The Response of Liner Shipping Companies to the Evolution of Global Supply Chain Management
Trevor D. Heaver *
The purpose of this chapter is to review developments in liner shipping in the light of the evolution of concepts and practices associated with supply chain and logistics management. The long-term developments have featured the shift in management philosophy away from managing functions individually to managing them as linked components of supply chain business processes (Lambert, 2001). This has had important implications for the expectations of shippers and the service decisions of shipping companies. Recently, shippers have shifted their strategies and priorities as a result of challenges in international logistics associated first with the congested conditions in container trades, especially in 2004–2005, and then with the recession of 2008 and 2009.
For many years, shipping lines were encouraged by their cost structure and the service interests of shippers to extend their services through horizontal and vertical corporate integration. The horizontal integration was pursued through internal growth, mergers and acquisitions and the on-going evolution of alliances. The vertical integration was achieved through shipping companies or the corporations of which they are a part extending their services through internal growth and acquisitions in three main areas. They are the management of container terminals, the provision of intermodal services and the provision of logistics services. The relationship of each of these services with the shipping activities deserves individual attention.
The extent and forms of integration have varied over the years as the challenges and opportunities for service suppliers have changed in the light of economic conditions and the interests of shippers. For example, the trade boom and congested conditions of 2004–2005 brought to light discontinuities in logistics management practices and in transportation capabilities associated, in particular, with port hinterland connections. As a result, attention has focused more than previously on the effective coordination among operations in and related to ports irrespective of ownership. This makes it appropriate to distinguish between the use of ‘integration’ referring to corporate and related organisational relationships and “coordination” referring to communication and operating relationships. This is to avoid the use of “integration” for both common ownership and the coordination of services and to give greater recognition to the challenges of achieving effective coordination along logistics chains.
In this chapter the evolving conditions in supply chain management and logistics are reviewed. This sets the stage to describe the responses of lines. Both the horizontal and vertical restructuring of lines are covered but the emphasis is on the latter. This part of the chapter draws, in particular, on Evangelista et al. (2001) and Heaver (2002). Interpretation of the patterns of relationships draws on the literature dealing with supply chain management, out-sourcing and transaction cost economics. The evolving organisational relationship between the shipping and logistics services of lines is explored in the concluding part of the chapter. The interests and conduct of shippers in the allocation of traffic among lines and in the negotiation of liner rates and services appear vital to the relationships of shipping with logistics services.
2. Evolving Conditions in Supply Chain Management and Logistics
Liner shipping is but one of the myriads of service and product activities that are necessary for the delivery of the goods and services required by consumers. The opportunities and challenges faced by the lines are affected by the network environment in which they operate. As the environment changes under technological, economic and political conditions, so the lines have opportunities to follow strategies that give them an advantage in serving customers needs. These strategies have implications for the organisational structure of the liner industry. This section of the chapter starts by defining the concepts of supply chain and logistics management and then proceeds to examine the implications of customer needs and the associated challenges and opportunities for shipping. It concludes by describing some of the changes in the logistics industry that affect the position of liner shipping companies.
2.1 The definition of supply chain management and logistics management
The advance of more integrated approaches to the management of intra-corporate and inter-corporate relationships is well documented (Hall and Braithwaite, 2001). Even though Hall and Braithwaite suggest “there is little point in seeking to document a perfect definition for supply chain management”, a definition is useful as it captures the importance of coordination. Mentzer et al. (2001) define supply chain management as: “the systematic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole.”1 That the “chains” referred to are more likely “networks” of private and public goods and services providers distributed globally is one of the possible shifts in the terminology that, fortunately, is generally treated as too esoteric to worry about.
Supply chain management is the wide framework within which logistics functions. The definition of logistics by the US Council of Supply Chain Management Professionals, formerly the Council of Logistics Management, reflects this. The definition is: “Logistics is that part of the supply chain process that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point-of-consumption in order to meet customers’ requirements.”2 It recognises that logistics management is only a part of the supply chain.
2.2 Customer needs and the challenges and opportunities for liner shipping
Global improvements in logistics performance have contributed to and been required by increased competition in product markets. The reduction of tariff and other trade barriers, improvements in the efficiency of transport services and the increased value and reduced weight of many products have all contributed to the ability of products from distant locations to compete locally. Multi-national firms that used to be organised with regional marketing and production divisions switched to product-based supply chains that source and market globally. Spatial competition (the competition in common markets for products from far away) is more important now than ever before.
