Risk Management in Global Ocean Context

Risk Management in Global Ocean Context

Feature Article by LSCMS Shippers Council

Rates have gone down massively in most trade lanes; congestion has eased, and capacity seems sufficient in most sectors. All of this despite the ever-prevailing threat of blank sailings and continuous reconfiguration of sailings by carriers. It appears that operational and procurement risks for beneficial cargo owners or shippers, in the short term, are minimal. In this context, the natural question out there is; with this somewhat optimistic landscape or outlook, what are the risks a shipper should be cognisant off given that the ocean is seemingly getting calmer.

This is the first article of four-part series that will attempt to look at specific areas of risk or management of risk itself. Written by logistics leaders who are practitioners in their respective companies, it aims to stimulate thinking on how shippers or BCO’s could view business continuity and risk in the current environment. The areas that will be deliberated in future articles are ocean shipping market landscape, freight procurement, reliability & visibility and the competitive landscape.

Risk management is about our attitude towards risk, ability to appraise the situation holistically, and our ability to manage risk. Reflecting over the last two years and crafting a sound insurance plan is essential. The ability to sufficiently analyze operating models and network flow of our companies is crucial. Some companies have adapted with near and/or off shoring, either due to cost or geo-political challenges. We can observe this quite clearly in the growth experienced in countries like Vietnam, India as well as Hungary and Mexico. There are other countries where growth has remained somewhat stagnant- probably due to the fact that their domestic markets dictate the network, tax advantages or confidence that they can ride out any risk with contingency plans. In the context of ocean procurement, one needs to internalize this with respect to the overall supply chain risk framework, for the very simple reason that logistics functions as an ingrated web and does not sit in isolation.

For a start, we need to critically assess of our end-to-end ocean processes. Internalize the old adage that we cannot control what is going to happen but we can surely control and adapt how we respond. That is the key and it is an important mindset shift. It is a common observation that shippers were unable to take advantage of spot rates, manage hybrid flows with spot/contract providers and work on a “LEGO” or “plug and play’ model with carriers or NVOCC’s. For most shippers or BCO’s our system structure, parameters and operational process at origin and destination are not ready for the kind of agility needed for a swift response.

Another mindset shift in the discussion of risk management, is the ability to work in ambiguity. One change behavior that many have grown into is the abhorrent view of ambiguity. The latter signals uncertainty and consequently fear of risk. For example, many shippers have now resorted to seeking fixed rates on a long-term basis even in this deflationary market. The fear of limited capacity and exorbitant rates in the last couple of years has left a permanent scar on the psyche of some shippers. One could argue that this is risk adverse behavior at play here. The art of risk management is to manage the equilibrium or of the “yin & yang” of the situation. Adopting either of the extremes may not be desirable.

Our approach to freight procurement would also require a revisit as part of a risk management strategy. The business environment, operational dynamics, cyclical imperatives and technology has altered significantly and this makes it imperative for shippers to review the overall design of the procurement process from the, collection of data and intelligence, overall procurement strategy, pricing as well as the contractual strategy. Gone are the days of a traditional global RFQ that is done yearly with a given set of partners. The nature of the beast today is one that requires us to contend with fairly volatile market dynamics where carriers mid-term sailing tactics, market shifts or geo-political events can have significant impacts on shipper’s logistics flow of delivery fulfillment. This would present significant risks to shippers if the latter continues to adopt a traditional procurement and operational mindset. Subsequent articles will expand on this topic, illustrating the myriad of tactical strategies, pricing models and contractual maneuvers that one can potentially leverage.

Visibility is often not viewed as a topic within the ambit of risk management. While it may not be a cause of risk, it is a capability that without which, may actually exacerbate risk scenarios.

The pandemic exposed the vulnerability of our supply chain to disruptions and demonstrated that a lack of visibility of cargo flow at a granular level, wasa major handicap in most instances. Downstream and upstream visibility is crucial if one is to orchestrate changes, redirect flows and manage business continuity plans. Supply chain visibility provides the ability to view and track inventory at product level across all modes from raw materials to finished goods at the customers door. The knowledge of shortages, delays and disruption are imperative to execute pre-emptive contingency plans.

There are different aspects of visibility from tracking of cargo flow, customer order details, inventory across the supply chain nodes, congestion spread and much more. Each aspect is a piece of the puzzle that aids the teams to better predict, pre-empt, execute faster response as well as uplift the overall organization’s capability in business continuity.

Similarly, transit time reliability has largely improved from the 2021 levels of ~30% to recent performances of ~60%. However, it is not the time to pop champagne. With the threat of an aggressive use of blank sailing, increase of idle ship and increased scrapping of older vessels, the scenario is still somewhat murky.

ny discussion of risk management in the context of ocean freight, cannot ignore the competitive landscape. The presence of alliances has been the most dominant feature in the last few decades. Since the beginning of 1998, with the formation of the Grand Alliance which was made up of Hapag Lloyd, NYK Line and OOCL, we have seen alliances being reconfigured over the years. Presently we have 3 alliances moving ~65% of global capacity. As such any significant change could make a wave a tsunami.

In this context, the most notable event was the announcement of Maersk’s exit of the 2M alliance by 2025. What does this mean to the shippers? While there are many predictions, large shippers or those with concentrated volume on specific trade ought to be aware of the changes. 2M is the largest alliance, with ~35% of world capacity. Early signs seems to suggest a divergence of strategies from Maersk and MSC, with the former inclined to pursue an E2E strategy providing customers pre and post carriage services, offering larger air delivery services, enabling over-arching system architecture to provide visibility and a series of other value add services.

MSC on the other hand seems to be developing a focused strategy on ocean services with limited and perhaps reducing the provision of related logistics services. A classic case of related diversification versus focused strategy that is taught in business schools. Their progressive plans can have significant impact on a shipper who is using their services directly or indirectly. One example is the recent exodus of AE1 Shogun loop from 2M North Europe loop which plys in the Far East to Europe trade. It is quite evident that there will be various implications on capacity, competition, pricing services, impact on the other alliances and over all ocean industry.

Managing risk in any aspect of entire supply chain flow is a daunting task. The trick is to be able to discern what is relevant to the context one is in and to be able to build a set of radar like capabilities to sense, evaluate objectively and respond decisively.

In next issue instalment of this four-part Risk Management in the Global Ocean Context, we will focus on carrier alliances and its impacts with a narrative on how shippers can ballast themselves in this volatile landscape that presents the well-equipped supply chain professional with opportunities to not just strive but to excel.

This article and the views contained therein was prepared or accomplished by the LSCMS Shippers Council. The opinions expressed in this article are strictly those of the LSCMS Shippers’ Council and not attributable to a specific individual or enterprise.