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The True Cost of Carrier Cost-Cutting

10.02.14

By Larry Gross Original article published Sep 25th at JOC.com

It’s working. Ocean carriers’ relentless drive to reduce costs, sparked a nearly a decade ago by Maersk Line and its acquisition of massive, 15,500-TEU container ships, is starting to show results. Maersk is demonstrating a consistent ability to make good money in the face of overcapacity and weak rates.

But, oh, the price we’re paying. To be sure, beneficial cargo owners can’t complain about ocean rates, which have been mired in depression for years. But as ocean carriers strive to optimize their operations, they’re having negative impacts on nearly every other stage of the international supply chains. What are the true costs?

Problems at the Ports
Let’s start with the ports. Carriers’ move to huge, cost-efficient ships has unleashed a torrent of spending on the required deep water, giant cranes, reinforced piers, raised bridges and other infrastructure necessary to handle them. But the billions of dollars the public is spending don’t enter into the carriers’ cost calculus, because it’s the government, port authorities and ultimately the taxpayers who are being saddled with the tab. Would the carriers have launched the big-ship revolution if they had been on the hook for the necessary land-side improvements and dredging? Of course not. The numbers wouldn’t have made sense.

In their drive to streamline, the carriers have sloughed off auxiliary, “non-core” aspects of their operation, most notably, chassis supply. But because of lingering oversupply--a situation the carriers themselves created--the liner companies have found that it isn’t so easy to tell their big BCO customers that the good old days of bundling the chassis into the door-to-door service are at an end. When a big shipper says to a carrier, “Keep supplying the chassis just as you’ve always done or I’ll walk,” we can all guess the outcome when plenty of alternative capacity is available to that BCO.

The result is a confusing, costly and slow-motion transition, with the drayage company caught in the middle, having to bill multiple parties for chassis costs and detention charges that are proving difficult to collect.

Port and Drayage Operations
Next up on the hit parade are the tremendous inefficiencies being introduced into port and drayage operations by the huge peaking problems related to the big ships. Ports are under tremendous pressure to turn these costly vessels around as soon as possible after they arrive. The need for speed at the berth sucks resources from elsewhere in the terminal, slowing critical operations necessary to get the boxes on and off the yard.

The ships’ comings and goings create massive waves of inbound and outbound cargo, causing gate congestion and impairing the drayman’s ability to match inbound and outbound loaded moves. The results are more empty, unproductive miles and unhappy drivers.

New Alliances
Compounding the problem is the new alliances ocean carriers have created in their frantic effort to control capacity. These alliances have increased landside complexity exponentially because the ships of individual alliance partners often call at different terminals within the port complex.

So today’s sailing of the XYZ Alliance departs from Terminal A, but the arrival three days later of the next ship in the rotation is at Terminal B.  How do the 4,000 chassis used to make the deliveries to Terminal A get to Terminal B where they’re needed next? And who pays? What are the chances a trucker delivering a load to Terminal B will be able to find a matching outbound move?

A further issue is that these new alliances are destroying the efficiency of on-dock rail. Efficient rail operations require the scale to build trainloads of containers to various inland points. Ocean carrier A has a contract with Railroad X to pull unit trains out of the on-dock railyard at its terminal. But now Carrier A is a member of the XYZ Alliance, the members of which also utilize two additional terminals scattered around the harbor. Maybe one has on-dock rail and the other doesn’t. So only a third of Carrier A’s inland volume is handled efficiently while the other two-thirds require additional inter-terminal switching or a dray to a near-dock facility some miles away. This is cost reduction?

The Situation Can't Endure
The simple fact of the matter is that this situation can’t endure. The first conduit by which the shipper will feel the pressure likely will be the drayage carrier. Based on conversations with drayage executives at this week’s Intermodal Expo in Long Beach, California, there’s no question the port driver situation is beginning to go critical and thereby starting to constrain the carriers’ ability to meet the customers’ needs.

Drivers are simply unwilling to continue to work in the field, because a driver paid by the move won’t accept a situation where he or she is  spending hours each time they enter a port terminal, and therefore can’t earn a decent living. The result will be rising rates, an increasing unwillingness on the part of draymen to absorb the costs of unproductive activities and a more discriminating approach on their part to which customers and which port terminals will receive their increasingly precious truck capacity. So even if ocean rates aren’t rising, the true door-to-door cost of the move will rise.

The solution will require the interested parties to work together to rationalize the system and root out waste. Ocean carriers, ports, railroads, chassis suppliers, drayage carriers and BCOs all will have a role to play, and all will need to change their behaviors. No longer will each entity be able to work toward optimizing only their piece of the supply chain.

The mechanism by which this critical transformation occurs isn’t clear yet, but it will need to happen eventually. The only question is how painful things will need to get before the process gets underway and starts to produce results.

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Lawrence Gross is president of Gross Transportation Consulting in Mahwah, New Jersey, and a partner at FTR Transportation Intelligence. A veteran with 34 years in the transportation business, he covers freight transportation, concentrating on the intermodal and trucking sectors from a transportation and equipment perspective. He is a frequent speaker at industry events. Contact him at [email protected] and follow him on Twitter: @intermodalist

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