Increased competition heightens pressures for the redesign of supply chains and logistics systems. The competition drives the need to reduce costs while, at the same time, maintaining or improving service levels. While the actions taken to reduce costs and to improve services work concurrently and dynamically, it is convenient to describe them individually. Such actions are considered next, prior to considering their implications for shipping lines.
2.2.1 Developments in logistics
Four strategies provide examples of the central role for logistics in improving supply chain performance. They are: sourcing in low-cost locations; just-in-time delivery; postponement; and improving supply chain visibility.
Sourcing in low-cost locations: Industries have always made trade-offs among alternate locations based on the benefits of locating close to low cost resource inputs compared with the benefits of proximity to markets. Typically, industries in which labour costs are high gravitate to low wage-cost locations. The ability of firms to do this is dependent on efficient logistics services to get products to where they are needed. Examples of the pull of low cost production are the shift of manufacturing textile, footwear, automobile, electronic and toy products to Asia, particularly China. However, the attractiveness of shifting to low-cost production locations has decreased recently if logistics conditions for those locations have not been compatible with the operation of manufacturing and retailing with low inventories. For example, the changing pattern of activities in the hard disk drive industry in Asia has been affected by various aspects of time responsiveness, including transit and order cycle times (McKendrick et al., 2000). Similarly, the location and role of facilities of the Taiwanese computer manufacturer Acer reflects the trade off between costs of manufacture and assembly in Asia and the time of delivering product to consumers (Nemoto and Kawashima, 2000). The congestion experienced in ports in 2005 and the need for quicker responsiveness in supply chains made evident during the 2008–2009 recession have increased the value placed on shorter and more diversified supply chains. Shippers remain attracted to low cost locations but have become more alert to the logistics disadvantages that they may imply for their supply chains.
Just-in-time delivery: The concept of just-in-time delivery (JIT) has been a major reason for the redesign of logistics systems. The successful use of the kanban system in the Japanese automobile industry had a major influence on all industries around the world as they have shifted to new delivery systems. JIT is just one approach to reducing inventories in supply chains through frequent, small quantity and highly reliable deliveries. These deliveries are timed to respond to immediate user needs; the products are pulled through the supply chain by demand. This is a major difference to the time when goods were produced in long, low-cost runs based on forecasts well ahead of demand. When manufacturers are the immediate recipients of goods, terms such as lean manufacturing are used to describe the new environment. When the recipients are retailers, the term lean retailing may be used.
For these systems to work effectively transportation services must be reliable; delivery is required at precise times. Many systems are also built on short lead times, thereby placing requirements for premium transportation or geographical proximity of the supplier to the user. However, the benefits of reliability as an attribute of transportation which reduces inventory costs are fundamental in logistics. The consequences of relatively low reliability and the long transit times generally associated with liner shipping have received heightened attention as a result of the congestion of 2004–2005 and then the need for agile responses to the recession of 2008–2009.
Postponement: The strategy of postponement involves the delay of processes. Manufacture of products may be delayed until a customer places an order; this is most likely when product manufacture or assembly can be done quickly. More frequently, undifferentiated products are held in a centralised inventory, thereby reducing the total inventory held and the costs built into it. When more information is obtained about demand, differentiating processes can be performed whether the final manufacture of a product, the labelling to national market requirements or simply shipping to one market rather than another.
For products with highly uncertain demand, the ability to defer production until as much as possible is known about demand is especially advantageous. Thus, the geographical shifts of manufacturing in the textile industry reflect the predictability of demand for particular product groups. For example, increased manufacture of fashion textiles has taken place in the Caribbean and Central America at the expense of Asia as time to North American customer has assumed greater importance (Abernathy et al., 2001). Similarly, the efforts of the automobile industry to provide individual car buyers with the style, colour and options they desire within ever-shorter times and at reasonable cost requires a responsive supply chain. The nature of trade-offs can be illustrated with an example.
Car seats are usually assembled close to the auto assembly plants, for the obvious reason that their bulk makes them expensive to transport. However, the manufacture of components of seats may be more widely distributed, for example in the manufacture of leather seat covers. This manufacturing is labour intensive. As a result, production is found in Asia often using imported materials. The finished covers may be shipped back by sea container. Products of good quality have been produced in systems that have had long though precise round-trip cycles. However, the pressures to give car buyers choice and fast delivery, at reasonable cost, is difficult for such a supply chain. To achieve the responsiveness to meet variable demands without excessive inventory close to auto markets requires a much more flexible logistics system. In the absence of forecasts of demand long enough in advance, some seat covers, at least, may have to be sent by airfreight. The difference in costs between sea and airfreight is such that the viability of exports from Asia is threatened. The challenge increases the competitiveness of alternate locations with low labour costs closer to the major markets, for example, Eastern Europe for Western Europe and Mexico or the Caribbean for North America. A general consequence for consumers if effective supply solutions are not found is that the range of options available in short times becomes limited.
