Lately, it seems the shipping industry is staring down an all too familiar problem: the race to the bottom. This means annual RFPs and frequent carrier switching, costing shippers money as they spend time finding and onboarding new carriers. But it doesn’t have to be this way. With a bit of innovation, carriers can find ways to cut costs and provide premium services that will bring shippers back.
While there has long been a practice of shippers switching carriers and annual RFPs, recent conditions have exacerbated the issue. Looming overcapacity problems and the need to remain competitive have led to consistent downward pressure on freight rates. Back in February, The Wall Street Journal reported that “free-falling freight rates spell trouble for shipping,” while in March, the Shanghai Containerized Freight Index (SCFI) showed that Asia to US West coast spot rates were 51% below their November peak.
And yet, despite dropping rates and high competitiveness, shippers are ever-less satisfied with services. We’ve set up a carousel of cuts that no one is enjoying: lower rates mean carriers have to cut costs in order to stay competitive. Cost cutting leads to poor service and more reliance on low cost carriers who have marginal consistency and on time performance (OTP). Delays in transit, breakdowns and missed deliveries leads to unhappy shippers, which causes them to then put the business out to bid in order to justify a switch in carriers. The ever changing merry-go-round of RFP’s, lowered rates, new carriers all undermine market stability and service…and round and round we go.
How Did We Get Here?
This started when carriers had to make some difficult decisions. As rates dropped, they cut costs through mechanisms like slow steaming, consolidation, and reducing the size of their customer-facing teams. This buoyed profits, but it made life worse for customers. Furthermore, each of these short-term cost-cutting measures cost more in the long run.
Let’s look at slow steaming. As we recently discussed, this can be an efficient cost-cutting measure to save on fuel in the short-term. But the lengthened supply chain for shippers also comes at a considerable cost. McKinsey & Company report that “if a cost-cutting measure such as slow steaming adds three days to the supply chain between the United States and Asia, the additional annual inventory and obsolescence costs for US importers can reach $415 million. Worldwide, that same three-day delay could cost about $5.7 billion. This could create an incentive for shippers to switch to faster carriers.”
Meanwhile, consolidation means pooled resources, but many carriers failed to account for greater levels of operational complexity. Tracking and planning become difficult as your operation expands. All this means that your short-term savings can be erased as shippers turn to a competitor who can better meet their needs.
Carriers are also suffering, as they incur more one-time, nonstandard expenses because they’re addressing operational problems, like transporting cargo between terminals, or paying detention charges for boxes that remain in port for too long due to congestion.
What Do Carriers Really Want?
What appears to be the obvious answer here– low rates– may be misleading.
According to the latest annual satisfaction survey conducted by Drewry and the European Shippers’ Council, shippers are in fact most dissatisfied with clarity of prices. Ranking second-lowest was satisfaction with transit time. In fact, in the 2017 survey “price of service,” ranked third-highest for satisfaction.
What does that tell us? According to Drewry, “Carriers have overlooked the wishes of their customers for consistency and quality of service, probably because of the need to reduce their costs in a low-price market. This attitude means that customer loyalty can be very low in the industry and is part of the reason why shippers chase the lowest price.”
So better service is called for, especially in terms of clarity.
Unfortunately, it looks like carriers and shippers will continue to struggle over the clarity of pricing, in the face of the 2018 emergency fuel surcharges and the pending post-IMO 2020 fuel surcharges.
But what about time? Accurate time forecasts might be the place where carriers can effectively deliver without having to pile on costs. Interestingly, Yuen and Thai (2015) examined service quality among 183 liner shippers in Singapore, “concluding that service differentiation by time-related attributes results in greater customer satisfaction than practicing cost leadership.”
In other words, time isn’t money– time is better than money.
Solutions on the Horizon
So what can we do? It’s time for carriers and shippers to work together to create new rules of operation that will benefit both groups, as well as partners across the supply chain.
For example: we have an untapped opportunity to improve customer satisfaction and drive down costs by making the physical flow of goods more efficient as they move off the ship and though the terminal. Off-load higher-priority boxes first, directly onto rail cars.
To answer shippers’ call for clarity, carriers can utilize the new tools and technology available in order to make real-time info available to carriers, shippers, and partners on land. This could help all stakeholders along the value chain to improve operations, and would provide more upstream visibility. While providing more clarity in service, carriers can tap new pools of cost-cutting opportunity. Some logistics providers, like Opus9 in California, are beginning to develop this idea already, having recently added a drayage mode to its automated freight-booking platform.
Carriers can also be proactive about moving appointments to non-peak hours and days, and offer accurate forecasts. Finally, carriers shouldn’t shy away from meeting customers in order to discuss real operational issues. Shippers want a balance between service quality and price: it’s time to stop the race to the bottom.
Red Arrow Logistics has the scale and scope to meet the budget and schedule requirements of the largest and smallest companies alike. If we can be of assistance, please email me at [email protected] or give us a call 425-747-7914
