Although shippers and ocean carriers engaged in some finger pointing during a panel discussion at the Virginia Maritime Association's annual International Trade Symposium, they also offered some practical suggestions for improving their relationship. Among them: providing carriers with shipment forecasts, signing longer-term contracts, and framing contracts to provide the greatest overall value, not just the best rates.
For their part, carriers said they're making the best of some bad situations they can't fully control. Take the ongoing shortage of containers, for instance. A sharp decline in new container production is partly to blame for the lowest equipment-to-slot ratio carriers have ever seen, said Donald N. Francey, senior director, Florida region, for the steamship giant Maersk Line.
To meet current demand and replace damaged equipment, manufacturers need to turn out 4.2 million new containers annually—close to full production capacity, he said. But after being burned by overproduction in 2009 and a decline in orders in early 2010, container factories are reluctant to ramp up production. Right now, they're operating at only two-thirds of capacity, and there is currently a production shortage of 1.5 million containers, he added.
Carriers are also at the mercy of market forces that affect their customers, said Francey, citing the example of leather exports from Asia, which fell by more than 30 percent in just a few months. "It's a challenge to manage equipment in those circumstances," he said.
Francey suggested that shippers could help by giving carriers more advance notice of expected volumes and by meting out their shipments to avoid peaks and valleys. That would prevent the all-too-common scenario in which a shipper tenders a single container one month and then with no forewarning to the carrier, tries to book several dozen the next, he said. Those shippers complain when the carrier has to turn away the booking because it doesn't have the equipment, but they bear some of the responsibility for that situation, Francey said.
One shipper on the panel likened the quandary facing ocean carriers to the classic "prisoner's dilemma," in which a business must decide whether to act in its own interest or make sacrifices for the common good. Given the state of the economy, rising fuel prices, and constraints on equipment availability and rail capacity, said Rob Shepard, director of logistics and transportation for International Forest Products Corp., an ocean carrier's best individual strategy from a financial standpoint would lead to higher rates—the most undesirable outcome from its customers' point of view.
Taking the long-term view
Shippers and carriers agreed that long-term contracts that take prevailing economic conditions and operating constraints into account would help remove a great deal of uncertainty. In fact, more customers are requesting three-year contracts during the 2011 contracting season, according to Lea Bogatch-Genossar, senior vice president, sales and marketing for Zim American Integrated Shipping Services.
"We all want stability," she said.
One shipper that's going that route is Disney Destinations. During the panel discussion, David P. Croft, logistics manager for the Disney division, said his company for the first time is signing three- to five-year service contracts on some trade lanes.
"We did not go with the lowest-cost carrier on every lane. We are looking at the total value proposition," including reliability and ability to meet service standards, he said.
Croft said it is more desirable to build long-term relationships with carriers than hop from one to another in search of lower rates.
"You want to be a shipper of choice," he said in an interview following the panel presentation. "If I can get a smaller increase in costs [than the average] and still get excellent service, reliability, and access to the equipment I need, then I'm getting the best total value for my company."