The effective deregulation of ocean transportation pricing that went into effect last May under the Ocean Shipping Reform Act (OSRA) has created opportunities for shippers to wring out costs from the logistics part of their supply chains — the part that involves transportation planning, the physical movement of goods and associated processes and transactions. The impact of OSRA, which allows confidential carrier-shipper service contracts, is gradually taking hold.
Carriers initially lowered their rates (six months before the law even went into effect) to protect market share, but today that's changing. Third-party agents and non-vessel ocean common carriers (NVOCCs) are forming consortiums to increase market share and their buying power. The use of confidential, global contracts is on the rise between shippers and carriers. Shippers are forming associations to leverage their negotiating position with carriers. Trust in the confidentiality of rates and other shipper data is an ongoing concern. Carriers continue to consolidate, and the Federal government continues to publicly question the anti-trust immunity provided for ocean carriers under the OSRA law.
Research conducted by our company in 1999 confirms that price continues to be a high priority in carrier selection in the deregulated ocean shipping market, especially among small- and medium-sized shippers with annual expenditures for ocean transportation of $500,000 or less. Closely following in importance, the research shows, are service values such as time-definite performance, document and data accuracy, shipment tracking and tracing, process improvement and proactive customer service.
Several factors have hindered shippers in their efforts to take advantage of the expected benefits of OSRA. For one, carrier discussion agreements continue to thrive. This means that despite the demise of carrier cartels, carriers are banding together to try to boost rates, with some success. General rate increases (GRIs) continue; for instance, carriers in the Pacific import trade have announced a general rate increase of $400 per 40-foot container scheduled to take effect on May 1. Shippers have also been largely unable to use the flexibility offered by the new law to force carriers to accept greater liability for damaged cargo. To some extent, OSRA has created a dog-eat-dog environment where, in short, the best negotiator gets the most competitive rates and service.
There are a few good lessons to be learned from the recent history of deregulation in other transportation sectors. Of the trucking organizations that were in operation before the deregulation of motor carrier transportation in 1979, 90 percent have dropped off the radar screen. Extensive consolidation occurred as a few strong players gained dominance and control. Following passage of the Staggers Act, which deregulated rail transportation in 1980, Class I freight railroads fancied themselves as retailers to small- and medium-size shippers. By the end of the decade, the big railroads, laden with massive capital and back-office expense, saw that service to smaller shippers had dragged down their profitability and reduced their effectiveness with large volume contract shippers. Solid, third-party intermodal suppliers emerged, such as The Hub Group and C.H. Robinson, and earned their niches by delivering total service value to small and medium-volume shippers. No matter what the industry, service always remains the single most enduring factor.
As with other large service industries, which have been deregulated, ocean transportation consumers are still groping their way through the newly reformed environment. What is clear is while small- and medium-volume shippers have not found it as easy as once anticipated to get low rates, all shippers are now in a better position to negotiate relationships which can yield better service and cost cuts, which go far beyond bargain basement prices. Indeed, these hard and soft cost savings can far outstrip those available through low transportation rates alone.
Far-sighted shippers have discovered ways to respond to the challenges and gain advantage out of the new law. First, shippers can work together to leverage their volumes to improve service. Shippers, such as the National Unaffiliated Shippers Association, have reported some success in this area. Shippers of all sizes have also wanted protection against indiscriminate general rate increases, assurances of containers and chassis, when needed and proprietary treatment for space on vessels, especially during peak shipping times.
New forms of third-party partnerships have the potential to take this concept even further for shippers. For example, using the market freedoms fostered by OSRA, BPD International and long-time client DuPont recently announced the formation of a joint venture that will offer small- and medium-volume chemical shippers a combination of competitively priced carriage and logistics process value that extends beyond basic transportation service. The venture, called BDP Transport LLC, pools DuPont's strengths in safety and volume transportation procurement, with BDP's transportation management and logistics expertise.
While the BDP/DuPont partnership is the first of its kind, others will probably follow. Regardless of whether a shipper chooses to utilize this type of hybrid service, it is our belief that partnerships between chemical shippers and third-party logistics providers will continue, particularly in the deregulated environment set by OSRA.
