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.

carrier-ship

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.