Monday, February 1, 2010

How Will Slower Ships Affect YOUR Transportation Department?

Below is an article from the Journal of Commerce regarding ocean shipping. So what if your company doesn't utlize imports... why should you care??

Think about this for a second or two. The ramifications are like a bell going off loudly. If it takes several more days - possibly another week or longer - to get shipments in, then companies are going to be forced to store more inventory. If, in the near future, companies need to store more in warehouses, the cost of storage will go up due to supply and demand. That means YOUR cost will be going up!

What are some other ramifications??? In order to be more competitive, could this possibly mean that there will be less shipping overseas and more manufacturing in the US??? That is a question that you may want to consider, which is good news for most manufacturers. Bad news for Yang Ming, Costco and others, but good news for US manufacturers who are ready to step up.

US manufucturers may want to keep in the back of their minds that eventually this will lead to more rail and truckload shipments - less from the ports.

You can read the article and come to your own conclusion - but here is a chance for you to dust off that crystal ball!!

Slow Boat From China
Joseph Bonney and Peter T. Leach

With vessel speeds slowing down, lengthy supply chains have gotten a few days longer
Manufacturers and retailers looking to cut shipping costs by slowing their supply chains are finding unlikely new supporters of the strategy: the ocean container lines that carry the overwhelming majority of goods in international trade.

Financially strapped ocean carriers are cutting fuel costs by reducing vessel speeds on a growing number of long routes, and the impact of what’s called slow steaming is starting to reverberate across supply chains. Even amid a halting recovery, the economy is very literally slowing down on the water, with dozens of routes — mostly those out of Asia — extended by several days, and some shippers say they are having to adjust inventories to the changing service patterns.
Shippers may have to get used to it. Carriers say what began as a cost-saving strategy will likely last into any recovery in global trade when carriers and regulators see the environmental benefits of slower speeds.

“I think the advent of slow-steaming on the trans-Pacific is an unavoidable outcome of the economics today,” said Ron Widdows, group president and CEO of Neptune Orient Lines, the Singapore-based parent of APL. “It has become quite a usual occurrence in other trades. But I think it is a glimpse of the future in the way this industry is going to have to operate, because of the need to reduce emissions.”

Jorgen Harling, vice president of global network design at Maersk Line, said engine speeds and vessel emissions “are 100 percent correlated.” He said slow steaming “is now becoming the industry standard, and everybody is getting used to it. I think we are entering a new era.”

Slow steaming — sailing 25-knot vessels at 20 to 22 knots — became standard practice on long Asia-Europe routes last fall as carriers sought to control costs and find gainful employment for some of the 700-plus container ships laid up around the world.

During the last three months, slow steaming has spread to trans-Pacific voyages, adding up to three days to the 11 or 12 days that most vessels required to sail from their last Asian port to their first inbound port on the U.S. West Coast. Ships also have been slowed on long intra-Asia routes and in other services.

The four-carrier CKYH alliance — Cosco, “K” Line, Yang Ming and Hanjin Shipping — announced last week it will extend slow steaming across its Asia-Europe service, using it on six loops before the first half of this year.

AXS-Alphaliner, the Paris-based consulting group, counts 64 long-haul routes that have gone beyond slow steaming to “extra-slow steaming,” at 17 to 19 knots. On some backhauls, carriers are going a step further with “super-slow steaming,” lumbering along at 14 to 16 knots or even slower.
That produces significant cost savings, but the impact for the carriers goes beyond the fuel costs. Keeping a ship on the ocean for three days beyond a 12-day trip keeps the vessel from taking on new loadings during that time, potentially cutting revenue opportunities but also effectively reducing capacity just as the carriers are trying to keep a lid on space.

For shippers, the new era means more slack in their supply chains — and the possibility of higher inventories and other adjustments to logistics networks that may already have been overhauled in the downturn. Complaints about slow-steaming have been muted, however, with many saying it is a business imperative for a shipping industry facing billions of dollars in losses.

“It’s not the most desirable thing for us, but we understand the environment in which the steamship lines are operating,” said Delinda Arnold, production control manager for overseas parts procurement at Toyota Motor Manufacturing in Georgetown, Ky.

Arnold said slower transits have added 1 ½ to two days to lead times for containerized parts and components that Toyota imports via the West Coast to meet tight production schedules at its Kentucky assembly plant. She said the automaker has made marginal increases to inventories but has encountered no serious problems.

But Bjorn Van Jensen, vice president for global freight and logistics services at Electrolux in Singapore, said if super slow steaming becomes widespread, shippers “will start looking for significant rate reductions, since carriers’ fuel savings will be enormous and shippers will not sit back and watch service levels deteriorate without sharing in the benefits.”

Jensen said if carriers add more than a week to transit times, Electrolux may have to plan to keep more safety stock at some locations.

“A transit time change of up to a week, on the other hand, is not going to make much difference, since we have been coping for years with carriers’ horrible schedule accuracy anyway, and so a certain buffer is obviously built into the system,” he said. “In this respect, slow steaming may not actually be a bad thing, since presumably it will leave carriers with a speed buffer that can be used to at least improve on schedule reliability.”

Some terminal operators say they welcome slow steaming because it could make vessel schedules more reliable. When ships fall behind schedule and arrive in port in bunches, terminals struggle with congestion and higher labor costs. If necessary, a slow steaming vessel could make up for lost time by temporarily increasing its speed.

