The positive impact the last 50 years of containerization have had on driving supply chain efficiency is beyond question. What the next 50 years may hold, however, is in question. Aside from the regulatory and infrastructure issues I mentioned in last month's column, shipping companies themselves have long-term challenges to their corporate cultures and strategic positioning to overcome if containerization can continue delivering the impressive supply chain efficiency gains it has in the past.
I found a paper on the future of the container shipping industry authored by IBM Business Consulting to be a worthwhile read. The paper lists five main challenges for container lines in coming years:
Infrastructure constraints: Exacerbated by poor port productivity, port and inland bottlenecks, especially in North America, are making it increasingly difficult to meet customer demands for reliability at low prices while also optimizing the use of assets.
Imbalanced trade flows: An increasing amount of containers is being sent back to origin empty, which makes for increased repositioning costs. For example, the East-West imbalance in the Trans-Pacific trade almost doubled between 1995 and 2004.
Increasing customer demands: Customer price points increasingly pivot on value - getting greater reliability for lower total cost, the IBM paper points out. Customers expect shipment visibility to become more accurate, granular and timely and shipping processes to become more tamper proof. Also a "chain of trust" will likely be required to satisfy government security concerns, which is likely to force certification of organizations stuffing containers and more evidence that each container once sealed has not been tampered with. This will force container shipping lines to make the considerable investment in better methods for tracking assets from ship to shore to door.
Poor discipline: Last minute changes, while they may boost short-term revenues, are costing container lines efficiency and profitability, not to mention adding security risks, the IBM paper states in arguing for better booking discipline. Too much variability is at odds with meeting increasing customer demands for better reliability and lower costs.
New competition: Container shipping lines face a real threat of new entrants. Major package delivery providers, which already have established reputations for being able to deliver with speed and reliability, are likely to target not only shipping lines' customers, the IBM paper predicts, but container lines themselves. These companies have deep pockets and are aggressively acquiring capabilities to become integrated supply chain providers. It's a scenario that could leave shipping lines "adrift between the integrated supply chain providers, which deliver overall value, and the focused port-to-port service providers that offer low cost," the IBM paper warns.
With such daunting challenges in their wake, container shipping lines will have to set a new course in coming years, employing strategies that go against their traditional ways of operating.
The IBM paper envisions a future where the container shipping industry is characterized by:
Freer and open markets: Policies such as the 1998 Ocean Shipping Reform Act in the US will continue to pave the way for open and confidential negotiations between shippers and carriers.
More concentrated industry structure: In 2004, the top 10 industry players held 53% of the market. The IBM paper sees the top 10 players controlling as much as 80% of the market, with the next 20 players controlling 15% and all remaining players sharing the final 5% of the market.
Sharply differentiated customer relationships: Shipping lines will segment the market more accurately, adjusting pricing and making relationship investments to optimize customer profitability.
Increased excellence in execution: Consistent business processes and integrated systems will drive down costs and increase data integrity and reliability.
Currently container shipping is an industry concerned with filling vessels and moving shipments as efficiently as possible. Supply side priorities tend to dominate, without being balanced with the need for reliability and the value of long-term customer relationships, the paper argues.
But, the IBM paper points out, service leadership will become more important. Shippers themselves are becoming more discerning, moving towards core carrier concepts which focus on doing business with fewer carriers and investing in back-end integration with favored providers. The container lines that can attain service leadership will be the winners in a consolidating industry.
And, although pricing may end up on an upward trend as a result, a greater commitment to customer service can only be a benefit.
WORTH REPEATING
"On this whole business of safety we have to be very clear which side of the fence we're on. We have to let the public know we care about punishing the bad apples more than they do."
- Bill Zollars, YRC