Jun 09

OOCL Adjusting Capacity for 2016 Peak Season

Trans-Pacific carriers are beginning to phase in their new deployments for the peak-shipping season in an attempt to right-size capacity in the largest U.S. trade lane.

Orient Overseas Container Line announced this week that it will suspend for six weeks the Central China service that it operates as part of the G6 Alliance, although the net result of the move will be an increase in capacity because the CC1 service will be replaced with the CC2 service, which features larger ships.

Noel Hacegaba, chief commercial officer at the Port of Long Beach, confirmed that the CC1 service, with vessels having capacities of about 5,000 twenty-foot-equivalent units, is being temporarily suspended. Hacegaba said the CC2 service, which also links Central China and South Korea with the Southern California port complex and Oakland, is returning after having been laid up during the winter months. The CC2 will have vessels with capacities of about 8,000 TEUs, he said.

Since OOCL announced that the CC1 is being suspended for six weeks, the intent is apparently to bring the service back in August. The busiest months of the trans-Pacific shipping season are from August to October, with holiday-season merchandise driving growing cargo volumes.

By temporarily suspending the CC1 service, the G6 carriers are attempting to keep rates from falling while the trade awaits the peak-season buildup. Service contract rates this year were negotiated down to record lows. Spot market rates bottomed out earlier this year and have increased the past two weeks, although they remain below historical levels, as displayed on theJOC.com Market Data Hub.

Trans-Pacific carriers also face the quandary of what to do with the increasing number of mega-ships they have on hand as newly-built vessels with capacities of up to 20,000 TEUs enter their global fleets for use in the Asia-Europe trade. Those mega-ships bump vessels of 8,000- to 10,000-TEU capacity to other trades, such as the trans-Pacific.The good news for carriers, if they can fill the ships, is that 8,000-TEU vessels have lower per-unit carrying costs than the 5,000-TEU ships they are replacing.

The CC1 service had been calling at Busan and Kwangyang, South Korea; Shanghai and Qingdao, China; Los Angeles-Long Beach and Oakland.

Contact Bill Mongelluzzo at bill.mongelluzzo@ihs.com and follow him on Twitter: @billmongelluzzo.

Jun 08

6 Month Import Outlook – June 2016

Monthly reports on U.S. containerized imports are painting an uneven picture of what is occurring this year in the merchandise trade from Asia, but retailers anticipate a “significant uptick” in imports this fall peak season, according to the Global Port Tracker.

The monthly publication of the National Retail Federation and Hackett Associates said containerized imports at the major U.S. gateways in April increased 9.1 percent from March, but were down 4.6 percent from April 2015.

“The unusual patterns seen last year in the aftermath of the West Coast ports slowdown are continuing to make valid year-over-year comparisons difficult,” said Jonathan Gold, NRF vice president for supply chain and Customs policy. “Retailers are balancing imports with existing inventories, but consumers can expect to see plenty of merchandise on the shelves for both back-to-school and the holidays.”

Global Port Tracker projects an up-and-down pattern for imports in the next six months. The year-over-year projection for May is a decline of 4.2 percent. Imports in June are projected to be down 1.9 percent, July up 0.2 percent, August down 3 percent, September down 3.5 percent and October up 3.4 percent compared to the same months last year. Global Port Tracker said containerized imports in the first half of 2016 will be only 0.3 percent higher than during the first half of 2015.

The Pacific Maritime Association, which tracks loaded containers moving through the West Coast, has recorded higher volumes than Global Port Tracker. According to the PMA website, containerized imports from January through April were 4.1 percent higher than during the first four months of 2015.

Also, IHS Economist Mario Moreno is more bullish on U.S. containerized imports than is Global Port Tracker. Moreno said U.S. imports in the first quarter increased 7.8 percent from the first quarter of 2015, and he projects that imports for calendar year 2016 will be up 7 percent from last year. Ben Hackett, founder of Hackett Associates, projects flat to maybe 1 percent growth in U.S. imports in 2016.

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“Inventories remain very high, pointing to an overstocked situation that will depress the volume of imports in the coming peak season. Unless inventories drop through further increased consumer spending, import growth will remain sparse,” Hackett said.

Despite the uneven projections for the rest of the year, nothing seems to be helping ocean carriers achieve compensatory rates. The annual service contracts that carriers sign with their steady customers were a disaster this year, averaging about $800 per 40-foot container to the West Coast and around $1,500 to $1,600 per FEU to the East Coast.

Spot rates reported on the Shanghai Containerized Freight Index seem to have bottomed out, and are beginning to increase gradually as cargo volumes build toward the peak fall months. The spot rates last week were $852 per FEU to the West Coast, up 8 percent from the previous week, and $1,685 to the East Coast, up 4 percent from the previous week, as displayed on the JOC.com Market Data Hub. Nevertheless, those rates are far below the spot rates that are normally in effect this time  of year.

