thanks to contracted annual rates. Shipping lines also often miss opportunities to get higher revenues from particular customers in select industries who rely on smooth and trustworthy transport; their inventory is typically stable and of tremendous value.

Operations

Operation improvements fall dead center in the wheelhouse of a shipping company. Much more so than commercial levers, these are fully under the control of a carrier. This is what makes them a great source of potential improvement in periods of both profit and loss. Also, given that a great many lines are already heading down their own implementation paths, that just makes it imperative for everyone else. Three levers wind up accounting for the majority of total costs, and so they deliver much of the impact; those are asset utilization, procurement, and bunker management. The improvements sketched out in the following paragraphs can usually result in earnings rising 5 to 10 percent.

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Bunker Management

Fuel prices have been rising lately, which are making bunker the biggest single cost item for many shipping lines. It’s frequently going past 40 percent of total costs, surpassing both overhead and fleet. There are many ways to reduce fuel bills. Some are relatively well-known, such as optimizing the speeds of vessels and cleaning propellers and hulls more often. Others that aren’t so obvious might include inventory management and unconventional trimming known as ‘by the head’. Something that a lot of carriers’ overlook is the possibility of lean terminal operations.

When there are faster turnaround times in port, ships are free to steam at slower speeds when at sea. Ports can sometimes automate intermodal dispatch of incoming as well as outgoing cargo both, using inland operators and IT systems to better integrate their planning. Such work will fall mainly on the shoulders of port operators, obviously, but shipping lines might make things happen using tough negotiating stances with competitive ports, where service line agreements can cement solid deals and guarantee the availability of berths.

Finally, even though bunker itself is classified as a commodity, many companies can attain better savings through enhanced sourcing process, making use of lower-quality fuels at times and places they are available, and drawing from a broader range and variety of suppliers. Reducing bunker costs through such moves can typically improve earnings by around 2 to 3 percent. For instance, one particular global shipping company recently optimized the bunker inventory of its ships, which in volume was worth hundreds of millions of dollars, leveraging a savings of roughly 3 percent of all its total bunker costs.

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Hidden Opportunities You Need To Know About Shipping Containers

Hidden Opportunities in Container Shipping

The industry for container shipping has become extremely unprofitable in the last five years. To make things even worse, earnings have also been extremely volatile. There are a number of factors which are responsible and more notable the trade’s recovery which has been spotty from a global financial-crisis, along with redoubled efforts from the corporate customers in order to control the costs. Some of this pain happens to be self-inflicted, as it was in the past cycles, where this industry extrapolated good times, where they experienced a rise that was unsustainable in the demands. Today it is the building capacity which appears to be the most unneeded.

These issues are significant and real, and also greatly beyond the powers of any single business to address. Yet the shipping companies just can’t afford to sit back and accept this fate. Hidden under these problems as well as driving these to a great degree is other sets of challenges that the shipping lines could readily be faced with. Across this enterprise, in operations, commercial, and fleet and network activities, the shipping lines have a host of hidden opportunities available for improving performance.

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For example, in sales, carriers frequently confuse the costs with value that is received by their customers, where they do not charge a “premium” for services that shippers would gladly pay more for. In many operations, most of the lines treat the bunker as just an additional cost involved with conducting business. In fact, fuel is one of those opportunities, and not only in procurement, yet also in consumption. In the network designs, a large percentage of the shipping companies are using outmoded approaches in order to design routes. Today there are more powerful and newer systems that use algorithms that make more effective and better decisions about the networks.

With a bit here and there, companies which take on a comprehensive program of different initiatives are able to increase their earnings by up to 10 to 20% points, which is more than sufficient to reverse recent trends and return to making a profit. However, in order to realize this type of upside, these companies need to prepare their organizations for these changes. This is a nontrivial challenge: in a lot of ways not much has really changed for the container shipping industry since 1956, when the very 1st crane hoisted its first box. Companies should be looking to find a way to assist their employees to embrace a new way of working and they also need to be prepared when it comes to betting on their future. The carriers which are open to changes are better prepared compared to their competition in order to make the most of the business cycles now as well as to keep on thriving into the following one.

The Bleak Economics Of This Industry

Transport often is seen as a harbinger when it comes to the broader economies. It has definitely fulfilled this role in the latest economic crisis, when business started to fall off precipitously. Shipping, however is now a type of indicator that is lagging: in the way that its performance is currently trailing an erratic and somewhat broader global recovery.

