Slow steam ahead
Slowing container ships to a sea crawl saves fuel and cuts carbon. It also has implications for customers' supply chains.
The proverbial "slow boat to China," from China, or to and from most anywhere else on the water has gotten markedly slower in the past four years. And it has created additional supply chain issues for shippers and importers already struggling to manage their increasingly complex global networks.
"Slow-steaming," the practice of reducing vessel speeds to conserve fuel and cut carbon emissions, was introduced in 2008 during a period of oil price volatility and a nasty global recession that led to unprecedented financial losses in 2009 for the ocean liner industry.
After making money in 2010 as businesses replenished their inventories and laid up ships to drive down costs, liner companies are expected to suffer billions of dollars in losses in 2011 when the final numbers are reported. The profit prospects look equally bleak for 2012, as carriers cope with problems that beset them last year, namely an oversupply of vessels, a leveling off in demand, and the inability to push through sustainable and compensatory rate increases.
To make things tougher, bunker fuel costs climbed to $650 a ton in 2011 from $350 a ton in recession-wracked 2009. No one expects bunker fuel to plumb 2009 depths any time soon.
Given the current operating environment and industry estimates that slow-steaming could slash a vessel's operating costs by between 3 and 5 percent depending on the knots and distance, it is unsurprising that it has become a permanent fixture in the seafaring trade.
"Slow-steaming is here to stay," Henry L. (Rick) Wen Jr., vice president, business development/public affairs for the U.S. arm of liner giant Orient Overseas Container Line Inc., said at an industry conference in Atlanta in February.
It's all relative
Defining slow-steaming is a subjective exercise. Curtis D. Spencer, president of IMS Worldwide Inc., a Webster, Texas-based consultancy, puts the typical slow steam speed at between 11 and 13 knots. Theodore Prince, who runs a Richmond, Va.-based maritime consultancy bearing his name, pegs the average speed of the world's liner ships at about 15 knots, adding that some companies may have their vessels steaming as slow as 12 knots.
Maersk Line, the world's largest liner operator, said its ships sail, on average, at 17 knots. The carrier may bring speeds down even more in the future, however. A spokesman at Maersk's Copenhagen headquarters said the liner is "continuously reviewing whether our network can be optimized further. This also includes considerations of reducing speed further."
The disparities in definitions aside, today's speeds are significantly slower than the 19 to 22 knots that modern-day vessels can steam when pushing full bore. To put it in historical perspective, the fast "clipper ships" of the 19th century sailed at a top speed of about 16 knots.
Slower speeds mean longer transit times. In 2000, a vessel sailing from Shanghai to Los Angeles generally arrived in 15 days, according to IMS data. Today, at the slower speeds, the time in transit is 17 days. The lengthened transit times are more pronounced at East Coast ports. In 2000, the same vessel bound for Savannah, Ga.; Charleston, S.C.; Norfolk, Va.; and New York would arrive in 29 days after transiting the Panama Canal. Today, the transit times are 35 days to Savannah and Charleston, and 36 days to Norfolk and New York, IMS said.
Prince said the longer transit times lend credence to his view that the expanded Panama Canal will result in little cargo diversion from West Coast to East Coast ports when the canal opens in 2014. Prince has long argued that shippers and Beneficial Cargo Owners (BCOs) won't achieve sufficient cost savings from an all-water route through the canal to justify the longer sailing times when compared with offloading cargo on the West Coast and trans-loading to rail for the inland move.
"Slow-steaming has just widened the discrepancy" in time between the coasts, he said. "The railroads haven't slowed down."
For shippers and BCOs, the slow-steaming numbers have real-world impact. If an importer engages in a "Free on Board" transaction, where responsibility for the goods, including transportation, insurance, and inventory costs, passes to the buyer once the cargo is tendered to the carrier, a longer voyage could mean additional inventory carrying costs. Slow-steaming also complicates a company's ability to react to unexpected events, such as bad weather or a labor disruption, which could affect product flow. In addition, slower speeds can trigger changes in ordering, production, and scheduling as companies adjust to filling any holes in inventory if the goods are still on the water rather than in a DC or with their customer.