Contact Bill Mongelluzzo at bill.mongelluzzo@ihs.com and follow him on Twitter: @billmongelluzzo.

May 17

Not Your Father’s Import Logistics Strategy

As I am writing this article in 2016, I have no wires going to my stereo speakers, my TV is paper thin and plays the internet, I have no landlines anymore for my phone, my neighbor has a car that doesn’t use gasoline, I hear that the new cell phone case that I ordered might be delivered by drone some day, and my phone’s screen is showing me that my Uber driver is just around the corner.

When I step into my world of importing containers from far off lands, I seem to time travel back to the 1980’s and 1990’s. Oh yes, a few things have changed, no Telex, fewer faxes, fewer phone calls, more emails, typing documents on the computer rather than the Selectric etc…  But, the “structure” of importing is still the same old inflexible, passive and unresponsive model that was designed just after the 1984 Shipping Act.

This IS still your father’s Buick!

Today, it is common for importers to still be using one, two or more NVOCC partners who also include their own in-house CHB and tracking system. This is a static import strategy that is slow to respond to changing conditions and is expensive.  Little has changed since 1984. Those who use two or more NVOCC’s use it to “spread the risk”, and “not put all the eggs in one basket”.  

The following is a visual representation of how the Freight Forwarder, foreign supplier, NVOCC, CHB, Tracking System and Delivery Management components are connected and duplicated in the traditional & static import logistics strategy.

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In the traditional strategy, the importer normally allocates a set of suppliers to book with forwarder A, and another set of suppliers to book with forwarder B. Those suppliers are given these instructions weeks or months in advance of the ready date.

When we step back and observe the old structure visually, we immediately notice some redundancies that our LEAN Master friends would title: WASTE.  Two forwarders, two CHB’s, two tracking / data management systems. This also means two sets of:  SOP’s, Compliance/KPI Agreements, CSR’s overseas and CSR’s in the U.S. etc.  If a spot rate forwarder is added, now there are 3 of everything.

The new spot rate environment has rates changing every 3 or 4 days. The traditional import structure is not designed with the flexibility needed to quickly switch to the best rate.

Switching to a new forwarder with a traditional structure is a problem. It prevents switching in a low risk, rapid and easy way. Even when that new forwarder might be offering rates $300-$500 per container lower than their current costs, the change-over is too cumbersome and the suitors are often turned away. The obstacles are Change-Over Costs, Friction, and Lag.

I have seen companies that import 1000 containers per year miss 9 months of a $300.00/container savings! This was because their import structure was not agile enough to take a trial run on a previously unknown forwarder with a great spot rate, or on a forwarder recommended by their supplier, or on an offer from a direct carrier, or even an offer from a Shipper’s Association.

That lack of agility (flexibility) has cost those companies a quarter of a million dollars in lost savings in a single year! Most importers have missed these savings during the last three years.

In 2014, I put my APICS CSCP “supply chain” training to work on replacing this traditional & static strategy. What I found was that when measured against the attributes of reliability, responsiveness, flexibility/agility, and costs (SCOR Model), and a LEAN perspective, the traditional & static strategy predictably fell far short.

Using these same attributes, I designed a “Modern & Agile Import Logistics Strategy” for Alliance International, Inc. as a service for its customers.  The Modern & Agile strategy performs significantly higher in reducing annual freight spend, reducing lead times, increasing responsiveness, reliability (on-time delivery) and flexibility/agility.

What are the significant changes in the import logistics industry that created this opportunity for a new strategy?

Three major evolutions have occurred that allows us to adopt a modern & agile strategy:

  • Technology that moves data throughout the import lifecycle. Specifically, web-based technology (the cloud)
  • Containerization has become a “commodity”. The lowest pricing on full container transportation has become the domain of the direct carriers, low-cost operators such as the Chinese NVOCC’s and the Shippers Associations.
  • The rise of the Spot Rate market.

We can take these three evolutionary elements into the equation and reconfigure the components to achieve high performance on all the attributes. This means we reconfigure the Forwarder, Suppliers, Ocean Transportation Providers (OTP’s), CHB, Data-Management, and Delivery function relationships into an efficient and effective agile structure.

This modern and agile import logistics strategy:

  • Gets a “thumbs up” from our LEAN Master.
  • Reduces direct and indirect supply chain costs. i.e. transportation spend, inventory carrying costs, cancelled orders.
  • Let’s the importer switch ocean transportation providers in a split second to get the best rate available in the market on that day, or capture lift during a week when the vessels are overbooked.
  • Results in sustainably high scores in process compliance and KPI’s.
  • Stabilizes and shortens the importer’s lead times.
  • Allows the importer to shrink it’s safety stock of inventory.
  • Results in the importer achieving higher on-time delivery to it’s customers, reduced cancelled orders, and therefore, higher customer satisfaction benefits.

