Sea-Change or Shell-Game: The Transforming of International Inland Transportation

brooks bentz“Sea-change” is a well-used term describing significant transformations since William Shakespeare coined the phrase in “The Tempest” in 1610.  More narrowly applied to transportation and logistics, sea-changes have occurred throughout history: sail-to-steam-to-diesel propulsion or break-bulk to containerized cargo, for example.

Now we are facing a more subtle sea-change – or maybe it’s more of a ripple – with the changing nature of how international import cargo is managed and paid for.  World trade has grown at over 9 percent per year for the past four decades, largely through the immense flexibility and operating efficiency provided by containerization.  Containerization has many virtues: much better economics and competitiveness, lower labor and terminal costs, reduced pilferage, damage to cargo and speed to customer.

Traditionally, if that word can be applied to a technology that is a relative newcomer on the scene, ocean carriers offered a single bill of lading (“Store-Door Delivery”), providing a multimodal service of truck-ocean-rail-truck from shipment origin to customer’s dock.  This made transportation relatively simple, convenient and painless for the consumers of transportation services.  This holds particularly true for retailers of apparel and footwear, electronics and other high-value products, from chips and computers to TVs, DVD players, PlayStations and Xboxes.

The “sausage-making” of linking the import box to the requisite trading partners and required equipment:  trucker, chassis provider (if other than the ocean carrier), liner operation, port-of-entry drayman and chassis, trans-load operator, stack train operator (one or more railroads) and a destination drayman and chassis, prior to final delivery were all activities taking place behind the scenes.  The BCO (Beneficial Cargo Owner) only had to worry about service reliability and total landed cost.

This operating model has been changing.  Led by Maersk, the world’s largest ocean carriers have been exiting the business of owning the chassis assets required to move box from the POE (Port-of-Entry) to any combination of customer dock, trans-load facility or railhead and, in some instances, transferring that responsibility to the BCO.

From a purely operational angle, this makes some sense.  The thesis is that the low utilization rates of chassis owned by ocean carriers was improved significantly by transferring that ownership to others, be they local drayman, truckers, chassis pool operators, leasing companies or maybe even a BCO or two.  Some ocean carriers have been seeing utilization of 1-to-2 turns per month, so the decision to outsource the asset ownership made good sense.  As a general rule, pooled assets achieve higher utilization than assets assigned to specific uses, with due attention paid to the interchangeable/fungible nature of that asset.  In theory, then, the total landed cost should decrease.

Many of the ocean carriers still provide a delivered product to provide door-to-door service, they just have gotten out of the chassis ownership business.  The alternative solution typically reverts to the local drayman tasked with moving the import box to the railhead, trans-load facility or customer dock.  These chassis may be owned by the carrier or may be pulled from one of the three main chassis pool operators.  Typically this cost is embedded in the carrier’s invoice to either the liner company or the BCO, depending on the provisions of the service booked.  According to Mike White, President, Maersk North America, “It’s just more efficient to have the chassis follow the power.”

One of the other key considerations is service reliability.  While liner service is predictable and generally reliable, inland service reliability is vital to get right or the end-to-end system breaks down.  In the case of Maersk, as Mr. White says, “We don’t want a ‘Sunshine Pump’ regarding inland reliability: it’s not best case, but what you can plan on that counts.”  This may lead to building in some cushion between trading partners to assure the required hand-offs can be made and the required equipment and capacity is available to complete the mission.

During periods of high volume, the ownership model may guarantee capacity to move boxes.  The question then becomes who is best positioned to provide the most flexible operating model.  Pool operators typically have more ability to flex up and down with changes in demand than individual owners might.

One industry veteran says “It’s all a shell game.  Some ocean carriers may want to be able to tell their owners they are out of the chassis business.”  While this may prove a political advantage internally, it does limit the ability of the lines to protect key customers in the event of a shortage.  One of the other considerations with the shift to pooled chassis is that an extra stop is often required for the drayman, which nobody wants to pay for.  This occurs when the chassis pool location is not proximate to the ocean terminal, CY or CFS.  The economics may also be suspect.  If chassis ownership runs $3.00-$4.00 per day, but per diem rentals run $18.00-$20.00, then the cost for the end user may actually rise considerably, as those costs get passed through.  The thesis is that moving from a fixed-cost to variable-cost model will save money and gain better operating efficiency.  The theory is sound.  Whether it proves out in practice remains to be seen, particularly in times of capacity shortages, when there will be an incentive to ‘stock-pile’ chassis in an effort to protect customers and keep congestion to a minimum.

The bottom line is that the ocean carriers typically have a different model for the rest of the world, outside the U.S., where they may not pay for inland transportation services.  And, in cases where they are offering the service, the chassis are usually arranged for by the drayage carrier, not the line.  The trend indicates they would like to convert the U.S. to the world model rather than the other way around.

Following the logical thread, that this model may be in the offing in either the short or mid-term future, BCOs would be well advised to make contingency plans on how they will operate and what the New Business Model will look like in terms of cost and service and how it will be operationalized.

Brooks Bentz, President, Supply Chain Consulting Services, has more than four decades in supply chain consulting, transportation and logistics, and currently leads Transplace Consulting Services. Prior to joining Transplace, Mr. Bentz spent 21 years with Andersen Consulting/Accenture, where he was a managing director in supply chain management, responsible for supply chain transportation. He also served as a vice president of intermodal for Burlington Northern Railroad, where he developed BN America, the company’s domestic container operation. He was president & CEO of Ameritrans Corporation, the 3PL subsidiary of IU International. He was also the CEO of Trans-Star Trucking, a regional LTL/TL motor carrier.

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