Transport Matters: What to do next

By Jonathan Gilbert, TFI Logistics Consultant

2009 is finally over
It’s hard to imagine that we have been in the downturn long enough now that year-on-year measures are actually starting to look good in the transport sector. While demand shrank, deep capacity cuts in nearly all modes helped to prop up pricing as we closed out 2009 and moved into 2010. Despite these cuts, carrier profits remain dismally low, and in some sectors, non-existent. Ocean freight has been a particularly difficult market.

Quoted in Logistics Management, Edward Zaninelli, VP Transpacific westbound trade for ocean carrier Orient Overseas Container Line, says that “Revenue is below cost in all trade lanes, and the recovery is just beginning.” Another recent article in the Journal of Commerce stated that “The world’s top 22 ocean container carriers lost some $11 billion in the first nine months of [2009].”

Service and reliability implications
TFI’s forecast is for slowly improving market conditions; we see shippers being generally more optimistic about 2010 volumes. We expect that the gradual strengthening of economic fundamentals will continue through 2010. Unfortunately, these modest gains may not be enough to prop up all service providers. Similar situations exist in the domestic truckload and less-than-truckload markets, as well as in international airfreight. Some of the weaker players may not survive through this year.

Faced with these difficult market conditions, ocean carriers are using “slow steaming” operations as a way to constrain capacity and reduce operating costs. Rather than idling ships outright, carriers are opting to run certain lanes at reduced speeds to save on fuel and reduce costs. Others are avoiding expensive transits of the Panama Canal by steaming around Cape Horn.

Slow steaming can reduce operating costs by as much as 5% to 7%, but the increased transit time, as much as 33% longer, may be problematic for time-sensitive shippers.

Bottlenecks forecast
Improving economic conditions could lead to bottlenecks in transportation as constrained capacity and carrier bankruptcies collide with growing demand. Spot market container rates are rising quickly in some lanes, reflecting this shift in supply and demand balance. In fact, small shortages in ocean liner capacity occurred in late 2009 just before the holidays, and we expect this to recur in January/early February 2010, driven by preparations for Chinese New Year factory shutdowns.

What to do next
Proactive shippers are carefully watching their carriers and aligning with strong, well-financed partners in all transport modes. Savvy buyers are making the best of bad market conditions and getting good pricing where possible, while still managing risk.

To avoid supply-chain interruptions, supply-chain managers should proactively review ocean transit times and communicate changes inside their organizations. Slower ocean transit times also call for reassessing the cost of capital for in-transit inventories and reviewing the total cost differential between airfreight and ocean shipping options.

Finally, supply-chain managers should actively analyze transportation-related risks and develop contingency plans to deal with service interruptions due to ongoing carrier financial stress and/or upticks in demand.

What are you doing to manage risk, control costs, and drive transportation innovation at your company? Let us know if you are curious how TFI’s experts help clients improve supply chains and better manage transportation.

Posted by Pamela J. Gordon, January 14th, 2010