Special Coverage: Shippers, carriers share lessons learned from Hanjin collapse

Various headwinds in 2016 sent the industry into a tailspin, culminating with the demise of Hanjin Shipping, a company many thought was too big to fail.    It was no secret that the ocean shipping industry was fragile. Carriers had essentially been operating in survival mode for nearly a decade. Ships were getting bigger, while world trade growth declined. Alliance lines were being drawn and redrawn in an effort to fill the ships. Merger and acquisition activity was accelerating.
   And all the while, everyone along the global supply chain was banking on the hope that things would somehow be all right.
   But last year’s events – heavy financial losses, historic levels of consolidation, labor disputes, restructured alliances – sent the industry into a tailspin, culminating with the demise of seventh-largest container carrier Hanjin Shipping, a company many thought was too big to fail.

Wake-Up Call. “We’re in a new world. Everyone has woken up,” Howard Finkel, executive vice president of China COSCO Shipping Lines North America, said during a “Learning from Hanjin” panel at the Journal of Commerce’s TPM 2017 Conference in Long Beach.
   “We can’t have a year like 2016,” he said.
   Hanjin’s collapse, which saw $14 billion in goods stranded at sea all over the world, was the cautionary tale that permeated nearly every discussion during the annual event.
   “The Hanjin bankruptcy is a real wake-up call,” said Karyn A. Booth, partner and transportation practice group leader for law firm Thompson Hine.
   Booth recalled phones ringing off the hook when Hanjin filed for court receivership, with shippers searching frantically for information on how to deal with stranded cargo. The problem was that no one had ever dealt with a carrier bankruptcy of such immense scope and complexity.
   What’s more, many shippers were caught completely off guard by the filing and had little or no contingency plans for such an event.
   “[We were] lulled into a false sense of security” about rates not covering operating costs, and expected banks to bail out the carrier, she said.
   And while Logistics Transformation Solutions President David J. Arsenault doesn’t think the industry will see another Hanjin scenario any time soon, he sees other signs of trouble ahead. Vessel owners are facing larger losses, he said, pointing to Rickmers Maritime, which reportedly defaulted on $3 million in loan interest payments last November.
   “Carriers are sick, but everyone has the flu,” Arsenault said.
   In the case of Hanjin, even the supply chain’s canaries in the coal mine – vendors, terminals, trucking companies – let invoices lapse for far too long.
   “There were red flags everywhere,” Arsenault said.
   This year, the implementation of three newly restructured alliances calling at different ports and terminals, along with existing equipment issues, will cause “another wave of confusion” for shippers and truckers, and further challenge cargo movement, according to Gene Seroka, executive director of the Port of Los Angeles.
   “How we respond, and more importantly, how we plan for that is going to be extremely important,” he said.
   In order to accomplish that, it will be more critical than ever for shippers and other service providers to scrutinize and strengthen relationships with the remaining carriers.

No Silver Bullet. Michelle Livingstone, vice president of transportation for The Home Depot, said her company has historically been loyal to a select carrier base that performs well.
   “That’s going to be more important going forward because there’s going to be fewer players to do business with and we’re going to have to be careful who we align with,” she said. “We do believe there is value in strategic relationships with key partners. We are all about service – that to us is very important.”
   To further hedge its bets, Home Depot has been transitioning to a synchronization system that has already been implemented on the domestic side of its business and is set to launch on the import side. The system takes into account vessel schedules and other factors to provide five-week rolling forecasts, an effort that requires 30-day advance notice for cargo moves.
   “We’re trying to eliminate the volatility in our schedule, in how we bring product, so that way our suppliers can produce to a more routine schedule, carriers will know when and what quantities it can receive and get it into our stores in a more consistent manner,” Livingstone said.
   Protecting against disruptive events like the Hanjin bankruptcy also will be key.
   “It starts with vigilance,” Booth said. “We can’t sit back any longer.”
   Booth called for shippers to take a multi-pronged approach that involves digging deeper into the financial solvency of their partners, whether it is relying on the research of consultants like Drewry and industry journals for insight, or building specific language into a contract – perhaps through a non-disclosure agreement – to gain access to carriers’ balance sheets.
   “It’s a new, difficult conversation,” said Booth. “[But] it’s something shippers need to know.”
   Finkel suggested developing relationships with non-vessel-operating common carriers (NVOs) that have insight on which carriers are losing market share. In fact, several NVOs pulled U.S. import volumes from Hanjin ships in the weeks leading to the bankruptcy, and some didn’t have to because they had deliberately limited their exposure to the financially troubled firm due to its high risk of insolvency.
   “Stay as close as you can to your reps and the guys in charge of vessel-sharing agreements,” he added.
   Booth also suggested diversifying one’s carrier base, asking for periodic updates, having flexibility in minimum volume commitments, and adding other contractual language such as force majeure.
   “There’s no silver bullet,” he said. “This is a time of change…Put yourself in the best position.”