Supply chain visibility: Reductions in the order cycle and delivery lead times have been achieved through many changes in the design and operation of supply chains and logistics systems. Vital contributions to the changes have been made by the developments in information and communications technologies (ICT). Notable has been the transfer of data and other information resulting in reduced order cycle times. However, another vital benefit of ICT systems is enhanced supply chain visibility.
Firms are striving to achieve better visibility, forwards and backwards, along their supply chains. Forward information reveals point of sale information from bar code scanning, shared real time or frequently through automatic electronic transmission. This allows members of supply chains to make quick and consistent decisions (with different levels of sophistication among supply chains) about replenishment based on common information. It enables the use of cost-effective methods such as Manufacturing Resource Planning or Continuous Replenishment Planning and avoids the violent fluctuations of inventories associated with sequential and delayed information provided along disjointed supply chains (Forrester, 1958). Visibility backward along supply chains enables receivers to be fully aware of the status of orders so that early actions can be taken to minimise costs associated with delays in supplies or with changes in requirements. The visibility of the status of purchase orders from the time they are placed until goods are delivered is one of the competitive services offered by major logistics service companies. Visibility is a key benefit at the heart of increasingly sophisticated supply chain software.
2.2.2 Challenges and opportunities for liner shipping
Each of the strategies described above is associated with a range of changes in the characteristics of supply chains and logistics systems. These create challenges and opportunities for shipping lines.
Relationships among supply chain participants tend to be closer. To achieve this, buyers seek to use fewer suppliers of particular goods and services. For shipping lines and other carriers, this means that shares of shippers’ business are larger but go to fewer firms. One of the attributes desired by shippers as they develop closer relationships with fewer lines is that those lines have an extensive service network able, therefore, to serve them in various trade lanes. The pressure on lines is to develop more extensive service networks.
The reduction of time is becoming a more important logistics strategy to reduce costs and to improve customer service. Hummels estimates that for manufactured goods imported into the US each day of travel is worth an average of 0.8% of the value of the good and that each day in transit reduces the probability of a country as a source by 1.5% (Hummels, 2001). The related feature is the greater attention to reliability of products and processes. The costs of “disruptions,” whether associated with variations in demand, logistics or supplier performance warrant close attention (Levy, 1995). The effects of disruptions are particularly great when lead times are long, even with good information systems, hence the importance of the unanticipated congestion in 2005. Greater recognition of the costs of disruptions discourages strategies of reliance on low-cost long supply chains and encourages the use of a variety of sources and the use of, at least, some shorter, faster supply chains. More local sourcing, the use of improved IT and of expedited logistics services are encouraged. The liner shipping industry faces prospects of a diminishing role, at least in percentage terms, in international trade if the threat of congestion were to remain. The competitive advantages accruing to lines offering short reliable transit times would increase. These are lines on short routes, with fast ships and with related services that ensure fast and reliable door-to-door service. Whether the heightened value of short transit times would be sufficient to create a market to support new fast ships in ocean services remains to be seen.
In pricing their services, lines face heightened competitive conditions. The competition for market share is increased by the traffic allocation strategies of shippers, the legislative weakening of conferences and the rapid increase in capacity resulting from the new generations of larger ships. The competitive mix has also been affected by the entrance into international logistics, including the services using liner shipping, of the integrated carriers such as United Parcel Service (UPS) and FedEx. Also, shippers have available to them a widening range of manufacturing locations and logistics strategies that place limits on the rates chargeable by lines on particular routes.
These changed conditions create opportunities for the lines that respond well. Notably, the strategies of lines to ensure faster, more reliable services are resulting in greater attention to the coordination of operations along the logistics chain and to on-going shifts in the span of activities in which the shipping lines are engaged. Striving to provide enhanced customer service is taking lines into additional service areas and redefining relationships in international logistics service. Before examining the position of shipping companies in other services, it is appropriate to examine developments in the logistics services sector.
