Understanding the impact of slow-steaming

It is all too easy to assume that a shipper either wants the lowest price or the fastest transit. Yet it is becoming increasingly apparent that things are far from being as straightforward as that.

The issue has come to the surface because of the growing disquiet over the strategy being employed by an increasing number of liner shipping operators to reduce their sailing speeds. It is arguable whether these operators have indeed even given any consideration to the impact of such a strategy on their customers. I might go further to even question whether all shippers themselves actually understand the impact of slow steaming on their supply chains and the risk to the profitability of their businesses.

If this is the case, help is on hand. I would like to draw your attention to two shippers that have given their view on the impacts of slow-steaming.

Recently, Jean-Louis Cambon, head of the Michelin Ocean Management Committee, explained why shippers needed to be cautious, in particular about the “super slow-steaming” being introduced by many liner shipping companies in the deepsea trades.

He had spoken last November at a conference organised by the European Shippers’ Council in Dubai for the Global Shippers’ Forum. He felt it necessary to repeat the message this January in order to clarify what he previously said (see http://www.shippersvoice.com for the full article).

Some carriers, he said, were carefully considering deploying super slow-steaming on the Asia-Europe route; loop composition was moving from eight to nine ships, and possibly up to 12 ships in the future.

In that scenario, the total round-trip time would move from the current 63 days to 84, and, seen from a shipper’s perspective, “this is a BIG change”.

Jean-Louis Cambon’s increased caution over such “big” changes arises from the impact it would have on stock levels in the supply chain. Some shippers, including Michelin, he claimed, could deal with the extra 3.5 days each way that resulted from an increase in ships from eight to nine in a loop. It could also be an acceptable trade-off, if coupled to an improved schedule reliability. Much more additional transit time will, however, start to present problems, especially in respect of adding costs of inventory.

It is well understood by most shippers that longer transit-times increase inventory, which has a cost attached to it. A balance needs to be made; but how do you determine just what that balance is, and where you should draw the line?

Fortunately there are some simple calculations which will give you a fairly good idea. Andreas Holter, a supply chain manager for an international metals-recycling company, in two papers produced for The Shippers Voice last year, in conjunction with his studies at Heriot-Watt University, shows what needs to be accounted for.

Holter argues that many manufacturers involved in international shipping experience problems related to poor visibility of delivery dates, frequent delays in-transit, too much inventory in the pipeline due to long transit times, and high and rising transport costs. These can be addressed by establishing certain transport purchasing and transport management procedures and disciplines, and by managing the shipper-carrier relationship more actively.

The cost of transport is more than what you pay your logistics service providers (LSPs). Transport affects a manufacturer in a number of ways, including inventory levels, production planning and customer service. A simple spreadsheet model can compare the cost implications of different service options. The model should include the shipper’s internal rate of return (IRR), for example 20%, the average shipment value in terms of sales price, for example $100,000, and the expected volume for each trade lane.

The inventory cost calculation, would therefore be $100,000 x 20% / 360 days x transit time (days) x annual volume. The cost comparison on each trade lane can then be made (i.e. the annual volume x the transport rate, which then gives the rate cost, which is finally added to the inventory cost calculated previoulsy).

Naturally there is a trade-off between, what Holter describes as the diversification of providers and volume leverage. Ideally the full volume could be concentrated on a single supplier, thus providing leverage on the rates, but there is an obvious risk attached to putting all your eggs in one basket; therefore shippers will likely spread their volumes across a few preferred carriers which also align closely with the standard operating procedures required and the KPIs needed.

In this regard, one must try to ascertain the reliability of the carriers and the costs of delays (which may vary according to the critical nature of the goods being shipped). This can be fed to the production team to determine appropriate safeguards in order to minimise the cost impacts of service-level under-performance by the preferred carriers.

Holter also brought to our attention the need to bring into the equation the cash flow implications of transit time. While negotiating lower shipping rates, a shipper is often forced to concede longer transit times. What some forget, however is, under certain payment terms, the longer the goods spend in transit, the later you get paid. Therefore, the length of the transit time may negatively affect cash flow.

The delivery date, and thus the transit time, can be entirely unrelated to the timing of customer payment. The lowest cost option may actually, under certain circumstances, be the higher freight rate and shorter transit time. The timing of payment for products could mean the difference between profit and loss on a sale, particularly where it is shipped over a long distance.

It is common, argues Holter, to incorporate 30, 45 or 60 days’ credit, or any other postponement of payment. For example, common payment terms of this type could be: “30 days after delivery”, or “30 days after end of month of delivery”.

For payment on or before despatch of goods, the transit time is irrelevant for cash flow purposes. The same applies for payment on receipt of invoice or documents. The real assessment comes when payment is made on or after delivery of the goods.

Calculations are fairly straight forward in that one takes the internal rate of return, multiplies this against the value of the shipment and divides the answer by 365 to arrive at a daily cost. The daily cost is then multiplied by the sum of the number of days in transit plus additional days credit given to the buyer of the goods (that is, waiting to be paid according to the payment terms offered).

The difference between two or more service options is in effect the opportunity cost: if comparing two services, the opportunity cost would be added to the rates offered by the option with the higher cash-flow cost. Therefore it is possible to see which option has the overall lower cost (putting aside the issue of standard operating procedures and KPIs). Examples are provided in the paper Reducing Containerised Transport Cost by Optimising Transport Rates and Cash Flow (http://www.shippersvoice.com/downloads/?did=14) (free to download) available on the Shippers’ Voice website.

The impact of transit time and payment terms needs to be shared with those in the company that determine what is appropriate for the supply chain and customer relations: armed with this insight they will be better placed to avoid making a decision on, for example, credit terms with their customer that could mean actually making a loss on the sale of the goods.

It is not sufficient that only the shipper understand the implications of slow- or super slow-steaming. The carriers and the LSPs contracted by the shipper must have an understanding also. How else are we to expect them to begin acting in the shippers’ best interests?

That then becomes a responsibility of the shipper: to establish closer working relations with those they contract: become a more valued customer by consolidating loads, building a rapport with the service providers, including them into the supply chain management process. Once they understand the business then you might expect that they can find better service solutions. That then leaves us hoping the carriers and LSPs are actually willing to consider your business and its needs.

Sadly, there are all too many shippers suggesting these days that there appears to be no such willingness from the liner shipping sector to work more closely with the shippers to find effective and optimal service solutions. With estimated losses of US$20bn last year in the liner shipping sector, it would not be surprising if many carriers were indeed more concerned with cutting their own costs and changing their own schedules and service parameters to suit their own needs first, foremost, and in some cases at the expense of their customers.

This, therefore, is the massive conundrum we face: to recover from the global recession in a sustainable way, I believe, there has to be greater connection between the shipper and the carriers and other LSPs. There needs to be an interest in and understanding of the customers’ needs and the way the business works.

I guess that is just something we should all keep working towards. Maybe, when the lines feel that they are pulling out of recession, a new mind-set may begin to show itself. Until that time comes, a shipper can only make sure it understands what the full cost implications of slow-steaming actually are. And they must help educate their colleagues to make appropriate changes in the foreseeable future, to such things as terms of sale, inventory management and sourcing decisions, in order to limit the impact of slow-steaming.

If you have a comment on this or any other issues covered by Andrew Traill and The Shippers’ Voice, please mailto:Andrew.traill@shippersvoice.com or go to www.shippersvoice.com.