Tuesday 22nd Aug 2017 - Logistics & Supply Chain

Catching the wave

As one of the most secure, cost-effective and reliable modes of transportation, sea freight has always been the workhorse of international trade.

For many years regarded as a largely commoditised activity, concerned only with port-toport operations, sea freight is, at last, winning recognition for the crucial role it has to play in the operation of today’s complex integrated global supply chains.

There is growing realisation that a well-managed sea freight service can help achieve cost savings across extended supply chains, and that the sector has evolved to better meet the needs of customers. Sea freight today is about extended services, tailored solutions and added value.

One example of this evolution is in the improvement in the dependability and predictability of sea freight. These were once areas of concern, but the average speed of modern ships has increased from approximately 21 knots a decade ago to 25 knots today, with an associated drop in shipment duration.

Containerships now offer fixed sailing schedules and tight delivery windows. The arrival of vessels into ports deviates little from published timetables, with variations of, at most, two to three hours. Such improved performance and competitiveness, along with the increase in world trade, has fuelled a resurgence in sea freight since 2000. Global market volumes have grown steadily from 56 million TEUs in 2000 to 79 million TEUs in 2004 – a 41 per cent increase. Our projections show volumes rising to 118 million TEUs by 2010.

International trade is, of course, nothing new. But we have now entered an era of global interdependence where national boundaries are no longer barriers to multi-national manufacturers and retailers. In 2000, Kofi Annan, Secretary-General of the United Nations, observed: ‘Globalisation has been made possible by the progressive dismantling of barriers to trade and capital mobility, fundamental technological advances, steadily declining costs of transport, communication and computing. Its integrative logic seems inexorable; its momentum irresistible.’

The virtuous circle
Trade relies on cheap and secure transport, and sea freight is involved in around 90 per cent of all global trade in goods. As container port infrastructure has improved and international trade has grown, so the demand for container maritime transport has increased, reducing its unit costs. Cheaper transport in turn makes international trade more economically attractive… and so the virtuous circle continues.

The transport element of the on-shelf price of a consumer good varies, of course, but tends to be marginal. For example, transport accounts for just two per cent of the cost of a television receiver or about 1.2 per cent of the cost of a bag of coffee. Indeed, the typical cost of transporting a 20-foot container from Asia to Europe – carrying over 20 tonnes of cargo – is about the same as the single economy airfare on the same trip.

China now dominates the global sea freight map as a massive exporter of raw materials and finished goods to North America and Europe – including industrial products, textiles, shoes and other fastmoving consumer goods. India and countries of the former Eastern bloc show substantial growth, while intra-Asia trade – typically short sea legs between the major manufacturing locations on the Asian seaboard – has also dramatically increased over recent years.

Hong Kong is expected to lose its long-held status as the world’s largest container port to Singapore sometime this year, and many major European and North American companies have already switched their traffics directly to the big ports in mainland China, and are now using Singapore rather than Hong Kong as a hub.

In volume terms, the trans-Pacific and intra-Asia sea legs dominate, with 41 per cent and 35 per cent of the global sea freight market in 2005, respectively, followed by the Asia-Europe, trans-Atlantic and Latin American equivalents with 17 per cent, four per cent and two per cent, respectively (both directions).

But not everything is plain sailing. The maritime sector is no more immune to global economic forces than any other. It suffered a significant reduction in volumes in the early 1980s, for example, and was hit again by the Asian financial crisis of the late 1990s.

Today, carriers and port authorities worldwide have a number of major challenges to address. These include controlling their operational costs, coping with increased crude oil prices, the supply and demand imbalance, and the need to invest more in port infrastructures to meet growth.

Sea freight volumes on the rise
Sea freight volumes are growing at around eight per cent per annum and the market currently has more than 85 per cent of the total available global capacity in use at any one time. Six months ago, however, it was a carriers’ market and there was a major issue with the supply side – ie physical container cargo capacity on ships – not being aligned to rising demand. The gap has now been filled, but the problem is likely to become critical again in the next two years. There is inevitably a substantial time lag before new ships and port facilities can be built and brought on stream.

Although there’s little the industry has been able to do about world oil prices, recent capacity issues have been addressed by chartering and building massive new vessels of more than 8,000 TEUs – up from 5,000 TEUs of just a few years ago. The container slots of such superships are being shared among consortia to reduce the operational cost overhead. After a recent spate of mega-mergers – including the acquisitions of P&O by AP Moller-Maersk and CP Ships by Hapag- Lloyd – new operational alliances are emerging.

Additionally a number of port authorities have extended, or are in the process of extending, their berths to cope better with the larger vessels, as well as making substantial investments in improving terminal infrastructures, including cranes and storage facilities. They are also seeking to reduce operational costs through process improvements, simplification of work methods and sweating assets.

So what future awaits the sector? With globalisation of production and trade continuing to promote growth, I believe the picture is rosy. Although world economic output increased by 2.4 per cent per annum during the 1990s, global trade grew twice as fast. Global trade is now projected to rise by an average of 6.8 per cent a year over the next decade – again more than double the expected growth in world output.

Traditionally, all supply chains were of the ‘push’ variety, whereby manufacturers ordered stocks of raw materials, made the goods, and then pushed them out into the marketplace for sale via distributors and retailers. In recent years, many supply chains have been transformed into more effective demand or ‘pull’ chains, in which customers drive the process and pull stock through the system.

In an ideal world, a demand chain would mean that customer orders directly trigger the manufacture of new merchandise. But even in the real world the process has still resulted in massive changes in supply chain infrastructure.

For example, time-to-market has shortened, and a delay of a few days or even hours can have a huge impact on the profitability of a particular line. Product life cycles are shorter – with items such as fashion garments and mobile telephones often being superseded within weeks of hitting the high street. Prices are being driven down by relentless competition and the application of new technologies. As a result, manufacturing and distribution locations are constantly changing to meet the need for speedy and low-cost sources of supply.

In all this one thing stands out – the need for information. Supply chains must be transparent, with full visibility of products at every step of the way. It is not sufficient merely to deploy sophisticated information and communications technologies; a managed approach is needed that gives customers the timely information (and confidence) they demand.

Major international freight management specialists, like DHL Global Forwarding, can handle large sea freight volumes on a global basis or specific requirements on a single route – at any time and to any destination – effectively becoming non-vessel operating carriers. Increasingly the requirement from customers is for sea freight to form part of a global integrated supply chain solution with high levels of visibility.

Proactively mananging performance
The specialists’ ability to proactively manage their suppliers’ performance – acting as the customer’s eyes and ears from the point of origin to destination – is a vital element in their success.

Further organic growth will come from the continued expansion of our markets, the take-up of integrated services, the trend towards concentration on core competencies, development of smart freight lanes and the strengthening of customer relationships. Our business is increasingly about delivering value, reducing direct supply chain costs, managing change, lowering inventories, increasing supply chain agility, optimising financial arrangements and raising product availability.

This year we celebrate 50 years of containerisation and the huge improvements that Malcolm McLean’s deceptively simple invention has wrought on the efficiency of international transport. Increasingly, global forwarding specialists are now able to offer customers used to demanding air freight solutions, equivalent but far more cost-effective options by sea. After all, shipping is one of the safest, most environmentally friendly and lowest-cost forms of transport on the planet.

Thanks to continued economic liberalisation around the world, and sea freight’s ever-increasing efficiency, the prospects for its further growth remain strong.

Chris Fahy is chief operating officer for DHL Global Forwarding: chris.fahy@dhl.com

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