De-Risking Your Supply Chain: Protecting Against Pandemic Panic
By Kimberly Cockrell
container shipping | Fri, Mar 13, 2020 | 6 Minute Read
It would be unwise to approach the Coronavirus or COVID-19 with anything less than caution and vigilance with more than 126,000 confirmed cases and almost 4,600 deaths globally to date. We’re witnessing in real-time, the impact of the virus’s spread; from travel bans, empty retail shelves, complete lock-downs and the cancellation of gatherings like TPM20. As the virus, and the associated fear, spreads, containment controls and their consequences are likely to become more severe.
75% of supply chains affected
The shipping industry is certainly not immune to health, nor weather, economic or political fluctuation. In the last year alone we experienced volatility from trade tariffs, global sourcing shifts, as well as new low-sulfur requirements. And now, according to a recent survey of supply chain executives, 75% of supply chains have been impacted by COVID-19.
According to Alphaliner, as much as 30-60% of weekly capacity from Asia to Europe and North America has been withdrawn; a trend expected to continue through quarter's end. Nearly 9% of the global containership fleet is inactive. The inability to obtain product from China is severely impacting Q1 sales and revenue for many retailers, and others project inventory depletion in mere weeks. US exporters likewise have reported continued booking cancellations, and the inability to procure space even one month out.
Yet 44% of supply chain executives don't have a plan
According to the same survey, 44% of supply chain professionals do not have a plan to regain control of their disrupted supply chains. Thirty-one percent are dealing with the disruption by turning down or delaying orders, and another 28% said they were looking for alternative suppliers. Unfortunately, neither of these options provide near-term relief.
What can we expect in Q2?
- Space shortages: As production has begun to restart in China, blanked sailings are decreasing and the clearing of the backlog can now begin. Late orders combined with the back-to-school rush will cause a surge. With so much inventory to replenish, demand for vessel space will significantly exceed weekly supply. Port execs are warning shippers not to be fooled by the low volumes moving right now as the situation will reverse in late April/May.
- Equipment shortages: Industry experts predict that the net effect of European containment measures over the coming weeks will be a slow-down in the turn-around speed of containers. This equates to a slow-down in the repositioning of empties to Asia, which has already been inhibited by low US exports.
- Rates on the rise: Ocean carriers have been shouldering the cost of inactive vessels for the full quarter and soon arrives the opportunity to recuperate those losses. The Shanghai Container Freight Index paints an extreme picture, and back-haul rates have increased from some origins (such as Northeast Europe) by 48% in the last two weeks.
Trust an ocean contract or opt for airfreight?
One supply chain executive stated on LinkedIn this week:
“We had back up inventory in Hong Kong and the EU but the lag time has eaten up most of that stock. As a result, we’ve moved the transportation model from Ocean Freight to all air, which is a relief valve but at a cost [emphasis added]."
1) Airfreight rates have tripled as airlines grounded flights from China. 2) Many shippers simply have too much volume to shift their model from ocean freight to air.
If the success of supply chains (and company financial health) depends on the ability to obtain ocean space and equipment, a supply chain professional must consider the options which deliver the highest degree of reliability. A service contract is not a guarantee. Not even the rates are guaranteed. Sure, both sides have financial obligations written into the contract and, if a shipper has the bargaining power, a no-new-surcharge clause. However, in practice it is virtually impossible to exact those liquidated damages and there are many creative ways to implement rate increases. If a shipper is unwilling to pay the increased cost, higher-paying cargo takes precedence.
Hedge against volatility
Shippers are now building customized monthly and quarterly NYSHEX contracts to hedge against risk. Many of the world's most savvy shippers are breathing a little easier than the rest for having made the decision last year to lock in Q1 guaranteed allocation through NYSHEX. They never could have foreseen what would happen this quarter but in shipping, can one ever? Some of our members are enjoying prioritization by carriers for upwards of 10,000 TEUs this quarter, and with rates set last quarter which cannot be adjusted. They are able to prioritize the most urgent cargo in their supply chain with those guaranteed contracts. Here's how it works.
- The rates you and your carrier partner agree to are effective for the duration of your contract.
- The shipper commits to monthly volume (which does not have to be the same amount each month).
- The carrier provides weekly space and equipment commitment based on the shipper's monthly commitment.
- The shipper can choose from multiple port pairs to fulfill their weekly allocation commitment. (For example, the shipper's commitment could be 1000 TEUs a month from China base ports to USEC ports).
- The shipper and carrier could agree to a range of variation, for example 10%. This would provide the shipper some buffer in case the weekly volumes vary within the agreed range.
Once their contract is digitally signed, it is backed by a two-way commitment promising that the cargo will be prioritized, and the rate cannot change.
In the event of a Force Majeure, both parties are relieved from paying defaults if the breach was genuinely caused by the crisis.
Across 90,000 containers, NYSHEX contracts have achieved 99% fulfillment.
To believe we won't see some new global crisis impacting the flow of cargo again in the near future once the current one has passed is naive. We've all been in shipping long enough to know otherwise. When you’re responsible for overseeing and managing your company's overall supply chain and logistics strategy, you have two choices: panic or preparation. We’re not here to help you predict the future; just to prepare for it.
"An ounce of prevention is worth a pound of cure." - Benjamin Franklin
Schedule a consultation with one of our strategists today to get a demonstration of exactly how NYSHEX guaranteed contracts can help you mitigate your future risk and get your cargo on a vessel at a fair price.
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