Ocean shipping industry weathers a sea of change

Most ocean shippers thought they had seen as much change as one industry can handle when the Ocean Shipping Reform Act went into effect in 1999. But in the past two years, another swell of changes has swept across the ocean shipping industry, leaving shippers, carriers and ports working even harder

In the wake of the attacks of Sept. 11, statistics about the gaping holes in U.S. port security came crashing down on the industry like a tsunami. According to one estimate, 95% of international cargo coming into the U. S. is carried by ship—roughly 6-7 million cargo containers a year, but as little as 2% of those containers were being inspected. Suddenly, all eyes were on our ports, tankers and containers, wondering how we could fix the problem and who would pay for it.

To make matters worse, in September 2002, the International Longshoremen's and Warehousemen's Union went on strike to renegotiate its contract with the Pacific Maritime Association, forcing shippers to divert or delay freight heading to West Coast ports from Seattle to San Diego. Then there was the power outage earlier this year that halted production in a good part of the U.S. and Canada.

And to top it all off, a massive manufacturing boom in China the past two years has led to increased demand for ocean carriers in the Pacific both into and out of China, pushing up ocean freight rates in that region and across the globe, as ocean carriers scramble to get a piece of the action in China. Average charter rates per day for container ships have tripled in the past two years (see sidebar), due in large part to the Chinese manufacturing boom coming at a time when shipbuilding is maxed out. Ocean cargo haulers are getting back at shippers for years of low rates and slumping demand.

Winds of change

Security concerns prompted the most visible change in ocean shipping recently in the form of the 24-hour rule for advanced shipper notification from the Department of Homeland Security. The rule requires all ocean carriers to submit a cargo declaration (and ensure Customs receives it) 24 hours before cargo is laden aboard a vessel in a foreign port bound for the U.S. or before cargo is laden on a vessel in a U.S. port. No longer can a vessel leave Hong Kong bound for the U.S. and have its documentation coming four days behind, as was previously the norm. Paperwork must now use specific language and be filed on time to get a shipment off the docks. Terms like "general freight" and "consumer electronics" are no longer acceptable descriptions of cargo.

The 24-hour rule went into effect in February 2003 and enforcement began in May when Customs and Border Patrol agents began issuing "Do Not Load" orders for shipments where paperwork and descriptions were not prepared properly.

"It's not just more detailed information we need now, but more precise and reliable information" says Jan Eyvin Wang, president of ocean carrier Wallenius Wilhelmsen Lines Americas in Woodcliff Lake, N.J. "We used to get the [shipping] information after the fact and now we need it before the fact. The shippers are more tuned into this and have changed their processes.

Some large shippers and carriers were already making improvements in exchange of documentation before Sept. 11 to combat theft and increase efficiency in tracking and distributing freight. Mark Kadar, vice president of Mercer Management in Lexington, Mass., says the rates in ocean shipping had been declining for so long that ocean carriers had to become more efficient in recent years just to survive.

Another new security program, the Container Security Initiative (CSI), went to stage II in June, extending the initiative beyond the first 20 international ports targeted in stage I. Under the CSI program, a team of officers from the Customs and Border Protection are deployed in ports overseas to work with host nation counterparts to target and screen high-risk U.S.-bound cargo containers before they leave foreign ports. Other initiatives currently in effect include the Customs-Trade Partnership Against Terrorism (C-TPAT), a voluntary initiative between the U.S. Customs Service, importers, exporters and carriers to tighten security in the supply chain.

If security is priority number one, ensuring that security does not slow ocean shipments is priority number one and a half. Elizabeth Wetzel, a consultant with the McCormick Jahncke Group in New Orleans, says there were delays when the new security initiatives were introduced, but the delays have been minimized down to hours instead of days.

"This industry is seeing more growth and we have some congestion problems on both coasts, which are good problems," says Patrick Valentine, director of corporate relations and former director of intermodal equipment at ocean carrier Maersk Sealand in Madison, N.J. "We have to ensure security, but also keep the flow of materials through the terminals. As an industry, we have done a good job so far, but there are some things coming down the pike that we still have to address, like deciding how and when containers will be X-rayed for security."

Valentine encourages shippers to become more active in public policy issues and voice their opinions on proposed regulations through industry groups to better gauge the cost-benefit analysis of such changes.

Strike one

Some shippers and industry watchers say the West Coast longshoremen's strike in September 2002 actually produced more change for shippers than the new security measures. John Amos, president of Amos Logistics in Pleasant Hill, Calif. and chairman of the ocean transportation committee in the National Industrial Transportation League points out that some of the cargo diverted from the West Coast ports during the strike never came back to those ports.

"The response from the [union] is 'Those ports can't handle a lot of extra freight.' But those secondary ports are going to make some things work in those cases and accommodate the extra shipments."