To investigate how this modern & agile import logistics structure can benefit your supply chain, email me at hugh@hughfinerty.com.

 

 

 

 

 

Apr 29

Inventory Levels 1st Quarter 2016

ORLANDO, Florida — Could U.S. freight volumes rise and overall economic growth slow? If that increase in freight volume accompanies significant de-stocking of “bloated” inventories, the answer is yes, an economist said at the 2016 NASSTRAC Shippers Conference here.

Investment in private inventories contributes to the expansion of real GDP, American Trucking Associations Chief Economist Bob Costello said in comments after a presentation to the conference. Cutting those business inventories pushes GDP down.

In 2014, inventory investment added 0.05 percentage points to annual GDP growth of 2.4 percent, Federal Reserve Bank data show. In 2015, that figure leaped to 0.17 points out of 2.4 percent growth. U.S. GDP growth would have been closer to 2.2 percent without the buildup.

GDP growth seems to have evaporated in the first quarter, after the economy expanded only 1.4 percent in the fourth quarter. The Federal Reserve Bank of Atlanta’s latest “GDPNow” estimate of first-quarter economic performance puts GDP growth at 0.6 percent in early 2016.

Fourth-quarter growth was actually 0.4 percentage points greater than the U.S. Bureau of Economic Analysis anticipated in its preliminary estimate, in part because the expected draw-down in private inventories wasn’t as great as economists thought it would be.

For trucking operators, however, a steep cut in inventories wouldn’t be a bad thing. Bloated inventories remain “the overriding thing impacting freight volumes today,” Costello said during his presentation, depressing replenishment demand and transportation revenue.

“Usually, there are three and a half things that drive truck freight: the consumer, factory output, housing starts and then the ‘half thing’ is the inventory cycle,” Costello said. “Sometimes, the inventory cycle has no impact on truck freight volumes. That’s not the case today.”

“Inventories remain bloated, well above historical average,” Lee Klaskow, senior analyst for transportation and logistics at Bloomberg Intelligence, told NASSTRAC shippers. The national average business inventory-to-sales ratio in February was 1.41, up from 1.37 a year ago.

The “optimal” range for the general business inventory ratio may be 1.30 to 1.35, Costello said.

“People would like to see the ratio come down 20 to 30 percent, but it will take time because the demand is not there,” Klaskow told NASSTRAC. “High inventories should be an issue that will be with us for the remainder of the year, if not into 2017, unless we all go shopping real soon.”

Inventories have been rising since the recession, but the inventory-to-sales ratios spiked following 2014, driven higher by stronger consumer demand that year and the West Coast ports labor dispute, which led many shippers to import earlier in the season and build up inventory.

“At the end of 2014, many shippers were telling me we can’t have that happen again,” Costello said. “They said we need to carry a little more inventory, have a little more of a cushion. Now you have too much inventory on hand and everybody says it needs to come down.”

In late 2014, inventory-to-sales ratios that had reached a plateau in the “soft patch” suddenly shot upward, and they’ve been climbing since. Shippers haven’t forgotten how to manage inventory, Costello said; they’re simply keeping more, and having difficulty forecasting demand.

Unusually warm weather last December, for example, cut deeply into demand for winter clothing at a time when stockpiles of coats, hats, gloves and other seasonal items had peaked. Retailers that had “invested” in inventory to avoid out-of-stock moments in stores had too much stock.

The rapid increase in the growth of online shopping also complicates inventory management as it reconfigures not only sales models, but how retailers source, store and ship goods.

Shippers at NASSTRAC and in other interviews have told JOC.com reducing inventories is a priority in 2016, but de-stocking is much harder than stocking. Everything depends on the consumer. Weak consumer demand means stockpiles of goods are likely to be reduced slowly.

If low unemployment and rising wages spur U.S. consumers to open their wallets wider this summer, inventory may fall more rapidly, though that could also reduce the support private inventory investment lends to GDP, cutting into GDP growth. Imports also subtract from GDP.

Greater personal consumption expenditures and fixed residential investment — more consumer spending and more housing starts — could help fill the gap, however, along with government infrastructure spending and, more unlikely, an increase in exports, all of which contribute to GDP.

Costello expects U.S. GDP to increase about 2 percent in 2016, compared with 2.4 percent the past two years. “That’s not good, but it’s not contraction either,” he said. “This is a very mature economy. If you’re sitting around waiting for 3.5 percent growth, don’t hold your breath.”

Contact William B. Cassidy at bill.cassidy@ihs.com and follow him on Twitter: @wbcassidy_joc.