Blanking voyages has turned into unblanking. Ocean carriers try to match supply with demand on a precise basis, to cut losses.
That is a proven technique in industries where you can also vary inventory. But voyages are time-sensitive, and result in lead time losses for shippers. And with large ships, there are a lot more of them.
Even in transportation we see it– I believe it is a similar philosphy to Precision Controlled Railroading made popular by Hunter Harrison at CN and later CSX. But the effect in railroading has been to drive business to trucks, except for large shippers. And we will see the same in ocean container carriage.
It’s COVID-19 time, and we can think about what would happen in public transportation, say a train system, adopted ‘blanked sailings’. You go to the station for the 8:42 and find that because of insufficient demand the train was not running and you’d be late for your work as a cleaner at a hospital. You’d be MAD. You would also think about how else to get there, perhaps a bicycle (probably there is no air!). And if this happened a lot, you might quit using the rail altogether.
Soon Ocean container carriers will serve only a few large customers who can stand the inventory fluctuations of blanked sailings. That is actually what has happened in railroading as well. Where can the small customer get a break?
Enter the forwarders. By doing the ocean carriers’ job, by consolidating shippers, they can buy blocks of movement, and become the large customers for the ocean carriers. but now there will be mismatches at each step. It is a classic bullwhip effect. forwarders over-order to be sure they get their share, then can’t fill their space. Carriers will blank sailings, inconveniencing everyone. And we see supply-denamd variation with huge amplitude, making it impossible to control.
Welcome to transportation life in the 21st century.
Spot rates for container shipping are staying up, but only because ocean carriers continue to blank voyages big time.
If you were shipping and you feared your voyage would be blanked, what would you do? You would be prepared to buy some shipping at spot, to be sure you can get on the ship. Your ratio of long-term (and possibly delayed) contracting for shipments and your short-term purchases would change in favor of the short term. And that would keep short term demand up in spite of a long-term need going down. That’s what’s happening now.
With COVID-19 out there, and no certainty about international trade, it seems certain that conditions are much worse than are being reported based on shipments. At some point the other shoe will drop, and all prices will go down. We need not to trust the BIMCO spot prices for future predictions right now.
Here is an interesting article about the questionable value of contracts. Do they make any situation more complex and less dependent on trust? Absolutely. And especially since many business people are expert at getting out of contracts that looked good at the time and turned bad as events unfolded.
I am reminded of a story that occurred to me in real life. Years ago we shred a data processing installation with a large company. They set up what they called an ‘alternate data center’ for backup of their main facility in Houston, and one of its main features was a giant IBM laser printer that was the size of a small house, what today we’d call a tiny house. The President of the company was touring the facility, and the guy running it was extolling the value of the printer in providing backup. Hi pointed out the that printer could print something like 100 pages a minute. Maybe it was more like 1000, I forget. The President said “Gee, I guess I’m going to have to hire more readers!”
The more contracts you have, the more you have to read them, and the more you have to have lawyers and other experts, all sheer overhead. And we well know from contract studies that something is likely to happen that will not be covered in the contract. What do you do then?
I’m not advocating a total absence of contracts. And I really like sample contract terms such as INCOTERMS and BIMCO contracts that give precise standards that parties can agree to without hesitation, or understand why they need something else. Over time these standards grow in value, because as more deals use them a history of how they work evolves, which can be used as a precedent. More would be useful. Chris Clott and I have written about the possibility of such terms for service levels in supply chain management of ocean shipping chains, which would coordinate the various participants (ocean liners, ports, terminals, drayage firms, storage firms, and long haul and last-mile carriers).
But still and all, there’s a need for substantial trust between the parties. And when there’s trust, that people will play fair, the contract may be too formal. Trust is also the reason why it’s unlikely that brokers of various kinds will still be successful in the maritime business despite the emergence of software forms handling.