Transpacific strategies in the ‘new world’

Transpacific strategies in the ‘new world’
Shippers, LSPs need to re-evaluate how to operate in the next three to five years.

   There seem to be so many new economic developments daily that rise and fall of 400 or 500 points on the Dow Jones Index seems normal. Each week, we find new companies as victims of the economic disaster that is being euphemistically termed as a 'downturn.'
   Factories across China have been shuttering their loading docks and machinery for lack of demand. U.S. retailers are suffering as consumers tighten their belts. Trade between Pacific Rim countries and the United States represents the largest slice in the balance of trade pie at 35 percent of the net imports ( Figure 1).
   Matt Frei, reporting for BBC News recently, said: 'A few years ago shipping companies in South Korea, Italy or Scandinavia were enjoying an unprecedented boom. There simply wasn't enough capacity to ship all the cars, washing machines and laptop computers the world was snapping up. The shipping companies built new ships, more expensive and bigger then ever before – now they don't need them.
   'The Port of Los Angeles is the nexus between Asian mass production and American mass consumption, the strange relationship that had fueled the unprecedented boom of recent years now seems but a fading memory.'
   The ports of Long Beach and Los Angeles are witnessing a decline in activity of about 15 percent this year, a figure people think will rise as the economy worsens and thousands of containers return empty to Asia.
   But whereas the economic downturn is a reality of today, shippers and logistics service providers (LSPs) must take advantage of this situation to regroup and re-evaluate their strategies. The playbooks that companies have used during the last decade can be thrown away, as they will not be used again for quite a while. We need to take a new approach to how to operate during the next three to five years in the current marketplace.
   According to a recent McKinsey & Co. article, 'Strategy under Uncertainty,' authors Hugh Courtney, Jane Kirkland and S. Patric Viguerie postulate that 'at the heart of the traditional approach to strategy lies the assumption that executives, by applying a set of powerful analytic tools, can predict the future of any business accurately enough to choose a clear strategic direction for it.' In times where history has no bearing on the future, and previous models have grossly underperformed, developing workable and sustainable strategies becomes difficult. 'When the future is truly uncertain, this approach is at best marginally helpful and at worst, downright dangerous.'
   The authors offer a framework to help develop a strategy for the uncertain future, which we have adapted with modifications that we consider relevant for this industry.

   Strategy under uncertainty framework
   There are three key elements to understanding the future of your business and developing a strategy to deal with uncertainty:
   ' Current facts: Fact-based indicators and trends – even using a very short period of recent history that is relevant to your industry.
   ' Alternative futures: These are the various possible outcomes that you could achieve through your business strategy – they provide direction but also offer 'safe harbors' that you can direct your company towards, if the strategy becomes irrelevent through network externalities.
   ' Randomness: These are factors that you will never be able to predict or have a handle on, or even know of. They are out there lurking in the future, but you may not have the ability to understand how and when they will impact your business.

   Current facts
      Gather all the data you possibly can about your business and your industry, including ancillary industries, and start understanding how they all map and link together. Have a very clear understanding of how the facts link with each other, and how they impact you.
   For instance, let's assume we are an LSP – what are the facts? Well, let's see:
   ' Trade with China is down – fact.
   ' There are containers returning empty to Asia- fact.
   ' Trade with China is based on U.S. consumption – fact.
   ' U.S. consumption is down – fact.
   ' U.S. consumption is anticipated to be down for a while – fact.
   You get the general idea.

   Alternative futures
   This involves figuring out where you want your business to go in the future. You may have laid out your plans and goals such as growth rates, market expansion, etc.
   Put all those aside – develop a new set of your alternative futures. What is a likely future for your business? What is a pessimistic case, and what is an optimistic case? Not only that, but what are the contingencies if other factors should occur. For instance, if you are an LSP focusing on the transpacific, you know the market is not going to be good for you, so start thinking about alternate ways of generating business.
   What are your options? You could, for instance, start looking at other lanes to work on, but there's already stiff competition from others who already have a market presence there. There are alternate futures for you – you could start extending your business services to related areas, such as offering demand and supply collaboration services for your shippers, information visibility, legally trading information where possible, creating different revenue streams associated to what you currently have.
   We bring you back our diagram from a previous issue, as shown in ( Figure 2), to display what are the various alternative futures that the LSP could get into, expanding out of their current core businesses.

   Randomness
   There are factors that are difficult to anticipate, but what you can do is to understand the vulnerabilities of your business, and determine 'limiting factors' of where your business strategy will need to change.
   For instance, we have a client who had opportunistically decided to contract a manufacturer in Canada to produce product. He realized that this was a moneymaking deal as long as the exchange rate stayed below a certain threshold. He also planned on backup locations to manufacture product, in the event that the exchange rate violated the threshold point. Using these 'limiting factors' he is able to maneuver effortlessly through this economic crisis, and has setup many alternate plans to defend himself against this sort of 'randomness.'
   No matter what methodology you choose, there is no doubt that you need a game plan for the 'new world' that we are living in today, where all the economies are connected, businesses are transnational, and LSPs and shippers need to be as flexible, nimble and entrepreneurial as they can – it's a question of survival.
   Deep R. Parekh is a partner with Equus Group LLC, a supply chain advisory services and management consulting firm based in New York, and Sao Paulo, Brazil. He welcomes your feedback and comments at deep.parekh@equusllc.com, and can be contacted at (917) 940-7538.