I interviewed Keith Gaskin who discussed Dealing With Disruptions to Supply Chain When Ocean Shipping.

 

 

 

 

 

 

Before we start this interview, can you provide a brief background of yourself?

 

I've been involved in logistics and supply chain now for 20-plus years in roles varying from operations, sales and running a branch prior to setting up SEKO with my business partners. 13 years ago, my partners and I started SEKO UK, really with the remit of working around client's supply chains with a technology-based solution in mind. At the time we were an independent forwarder but we joined with SEKO within six months of start up. SEKO globally started in 1976 as a US domestic forwarder but the last 15-20 years has seen a big shift to the international market and we’re now turning around about 750-800 million US dollars globally with the majority of revenue based on international business. Just under two and a half years ago, we did a recapitalization of the business with a US venture capitalist company called Greenbriar. Greenbriar who are based in the UShave given us a fantastic platform for growth and we’re looking to reach a billion dollars globally within the next couple of years.

 

My background more latterly has been to head up the group ocean procurement for SEKO Europe as well as a strong involvement in the sales process for the ocean product.

 

Great. Well, my first question is, can you provide an overview of what's happening in the market for ocean?

 

Well, it’s certainly not dull in an ever-changing market on ocean!! Around 3-4 years ago, there were approximately 18 to 20 global carriers and most started to expand very heavily, increasing the capacity on the ships as well as the number of vessels within their fleet. Unfortunately, due to the global financial crisis, demand wasn’t matching the increased capacity and with the substantial overcapacity, the freight pricing dropped. Subsequently, there's been more than a few price wars as the carriers bought new larger vessels into the fleet and looked to fill them with cargo. Approximately 10 years ago, Maersk launched the 13,000 TEU vessel called the Emma Maersk (one TEU is a 20-foot equipment unit, so a 40-foot is two TEUs) which was the largest container ship in the world at that time but now the largest vessels regularly being launched are over 20,000 TEU’s on the Asia to Europe trade route.

 

During these price wars and overcapacity in the market, it drove some of the carriers to run very dry on cash and they were forced to recapitalize the business or go to shareholders looking for more money. Due to some of these sustained losses, over the last 18 months there's been a lot of consolidation between the carriers to try to reduce costs and some very well-known names are starting to disappear from the market. The biggest casualty was around about a year ago, when one of the Korean carriers, Hanjin, went into liquidation.

 

The loss of Hanjincaused a lot of disruption to business’ supply chains as vessels were held under arrest by various ports around the world as they looked to recover outstanding debts. While the ports looked to regain some of their money, it meant shippers weren't able to access their goods within the containers causing huge disruption to transit times as well as additional costs. So talking of risk to supply chains, that was a huge issue which saw people wait four to six weeks (or more in some cases) before they were able to gain access to their own inventory.

 

The consolation within the industry means we're potentially going to be down to 8 to 10 carriers within the next 6-8 months. The three Japanese carriers NYK, K-Line and MOLwill be merging all their operations globally outside of Japan in March next year, which is a huge exercise, potentially causing issues and risks for shippers within the supply chain. Although there are potential risks during this period, they’re being forced to consolidate to reach a scale that will allow them to compete against the largest carriers like Maersk and MSC.

 

The idea has been to change the way that the freight is being procured meaning people are moving to longer-term contracts to ensure some surety on the freight rates and avoid the recent peaks and troughs. It’s the hope that consolidation will stop the carriers losing money via the practice of offering extremely cheap freight rates to gain more traffic. Clients cannot risk to have another carrier go out of business like it did with Hanjin and this period of consolidation is set to continue for the next 12-18 months.

 

As long as the capacity doesn't become too great again, they should be able to control freight rates to a better extent and stop them dropping to sustained loss-making levels. So there's currently a great deal of change within the industry driven by losses and consolidation.

 

How can companies react to these disruptions in the supply chain?

 

Companies being the shippers?

 

Yes.

 

If you have a large import or export company, they'll normally diversify across different shipping alliances and carriers to de-risk their business from a transit point of view in case of service reliability issues. In addition now though, shippers are reviewing the balance sheets of the carriers to check their financial viability. One carrier has sustained losses of just over $110 million US dollars in the last quarter and that was while the freight rates were higher compared to last year.

 

So there is some nervousness amongst the shippers and balance-sheet checking is certainly one area they will look at when reviewing the carriers. Whereas previously shippers may have looked to procure the cheapest freight rates, they're now looking for continuity in service, schedule reliability, receiving guaranteed space on each vessel whilst ensuring that the carrier is financially sound. It’s forced people to realise that procuring the cheapest freight rate isn't the best long-term solution for anybody - because if another carrier goes out of business, that could mean less competition on routes and long term higher prices. It’s now a case of mitigating your risk amongst different carriers whilst ensuring you're working with a carrier with good financial standing and robust schedule reliability.

 

Do you have any final insights you'd like to share for the shippers?

 

I think it's a case that stable rates are actually a good thing for the market because if there were only five global carriers (the head of Maersk, Mr. Skou, has recently announced that he believes in the next 5 to 10 years, they'll only be five global carriers) that would lean to a sustained period of higher freight rates.

 

Any final recommendations or insights?

 

I think a big one would beto pair the schedules of the carrier with your end to end transit requirements and that the cheapest freight rate isn't necessarily saving you money. If you suffer delays in your supply chain, the freight rate can become irrelevant if your goods are late into store or your DC which in turn, could cost a lot more money in the long term against a few freight dollars saved. From our perspective, the freight rates are very much a commodity which are transparent on indices like the SCFI (Shanghai Container Freight Index). Most of the carriers offer similar pricing models now so it comes down to supply chain value. Can we look to save cost and efficiency in your supply chain by introducing relevant technology and by reviewing your processes at origin and destination?

 

I think for the shippers, it's looking at the entire ocean freight market whilst making sure that you're not trying to push the carrier to a point where the rate level is so low, that your business is of no interest to them because they're not making any margin from it. The carriers are becoming ever more focused on margin now (They are in business to make profit!) so they're restricting capacity when rate levels are low to push the rates up and if you have a cheap freight rate, they may not give you the volume that you require in the peak season. So coming into the Christmas rush - which would be August through to November –space availability could well be key as the carriers seek control it. You need to ensure that your freight rate is at the right level so that every container you look to ship, moves on the specified vessel at the agreed rate. It’s also worth looking at taking advantage of some of the spot pricing opportunities available at present so that not 100% of your business is contracted at a set rate. Whatever strategy a shipper chooses, it’s important that they are willing to stick to that strategy and where possible, enter into a contract with either the shipping line or logistics company so that all parties have a clear understanding and will support their requirements. By contracting the business, it also ensures that all parties view the business as a long term partnership and are willing to invest in it.

 

Thanks for sharing today, Keith.

 

You’re welcome and thank you.  The market is certainly ever changing as are the carriers which has brought strong client interest. Thankfully it's taken the focus for a lot of the clients away from pricing on a freight port-to-port element and bring into consideration all the additional value-add components and commitments that you require. From our side of the fence, ever more emphasis is being placed on our technology, innovation and how we can save money for clients in the whole supply chain rather than an individual port-to-port cost. As pricing is now readily available on major routes from Asia into the US and Europe on shipping indices, freight rates are now a commodity which means pricing is ever more transparent. Clients are now looking beyond price and into what value the solutions will provide to them across the supply chain.

 

 

 

About Keith Gaskin

 

 

 

 

 

Keith Gaskin

 

Owner, Group Commercial Director - SEKO Logistics

 

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