Both Kadar and Wetzel say there has been a boom at some East Coast ports (namely Savannah, Ga.) in the year since the West Coast port strike, proving that shippers and carriers alike want to avoid another problem. "Shippers want to ensure that carriers have alternate routes today," Wetzel says.

One of the companies diverting freight during that strike was Japanese carmaker Toyota. Steve Sturm, vice president and general manager of Toyota Logistics Services in Torrance, Calif., says the West Coast port strike forced Toyota to divert some of the 700,000 vehicles it sends by ocean each year to other ports. Toyota relied more on Portland, Ore. and San Francisco than it had in the past to deal with the 11-day strike, but did not send any shipments to Mexico or Canada to get into the U.S.

More recently, Toyota saw some scheduling issues crop up when one of its long-term carriers was forced to offer up two of its vessels to the U.S. military to transport supplies to the Middle East during the war in Iraq. It's these kind of disruptions that Amos says have given birth to the term "almost-in-time"' instead of "just-in-time" to compensate for all of the possible delays due to increased security and labor issues in the past two years.

"In many instances, manufacturers are keeping a little more inventory than they were before," Amos says. "That is preferable to shutting down a production line or missing a shipment to a retailer."

Technology is playing a big role in many of the changes in the maritime industry. New regulatory and security requirements are forcing ports, shippers and carriers to look into new technologies to streamline things. For example, the Port of Savannah, Ga. recently announced the Savannah Maritime Logistics Innovation Center, a partnership between the Georgia Ports Authority and the University System of Georgia under which the two groups will work together to develop new technologies for streamlined maritime security. Corporate partners will have access to technologies for commercialization.

"I would say ocean shipping is as advanced as other modes," says Strum. "Ocean shippers have always used technology for weather and estimated times of arrival. We have used a computerized ocean shipping system for a long time, so we can know which vehicles are on which vessels."

Valentine says the biggest benefit to come out of all the changes is that shippers are much better at contingency planning today than they were two years ago. After enduring the aftermath of Sept. 11, a down economy, a West Coast port strike and a major power failure in the past two years, Valentine says today's logistics industry—shippers and carriers alike—are ready for anything.

Money matters

The biggest concern among shippers is where the money will come from to upgrade security and technology on the high seas and in U.S. ports. The efforts to upgrade security at the nation's 361 ports over the next decade will cost upwards of $7 billion, according to Coast Guard estimates. One proposed plan calls for user fees of several hundred dollars per container as a way to pay for the higher security costs, which would hit the shippers of high-volume, low-margin goods hardest. Also, by enforcing descriptions of cargo, fewer carriers and shippers are able to use alternate descriptions to gain a lower duty rate.

Wang says costs for carriers have gone up and those costs will eventually be passed on to shippers, but, as yet, they have not been. "Our customers have seen their costs go up as well, so everyone is feeling the pinch. I think more work needs to be done to find out where the additional costs are."

Sturm says much of the security work is being done by the ports and noncontainer shippers like Toyota are not being hit with changes or cost increases yet. He says using long-term contracts with reliable carriers has limited the disruptions and rate changes Toyota has seen in the past two years. Wetzel concurs that shippers have not yet been hit with the cost of security, but the hit can be minimized by spreading it across different types of shipping and industries. She says the greater emphasis on supply chain costs instead of modal or shipping costs has limited knee-jerk reactions to one-time cost increases.

The increased costs in the supply chain may be a blessing in disguise, spurring manufacturers to work harder at getting control of their inbound ocean freight to control costs. With ocean rates on the rise, importers want to know exactly what they are paying for freight and how they can reduce that cost. Ocean shippers are beginning to think more like their ground counterparts and seeking faster and cheaper methods of shipment. Industry watchers say this trend is still developing after so many years of lower ocean rates, but it will be an area of greater emphasis for shippers.

Amos has two recommendations to shippers looking to adapt to new rules and gain better control of inbound ocean shipments. First, make sure you have a qualified and experienced logistics manager working for your organization. The idea of just tacking logistics responsibilities to the purchasing manager or marketing person's job is no longer feasible, no matter what the size of the company. Second, make sure all necessary sectors of your organization are communicating effectively, most likely through integrated information systems.

"If you leave someone out of the loop, you will pay for it," Amos says. "It happens all the time. Manufacturing will surprise the logistics organization by telling them the company is moving from a Taiwanese supplier to a South American supplier in two weeks and they need to know the rates and service schedules from the South American port. Well, we may not even be able to get service from that port and, if we can, it may cost much more than the original port. If logistics were involved from the beginning, they could consult on that decision."

Wang says moving as much communication as possible to an electronic format, including increasing use of EDI, will pull some cost out of the ocean shipping process. New technologies like radio frequency and bar coding are well worth the investment, according to Wang.

"You cannot look at this in your own silo, but as a link in the supply chain," Wang says. "Otherwise you won't achieve the efficiencies you are aiming for."