A large part of this issue has to do with that this industry is continuing to add more capacity. By the year 2015, an average vessel that was delivered would handle around 10,000 20-foot equivalent units (TEU), which is around 5 times more compared to ships which were made in the 1990s. It comes as no surprise that the pressure involved to fill these capacities along with capturing efficiency benefits for these bigger vessels has resulted in hasty and sometimes unwise decisions by the carriers. As a result, profits are not exceptionally volatile. The record losses that occurred in 2009, were then followed by profits that were strong in 2010 and then losses once again in the year 2011.

The demand and supply imbalance means that the bigger vessels will only be contributing to making this imbalance worse, and volatility of overall profits a major problem. However, we still argue there are symptoms of much deeper challenges.

For example, at this stage markets are saturated, with this industry now racing for a market share. The aim to take these shares is to squeeze out the smaller players, which has resulted in yet another price wave war. The shipping companies are ignoring their guideline when it comes to pricing, in both general and spot rate increases, while making the decision to not enforce contracts when it comes to their customer.

Companies are now pricing at marginal costs. This might not be necessarily bad and is actually a good decision when it comes to many. Yet for others its irrational and when everybody is doing it, the overall industry will suffer. Most of the shipping companies are known for having cost-management systems that are ineffective. This usually includes when they are using these for determining pricing, this results in pricing at only a portion of the full costs. For example, fuel is only priced partially into many of the charters. This means that companies are now passing on all their cost savings which they achieved over the last few years onto their customers.

Innovation when it comes to services offerings happens to be sporadic. Many carriers offer either a similar or the same services to all their customers, despite the actual need. Carrier’s miss out on opportunities when it comes to charging premiums when it comes to value-added services. This could include guaranteed and inter-modal delivery times, which causes them to fail at monetizing these innovations.

The changes in fleets have also made the network designs to be outmoded. Many networks of these companies are unable to adequately maximize on these profits. An example of this includes the introduction of the latest ultra-large container ships which have already triggered a cascading effect on the smaller ships. Even though the feeder ships continue to benefit from these trends, the mid-size Panamax vessels along with others have now been forced out. This will result in significant effects on the shipping lines, who carry a large percentage of the Panamax vessels in their balance-sheets.

shipping fleet - container ships

The conflicts between transportation companies and asset managers have resulted in business decisions that are suboptimal. Most of the carriers are caught up in a conflict with the owners of the ships that they are managing. Carriers are interested in managing transportation business to yield a profit, while the owners are looking to manage to provide the maximum value when it comes to their assets. Many are at a disadvantage when it comes to conflicts between transportation and asset-management mindsets. Without any fundamental changes like new external-shocks or industry consolidation, we will start to see a trend of industry losses and overcapacity that will continue over the following 3 to 5 years. We also predict that demand/supply imbalances will also persist where pricing and revenues remain under pressure, while the bigger vessels launch, and the global GDP is only growing moderately.

Organizational Challenges

The executives are very aware of the different issues that this industry is facing. And many are aware of the solutions. Yet getting their own organizations to actually act on these changes is difficult. The shipping industries are extremely conservative, and changes will only happen very slowly. Most of the companies will discount anything which is “not invented here”. One of the operations heads discovered that unconventional trim of 1 to 2 meters “by the head” was able to lower bunker consumption by as much as 3%.

Yet when masters and captains balked, the executives were unable to find any support elsewhere to drive these cost-saving ideas. Many lines only have very few analytical-resources, in either the business-units or corporate center. Decisions are very often undertaken while forecasts are made with very little information, with much borrowed from the external providers who supply their competition.

The conservatism of this industry in part, has to do with the long history associated with “boom” and “bust”. It is the cycles which make it extremely difficult to come up with performance-based incentives that are meaningful to staff and executives. This is what hinders motivations, which means that most employees have no interest in changing ways in which they work or to rise up to a challenge.

Another issue rears its head in the company structures. Many are organized according to function, for very good reasons. Yet guaranteeing cooperation is often difficult when there are departmental budgets that are involved. Maintenance organization is what pays to clean the propellers and hulls, yet any resulting savings when it comes to fuel will go towards purchasing.

Evolution Is Inevitable In The Container Shipping Industry

Network And Fleet Improvements

Improvements to a network and fleet can take more time than operational or commercial moves, and they require strategic timing.

Two particular moves might boost earnings from 6 to 8 percent.

