Many shippers have been readjusting their supply chains to compensate for COVID-19’s disruptions, and they may observe that in a slow market, more ocean carriers are offering first- and last-mile logistics services as a way to drive additional revenue and shore up bottom lines.
On the surface, this all-in-one service offering seems like a sound idea for shippers eager to save money and time in their busy schedules. After all, who would be better than the ocean carrier to coordinate a door delivery once the cargo has arrived or arrange transport to the port for export?
But this is not their core competency, said David Duke, Chief Operations Officer at ITG Transportation Services. What might work easily when drayage capacity is loose could become a challenge when the market tightens, as ocean carriers have a comparatively small network and lack longevity in the drayage business. Often, they enter and exit the market sporadically, based on their current business needs.
“We certainly don’t take for granted the historic relationships, but what I think many of the direct dray carriers see with ITG is consistency,” said Duke. “A lot of it has to do with the longevity of the employees within the industry and their clear understanding of what both the carrier and client needs. Understanding an individual carrier’s strengths and weaknesses in a given market. Is it a cost grab? Is it a service requirement? Different draymen are going to have different cost structures. They will also have different service levels, different levels of communication. Knowing what dray carrier or carriers fits in line with that particular client’s needs is paramount.”
Shippers must know that ocean carriers’ assurance of competitive door-to-door drayage pricing will always be secondary to their primary focus on ocean moves. While this works well in a soft market, when the market tightens, draymen can raise rates and favor taking business that is more profitable. The weakness of their small carrier networks then becomes apparent.
Ocean carriers can subsidize the drayage cost into their ocean freight rates. Rates that ocean carriers pay draymen are largely built on dedicated volume and take advantage of discounted rates based on that volume. When carriers are hungry for steady volume, they’ll easily accept these loads, but they are less likely to take that cargo when the market tightens.
“When markets become tight, availability becomes much more challenging and can lead to delays, additional costs or blown deadlines for the client in terms of deliveries or pickups,” said Duke. “Most of the ocean carriers have set drayage carriers in a given market. It’s not a limitless pool. Not that anybody has a limitless pool, but it tends to be a little bit smaller in scope per market than a lot of the freight forwarders or certainly the drayage brokers.”
“We’ve heard from numerous customers that when they’ve used the ocean carriers to handle drayage, their export bookings are being rolled or their import containers are incurring demurrage while they wait to be picked up,” added Derek Kopp, Director of Marketing at ITG Transportation Services. “This places freight forwarders and NVOCCs in an awkward position, as the cost savings that looked good for their customers in the quoting stage begin to disappear.”
Demurrage refers to the time an import container is held in a terminal, with carriers responsible for those penalties on behalf of the marine terminals. Demurrage has posed a major problem during the pandemic, due to either understaffed or overstocked warehouses and distribution centers. For these reasons, back in April, the International Federation of Freight Forwarders Association (FIATA) asked ocean carriers to “exercise restraint” on demurrage.
On-time deliveries are more complex than knowing exactly when a container will arrive at a port. If an ocean carrier has a network of three or four carriers in a given market and capacity is tight, there’s a good chance the container won’t leave the port before the last free day before demurrage. If that happens, it can set off a series of events that further delay retrieving and delivering the container. By comparison, and considering Chicagoland alone, a brokerage like ITG Transportation Services has a reach of 141 carriers in its network. If its first five carriers aren’t available in a given situation, there are 136 remaining carriers to call.
So while this service add-on could be seen as an obvious win, the potential costs and disruptions to a client’s supply chain might in fact outweigh the convenience and the initial quoted cost. It often causes more of a headache than it’s worth, as well as a strain on profitability and relationships between shippers and their end customers.
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