No Fun in this Dysfunction

We talk a lot about the need for businesses to change me-first, win-at-all-cost mindsets to that of new vested, cooperative relationships that over the long-term result in mutual benefits.

In the world of transportation logistics, supply chains and shipper-carrier relationships it’s a long-running story of irrational and often toxic rate and service level relationships. Carriers and shippers are prime exemplars of Vested Outsourcing’s 10 Ailments.

It should be different: Shippers and freight forwarders depend on ocean carriers to get goods to market, and carriers need shippers to fill containers and cargo holds with merchandise. Since they need each other to prosper one would think it would be in their best interests to cooperate more fully and even trust each other, at least a little bit.

But unless you’re a Wal-Mart or a Target and can negotiate with carrier consortia on an equal footing that almost never happens. Trust? Don’t be silly!

For a look at how not to do it, look no further than to the dysfunction of trade and logistics on Asia-Pacific trade lanes. Trans-Pacific liner operators lost at least $15 billion last year, and 2008 wasn’t very good either as trade and financial markets headed south. Some damage was self-inflicted: They desperately scrambled to preserve market share by slashing rates while an influx of huge new containerships they purchased, perhaps unwisely, during the boom times of the economic bubble entered their fleets. Of course when the Great Recession hit, these carriers found themselves high and dry – chasing too little cargo with too much available capacity at non-compensatory rates.

Today the carriers, desperate to recoup those losses as quickly as possible, have embarked on a highly muscular, unilateral strategy: Raise rates dramatically, cut vessel capacity sharply and also steam across the ocean at much slower speeds to save on fuel consumption (which cuts available capacity even further). Shippers and freight forwarders, especially in the small-to-medium size range, are in effect being held hostage by the carriers: They must pay more for less space and poorer, i.e. slower, service.

This kind of behavior is typical of the way ocean carriers and shippers operate, with or without contracts in place. It’s a long-standing tradition. Some years the carriers have the power, at other times the shippers do – a ping-pong match of who can outsmart and whipsaw the other player.

They demonstrate textbook examples of What’s in it for Me thinking, instead of What’s in it for We by focusing on immediate returns, on the what not the how, based on who has the upper hand at any given moment. Old hands in this industry merely shake their heads, smile knowingly and comment that it’s just the “boom and bust” nature of shipping and trade.

I believe there’s a better, and as Dr. Oliver Williamson might say, a more rational way. Collaborate on mutually beneficial rate and service outcomes; move from the cutthroat me-first “win” mentality to the “win-win” by vesting in each other’s success through earned trust and loyalty with credible, vested rate and service contracts.

There are some who see the light, or at least talk that way. Jean Louis Cambon, who recently took over as chairman of the European Shippers’ Council Maritime Transport Council, said recently: “Carriers must understand that by restraining capacity below trade demand and creating cargo roll-overs, they will encourage the increasing number of shippers who want to shorten their supply-chains to shift sourcing of their products to origins closer to consumption markets, which eventually will reduce the ton/miles transported and the fleet necessary to carry them.”

In other words the carriers are cutting their own throats, as usual, for the quick buck. Cambon talks further about the serious impact of the carriers’ unilateral actions on supply chains, including longer lead-times and higher inventory costs.

“It is time move beyond the old cycle of boom and bust, rate volatility and instability in the liner shipping market; we all have a vested interest in the long term stability of the liner shipping sector; equally the liner shipping sector has a vested interest in the sustainable economic growth of their customers.”

Just words? Are carriers listening? They could start by studying Vested Outsourcing; it’s time for a new tradition.

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