Offsetting the impact
NCR Corp., a global technology company based in Duluth, Ga., attempts to pre-position its inventory whenever practicable to mitigate the impact of slow-steaming. Michael Chandler, NCR's vice president, customer fulfillment-global operations, said the company, which generally builds to order and not to stock, will pre-build automated teller machines in Asia prior to the placement of a purchase order and have them shipped to the company's Atlanta warehouse so they are available when the customer wants them. NCR's longstanding customer relationships allay any concerns it will be left holding the bag prior to the signing of a formal order agreement, Chandler said.
To offset the impact of slow-steaming, NCR will sometimes intercept shipments arriving on the West Coast before they can be trans-loaded to a railhead and have them moved inland by truck for faster delivery. The company will, at times, also instruct its 3PLs to handle the truck delivery direct to customers. But both options are costlier than shipping inland by rail, and the latter raises visibility and security issues because it could compromise NCR's product tracking capabilities, Chandler said. In rare instances, Chandler said NCR will have to ship a machine to its destination by air, the most expensive alternative of all.
As much as NCR tries to mitigate the effects of slow-steaming, there will always be pockets of vulnerability, according to Chandler. "We have to take an inventory risk somewhere in the supply chain," he said.
Mike Orr, senior vice president, operations and logistics for vehicle parts giant Genuine Parts Co., said his company has yet to experience any adverse impact on its business as a result of slow-steaming. Yet Orr is more concerned about the future than the present. "We ... execute to 'high velocity' flow through our supply chain," he said in an e-mailed statement. "Having a key link intentionally slow down is a concern."
Much ado about nothing?
Not everyone is worried, however. Spencer of IMS Worldwide said businesses flooded their pipelines with inventory during a six- to nine-month period in 2010 in reaction to the slower speeds. The inventory backfill has long been completed, and networks now are "in equilibrium," he said.
Mark Holifield, senior vice president of supply chain for The Home Depot Inc., said he pays little heed to steaming speeds because ocean freight is inherently slow and a couple of days of voyage variability mean nothing.
"Predictability and consistency is more important than speed," he said, adding that slow-steaming is acceptable "as long as we can count on [adherence to] the published schedule."
Carriers, for their part, believe slow-steaming can improve reliability by introducing more vessels and adding frequencies to offset the longer voyage times. "With slow-steaming should come better scheduling reliability," William E. Woodhour, senior vice president and North American area sales manager for Maersk, said at the Atlanta conference in February.
Chandler of NCR disputes that claim, saying there have been times when his company was given a specific sailing schedule prior to the vessel's departure, only to be notified of a change in voyage times once the freight was on the water.
"From my view, it's a moving target," he said, referring to schedule commitments. "We are getting surprised. It's not an every-week surprise, but it is happening."
Ironically, carriers are discovering that slow-steaming increases their operating costs because the fuel savings are more than offset by the higher costs of operating a longer "string" of vessels. The roundtrip cost of operating a string of seven 8,500 twenty-foot equivalent unit (TEU) containerships steaming at 13 knots in the U.S. West Coast-Far East Trade is higher than operating a string of five ships in the same trade steaming at 19 knots, according to data from Paris-based advisory firm Alphaliner.
With slow-steaming now a fact of life, companies are likely to at least consider changes in their inventory positioning. Tim Feemster, senior vice president and director of global logistics and supply chain consultancy at Dallas-based real estate giant Grubb & Ellis Co., said companies need to look harder than ever at multi-sourcing some of their products and bringing production closer to the goods' end markets.
Prince predicted that companies will adopt an inventory bifurcation strategy, with higher-value Asian-made goods entering on the West Coast and lower-value commodities heading to the East, where the longer transit times don't have as much of an impact on inventory obsolescence.
Carriers may even look at launching premium services at faster speeds, which, of course, would come with higher rates. "You have to segment your market and focus faster speeds on customers who want it," said Woodhour of Maersk.
Feemster said it's possible that the marketplace would welcome an expedited form of liner service, noting that railroads and motor carriers have successfully launched similar services in recent years. "The trouble is, we haven't seen the demand for it up to now," he said.More articles by Mark B. Solomon
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