2.3 Changes in the logistics industry
It is customary for firms with small volumes of international traffic destined for or originating in a foreign country to use a freight forwarder. Freight forwarders have long been specialists in arranging the transportation, storage and handling of goods along with associated documentation activities between and within countries.3 They manage the activities through their own offices and through those of partners. They may act as agents in arranging transportation or act as a non-vessel owning common carrier (NVOCC) co-loading freight onto a shipping line’s vessel and issuing their own bill of lading. For example, DHL provides this service as Danmar Lines. In the trade of countries with highly specialised logistics and transportation conditions, even large firms with substantial volumes of trade into the country have traditionally sought the assistance of such specialists.
The increased demand for logistics services in the last 20 years has arisen with the growth of global supply chains and the greater use of outsourcing for logistics services. The result has been the creation of a multi-faceted, large and complex logistics services industry. It has evolved from various bases the most important of which has been the traditional freight forwarding firms, the largest of which commenced from European roots and had a wide international presence for most of the twentieth century. They were present in most continents but had varied intensities and relied on partners in some countries. In the last two decades they have increased the number of countries in which they have a direct presence and have increased the intensity of their presence in most countries. They have generally done this by acquisitions and mergers. In 2008, the Swiss-based Kuehne & Nagel had an invoiced turnover of US$20.3 billion (CHF21.6 at CHF1 is US$.94) of which US$9.4 billion was for sea freight services. In 2008, Panalpina also Swiss-based, had revenue from its forwarding services of US$10.0 billion (CHF10.6 at CHF1 is US$.94). The other leading European forwarders Danzas and Schenker are now owned by Deutsche Post and Deutsche Bahn respectively. Deutsche Post acquired Danzas in 1998 and branded its forwarding and logistics services as the Danzas Group but following the acquisition of DHL (and Exel) in 2005, it branded the services as DHL Global Forwarding and DHL Freight. In 2008, Deutsche Post World Net reported revenue from forwarding, freight and supply chain services as US$41 billion (€27.9 billion at €1 is US$1.47). Express services had revenue of US$20.0 billion. Deutsche Bahn acquired Schenker in 2002 (and Bax Global in 2005) and conducts its global business under DB Schenker Logistics. In 2008, DB Schenker Logistics had revenue of US$21.6 billion (€14.7 billion at €1 is US$1.47).
The logistics services industry has also experienced growth from firms with previously more specialised businesses. They include domestic transportation and warehousing companies, courier and parcel services and liner shipping companies. Particularly in North America, changes occurred in transportation and logistics services in response to the opportunities and challenges associated with the growth of companies, the deregulation of the transportation industry and the heightened service demands of evolving supply chain management practices. Contract logistics suppliers have developed to take advantage of the interests of some large companies to out-source logistics activities. The best examples of these new third party logistics providers in the US are Schneider Logistics and Ryder Logistics, which expanded into logistics from trucking operations, and C.H. Robinson that had a produce warehousing base. These companies have subsequently expanded into international logistics and supply chain services. However, while the firms are substantial in total, as public companies Ryder System and C.H. Robinson Worldwide reported revenues of US$6.2 billion and US$8.6 billion respectively, their international revenues are still modest. This is identifiable for Ryder in 2008 as US$800 million, which is one half of the company’s Supply Chain Solutions revenue.
Companies in the express and parcel businesses have also added logistics and freight services. UPS expanded into international logistics services rapidly since it acquired Menlo Worldwide Forwarding in 2004 and incorporated it into a newly formed UPS Supply Chain Solutions. In 2008, the revenue from Supply Chain Solutions and Freight was US$8.9 billion and from the international package business was US$11.3 billion. (Revenue from domestic packages was US$31.3 billion.) FedEx has also expanded its portfolio of services. In 2000, FedEx acquired Tower Group International, a leader in the business of international logistics and trade information technology and used this as the core of its new FedEx Trade Networks. In 2008, FedEx Trade Networks initiated its first ocean-ground distribution service with a service from Asia to the US West Coast. (In 2008, the total value of FedEx international business was US$8.5 billion compared with US$27 billion of domestic revenue.)
Finally, shipping lines have made a significant entry into logistics services. Responding to the interests of shippers to deal with fewer suppliers and to outsource logistics activities, most liner companies had introduced some logistics services. However, the lines providing the most substantial logistics service remain those that were the entry leaders between 1970 and 1980 serving the interests of importers of manufactured goods from Asia. Importers of Asian goods felt the need for better assistance in managing the flow of imports. The value of imports from Asia was increasing and the shipping lines were interested in extending their range of services to customers.