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Own? Lease? The decision between the two is a question that has been central to strategy in container shipping for a long time. Analytics suggest, however, that the industry is overly reliant on leasing. There are unfortunately quite a few cash-strapped liners with significant debt, and leasing might be their only option. Still, other lines need to consider taking advantage of ownership for more and more of their own fleets. It is true that leasing offers a bit more flexibility in terms of changing vessel deployments, although that breathing room often comes at a steep price.

Shipping lanes might also be known as ‘trades’, and whatever you call them, they offer a unique test. Shipping carriers have to choose whether or not they want to deliver direct versus transship through an interim hub. This choice boils down to a handful of factors, like distance and the size of the ship. The tradeoffs of yesteryear have certainly changed, given how today’s vessels are larger and fuel has gotten more expensive. However, shipping lines haven’t always kept up with things by making the needed changes across their networks.

Having said that, a few leading lines have been building fresh network tools in an attempt to work through these challenges.

Making Things Happen

As various lines adopt the complicated agenda previously outlined, they should also make organizational changes that put them in a good position for success.

There are five tactics in particular that can help most container-shipping lines reach their full potential.

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1) Build Teams That Can Cross-Function:

Teams which can bring crucial functions together are able to make better decisions regarding the trade-offs that carriers face. For instance, one global carrier recently put an exception-management team into place that had both commercial and operations representatives. The mission of this team was to decide the murky questions that arise often in terms of vessel operations. Should a particular vessel speed up to reach Hong Kong where it could take on some transshipment cargo, or is it better to skip that port and keep sailing at a slower speed? An exception-management team can take both operational and commercial impacts into consideration so that it makes a good choice for the whole company.

2) Challenge The Status Quo:

Businesses are wise to sometimes shake up the status quo by embracing new perspectives, even if they’re controversial. One way to challenge pre-existing practices is by bringing in external experts. Companies have to innovate, so using a systemic approach to both finding and then testing out new ideas is something that can help out. Innovation is something that can happen across the entire enterprise, no matter the business or operational models or products or services. It can certainly happen when key operational processes get digitized. It’s not a stretch to think that inside the next three years, fresh technology start-ups might wind up creating a databased point of view on cargo flows that is so superior that container lines get threatened by it. In fact, a number of new IT-enabled businesses have already made impressive inroads into the markets of logistics and freight-forwarding, whereas others aim to automate their processes for booking and invoicing ocean-freight. Anticipating this, many of the leading carriers are now investing in software and devices that track containers in live time. Even carriers that don’t do any of this need to at least pay attention to what’s going on.

3) Create A Culture Of Performance:

Programs which can transform business practices might start out strong, but they typically wind up fading over the following months or even years. In order to sustain improvements, shipping lines need to build a robust and routine performance-management system. Weekly dialogues always help improve transparency and can help the senior management make better decisions.

4) Redesign The Incentives:

Employees generally need both recognition and monetary incentives if they’re going to be an energetic part of any journey through transformation. Global shipping establishments need to rethink how they do their incentive program by coming up with a new design and then rolling it out. Programs might include brand-new key performance indicators, ceremonies, recognition awards, and bonus pools. It’s crucial to achieve a good balance of non-monetary and monetary incentives in order to witness the behaviors that are wanted.

5) Invest Into Analytics:

Senior managers can use dedicated analytics teams to truly get a grasp on the various financial impacts of many high-level issues surrounding corporate pricing and strategy. Analysts can be helpful with tactical issues that include network design (string strategy, vessel deployment, and utilization), terminal productivity (terminal operations and port bottlenecks), bunkers (optimal speeds and the speed profiles of vessels), as well as market forecasts and intelligence (rate trends, mid-term outlooks, long-term outlooks, and industry-wide utilization of given shipping lanes). Automatic identification system data, or AIS data, can prove to be an irreplaceable resource for an analytics team; some of the industry’s leading shipping lines are developing AIS-based models for productivity and utilization.

The container shipping industry has been through five years of tremendous volatility, most of it unprofitable. Still, while these five years are in the rearview mirror, the health of the industry is still in poor shape. Challenges are expected to persist, particularly with all the new capacity slated to come online. However, container-shipping lines can’t give up even when faced with market adversity. They have to do what they can to initiate robust transformations which address technical issues as well as upset longstanding mindset and organizational challenges. This is really the only way to get ahead of the rest of the competition and attain that ever elusive profitability.