Arnold said Toyota’s carriers have told the automaker they don’t plan to boost trans-Pacific vessel speeds to make up for rough weather or other unexpected delays. She said that could require some imports to be shifted from rail to truck or, in extreme cases, air freight, to avoid supply chain interruptions. “That’s something we would have to absorb,” she said.

Although some shippers have complained that carriers failed to provide enough notice of their switch to slow steaming, Arnold said that wasn’t an issue for Toyota.

Container ship lines have billions of reasons to slow their ships.

Their worldwide losses for 2009 were estimated at close to $20 billion, and more red ink is likely this year. Carriers began experimenting with slow steaming when bunker fuel prices spiked in 2008 to about $600 a ton. After dipping early last year, bunker costs have risen since June to about $500 a ton.

Carriers have offset some of the increased costs through surcharges, but cargo demand remains weak. Drewry Shipping Consultants forecasts a 3.7 percent in global volume this year after a 10.3 percent drop in 2008, but vessel capacity continues to increase. Shipyard order books include capacity amounting to nearly one-third of the existing fleet.

ASX-Alphaliner estimated at the start of the year that extra-slow steaming has reduced the vessel surplus by absorbing 2.4 percent of world container ship capacity — the equivalent of 47 vessels with capacities of 3,000 to 13,000 TEUs that otherwise would be idle. In recent weeks, carriers have slowed additional vessels. AXS-Alphaliner said 12 Asia-West Coast routes have been slowed, representing 32 percent of trans-Pacific strings.

At $500-a-ton bunker prices, carriers can save 5 to 7 percent by operating vessels at 17 to 19 knots instead of at full speed, AXS-Alphaliner estimates. For a typical Asia-Europe service with 8,500-TEU vessels, that could amount to $15 million to $20 million a year.

The ocean carriers are not alone in taking speed into account in managing capacity.
Major U.S. railroads generally saw their network velocity slow down in the second half of 2009 as they parked cars and increased what the railroads call terminal dwell time amid a double-digit decline in freight demand.

Some large trucking companies have put speed limiters on engines to keep top speeds on trucks at around 62 to 65 miles per hour, a fuel-saving tactic. The American Trucking Associations supports mandatory speed limiting devices set at 65 miles per hour for trucks, but independent truckers oppose the limit, in part because it could cut into loads and revenue.

One the water, slow steaming takes a variety of forms. A few carriers have kept the same number of ships but slowed speed by reducing port calls, but that’s unpopular with shippers forced to find alternatives. Most carriers have slowed schedules by adding one or two ships to a service string.

Maersk’s Harling said the Danish carrier has slowed its vessels on virtually all long-haul routes, but that it doesn’t make sense everywhere. “You need long distances,” he said. “On an intra-Caribbean service with three ships, adding one ship would bring havoc to the schedule.”

On its longer routes, Maersk typically adds one vessel to a string, maintaining weekly service but stretching the round-trip voyage by adding two days on the head-haul segment and five days on the return trip. A ship that sails 19 knots on the busiest half of the voyage may average 15 knots on the backhaul.

Slow steaming represents an about-face from carriers’ long-standing emphasis on speed. For decades, carriers trumpeted their fast ships and speedy transits, and shippers shopped for the quickest way to supply their just-in-time networks.Mark Page, director of liner shipping at Drewry Shipping Consultants, said the effect of slower ships on supply chains highlights a critical gap for the container carriers. “Carriers haven’t properly priced added speed,” he said. Page said there could be an opportunity for carriers to take a cue from FedEx and UPS and charge higher rates for routes with faster transit times.

John Isbell, vice president of Starboard Alliance and former director of corporate logistics at Nike, believes carriers eventually will rediscover the virtues of fast transits. “As soon as demand gets back to the level of a few years ago, those ships will speed up,” he said. “If demand gets back to 2007 levels, carriers will be looking at ways of loading as many boxes as they can as fast as they can.”

NOL’s Widdows concedes if business were rosy, carriers probably would be going full speed ahead. “Right now, slow steaming is driven by costs,” he said. “There are only a few ways you can reduce the costs of running ships. You can lay them up, but there’s a limit to the amount of that you can do. Or you can slow them down, which has quite a substantial impact in reducing costs, but it obviously has some tradeoffs in terms of the service structure.

“The good news is that most customers are more focused on reliability and consistency than they are on transit time per se,” Widdows said. “Obviously, this will have an impact on supply chains. Some shippers understand this very clearly. This is the way forward into the future. The sooner our industry moves in that direction, the better off we will be relative to our environmental impact.”

He said environmental concerns would be the long-term driver of slower vessel speeds.
“Our future is driving lower emissions and the only way we have to do that is to lessen the amount of fuel we burn, and that means we’ve got to slow the assets down,” he said.

The environmental benefits and fuel savings eventually will require more investment, he said. When ships sail at slower speeds, more are required to maintain service. That’s no problem now, with some 560 vessels idle. But Widdows said when cargo demand recovers, carriers will have to expand their fleets.

“Cycle this forward five or six years and it will mean that every time one of us wants to start a new trans-Pacific service, it will be a six- or seven-ship loop instead of a five-ship loop,” Widdows said.

“The level of investment that’s required to serve the market is already very large. The investment will get larger,” he said. “Therefore, this industry will have to figure out a better pricing model. Emissions, cap-and-trade, levies — whatever comes is going to increase the cost to this industry. We’ve got to find a better model for a sustainable way of pricing our product to enable that ongoing investment. This is not an industry that’s figured out that mousetrap yet.”

For a link to the Journal and Commerce, click here


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