NOL: CONSIDER ALTERNATIVES TO “BEATING DOWN FREIGHT RATES”
NOL: CONSIDER ALTERNATIVES TO “BEATING DOWN FREIGHT RATES”
International shippers and logistics providers should improve the management of supply chains to generate business value, instead of just seeking to obtain low freight rates from ocean carriers, said Flemming Jacobs, the outspoken president and chief executive officer of Neptune Orient Lines.
Through its logistics subsidiary, APL Logistics, and its container shipping arm, APL Liner, Neptune Orient Lines is active in both sectors.
Jacobs told the Marine Money conference in Singapore that it costs only about 40 cents to ship a pair of sneakers from Taiwan to California by containership, and about 70 cents to get a VCR to the States from Hong Kong.
“The industry is highly efficient and becoming more and more so,” he said. “The efficiencies that we alone have achieved have reduced our cost by more than $100 million so far this year. With many of our competitors doing similar cost reduction work, the industry is starting to look very lean.”
The impact of ocean shipping rates on product landed costs is very small, Jacobs said.
“Therefore you shouldn’t look to these rates continuing to drive major cost efficiencies for the exporters and importers in international trade,” Jacobs said. “Instead I suggest you look at the result of the impact that a well managed supply chain can achieve — and at the business value it can generate.”
He said that customers are changing their focus from “just beating down freight rates” to seeking improved logistics tools. Such logistics tools can provide process controls, pipeline visibility, low costs, seamless handoffs and a reliable network.
Jacobs also commented on the key role of information technology to manage supply chains. “Powerful information technology tools enable, or power, our supply chain management capability,” he said.
Jacobs said that one of his company’s customers saved over $1 million in supply chain expenditure after starting to use the company’s systems. Another customer has reportedly reduced their total supply chain costs by 2.5 percent “through enhanced product flows, streamlined transport processes and, above all, inventory visibility and management.”
Jacobs said that ocean shipping costs across the oceans accounts for a tiny proportion of international supply chain costs.
“That’s why, despite a somewhat disappointing first half of this year, we simply believe that supply chain management is the way of the future and that is why we are investing so much time and effort in APL Logistics,” Jacobs said.
Neptune Orient Lines has sought to increase the proportion of its revenue coming from logistics in recent years, aiming to generate revenue figures equal to those of its container shipping business.
Jacobs said that shipping “is facing a tough time right now.” Neptune Orient Lines reported a $72-million loss on its container shipping arm in the first half of the year, and an $11-million deficit on APL Logistics.
The deficit of APL Liner and other container shipping lines was largely the result of a sharp reduction in freight rates and of ship overcapacity.
Although shipping lines have continued to cut their costs, “no amount of cost reduction can fully compensate for the low rates,” Jacobs said.
“Again and again it is said that the big increase in capacity is the mother of all problems,” Jacobs said. He admitted that ship operators have not been very good at managing capacity.
Yet, over the past 12 years including this year, shipboard capacity growth exceeded demand growth only for four years. “So in principle the industry has been responding to the growing demands of its customers,” Jacobs concluded. “But, as is evident, the industry has not been good at forecasting specifically those years where there was a slump.”
The problem in terms of freight rates is compounded by the fact that industry is still “heavily fragmented,” he noted, with the top 20 carriers today controlling about 60 percent of total containership capacity, up from 40 percent 10 years ago.
Jacobs said that the increased market concentration “still does not allow for effective price leadership when even the largest carrier today only controls about 11 percent of total capacity.”
Jacobs asserted that container shipping remains a growth business. Volumes carried increased by eight percent a year on average in the nineties. “The shipping industry is the backbone of world trade, with around 90 percent of the world’s freight still moved to market by sea,” he said.
