Discipline Is The Key

August 4, 2014
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Can the industry exercise proper restraint to cure some of the problems facing it?

I love the smell of volatility in the morning, it smells like headlines.

With apologies for ripping off Apocalypse Now, the logistics industry seems always poised for another apocalyptic year. All but two of the major ocean carriers are posting losses, says Chaim Shacham, a maritime consultant. Why?

Extreme overcapacity. Yet they continue to commission new, larger vessels.

The P3 Alliance hit a snag, but Shacham suggests it may not be done — China may have torpedoed the alliance to get a presence in a P4 coalition of carriers.

Shacham notes that when the maritime industry faced a similar overcapacity situation in 2010, it laid up ships. That helped the carriers improve pricing and their bottom lines. They are idling ships now, but at levels that are insignificant, he says. The P3 and G6 Alliances could have helped by improving vessel sharing and rationalizing capacity.

Add a U.S. West Coast labor contract, and the seas look a bit choppy ahead. Some back-to-school goods are already showing up in retail Dcs and even on store shelves well in advance of the selling season in anticipation of a disruption and in order to avoid lost sales. Retailers have already sidestepped part of the issue.

On the motor carrier side, the Fed Ex announcement it would expand dimensional pricing and a quick “me too” from UPS has the LTL industry talking about the “inevitable” shift from what is repeatedly referred to as the antiquated class system. There’s a lot at stake in both parcel and LTL. One advantage of the current NMFC class system is that it is universal for LTL carriers. But it enjoys some limited anti-trust immunities to meet and discuss classifications. Has anyone checked to see if a dimensional pricing scheme can be handled the same way, or would the carriers be left to develop their own systems? And, if a dimensional pricing scheme isn’t universal, can it succeed?

With the dimensional pricing passing the real carrier costs to the shipper, there are bound to be some changes for consumers as well. Higher shipping costs and a reduction or elimination of “free shipping” could put a ding in the impressive growth rates of e-commerce. That is, it could change the direct e-fulfillment model. Brick and mortar retailers could have a significant advantage in using their stores as forward stocking locations and doing e-fulfillment on a local level from select stores. That would take large volumes of parcels out of the hands of UPS and FedEx and put them into the backs of local delivery vans or postal vehicles. The parcel carriers’ gain in operations efficiency and cost recovery could, therefore, bring about a drop in volumes and revenues.

In all of these scenarios and more, the key is the discipline of the parties to the logistics transaction. Can ocean carriers manage capacity and price appropriately? Will the West Coast unions recognize shippers and carriers have contingency plans to build inventories and use alternative ports to mitigate some of the impact of a disruption? Labor actions become more counterproductive when they derail a fragile economic recovery and lead to loss of consumer confidence and lower consumer spending. Will the LTL industry take a rational, disciplined approach to adopt a pricing scheme that is based on efficiency and cost recovery and then not give it away in discounting? And, will shippers and consignees recognize the new reality and adapt?

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