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.
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.
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.
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.