Cooperative Approach. Moving forward, both cargo owners and carriers see greater opportunity in redefining and deepening their relationship.
   At a TPM panel on achieving successful cooperation between shippers and carriers, Hapag-Lloyd CEO Rolf Habben Jansen said he and other carriers that spent the last five or so years trying to survive are now looking at ways to add value to their services beyond rates.
   APL, for example, recently launched its Eagle Guaranteed product, which promises day-definite cargo delivery from Los Angeles to Chicago and other inland rail yards.
   “There are so many other things you can do to make the business better,” whether it’s contracting in a different way, extracting waste from the process, or doing more on the digital front with automation, Habben Jansen said. “Now we need to shift gears again as well to make sure we do more and better things for our customers.”
   Glenn E. Berger, vice president of global transportation for Restoration Hardware, said there’s value in reliability and working with a support team to foster regular communication on special projects.
   “And when it comes time for us to make decisions in terms of [volume] we’re going to allocate to those people. We make those decisions based on not just price but those value components as well,” Berger said.
   Meanwhile, underlying issues outside the shipper-carrier relationship like equipment availability and increased lull times remain, and technology will be central in solving them.
   Todd Zaninelli, director of international transportation at Lowe’s, said his company is working with drayage providers that use GPS and sensor technology on vehicles in order to track key metrics.
   “The data is very comprehensive and really helps us in identifying where the [issues] are in our supply chain,” he said.
   He encouraged companies to work with their drayage providers and ocean carriers, as well as industry groups such as the Coalition for Responsible Transportation (CRT), to discuss ways to improve velocity.
   Zaninelli pointed to several pilot programs that have resulted from those kinds of discussions. The CRT board, for example, is currently working on the next phase of a pilot “peel off” program – also known as “free flow” – at terminals in the ports of Long Beach and Los Angeles. Under the program, containers belonging to BCOs moving more than 50 boxes at a time are placed in a single stack in a container yard, so that they can be picked, or “peeled,” off the top of the stack, instead of having to hunt through the stack for a particular container.
   “Together, we can start to solve some of these issues,” Zaninelli said.
   Seroka noted a partnership between the Port of Los Angeles and General Electric on a data portal that could help stakeholders along the supply chain better plan for massive shipments as many as 14 days ahead of arrival.
   The pilot data portal, which will include non-proprietary freight information from the U.S. Customs and Border Protection’s Automated Commercial Environment (ACE) system, has the potential to be “transformational” to the industry, according to Seroka.
   And for the last two years, the port has also been finalizing plans and permits with Saybrook Capital on the Harbor Performance Enhancement Center (HPEC), a $150 million project to repurpose more than 100 acres of unused land at Terminal Island.
   HPEC, which is still subject to Harbor Commission approval, would allow roughly 3,500 containers a day to move seamlessly from terminals to a yard intended to service all shippers “without bias.” The solar-powered yard would free up space at terminals and give BCOs better control of their inventory, and would also be home to the Institute for Logistics Research.
   “This really is our second industrial revolution,” Jonathan Rosenthal, managing partner at Saybrook Capital, said of the project.