World’s largest carrier makes revolutionary move by introducing ‘daily cut-off’

The world’s largest container carrier could be defined by the actual number of container ships owned / chartered and operated and, or the actual number of container (TEU) slots offered to the shippers irrespective of the number of ships owned / chartered and operated. Based on data available in the public domain, the battle if at all, for the top slot would be between Maersk Line and the Mediterranean Shipping Company better known as MSC.

Irrespective of who fits into the top slot, Marersk Line recently made a revolutionary move by introducing a “daily cut-off” for cargo booked to be shipped on their vessels. This sensational move could easily be dubbed as the latest revolution in container shipping, next to the introduction of the marine freight container by Mclean in the late eighties. If successfully implemented, it will be a real bonanza for the Shippers and Consignees who will now have the potential to gain and make huge cost savings on their production, inventory and supply chain.

Cargo “Cut-Off”

Although Shippers are very familiar with the term “cut-off”, for the benefit of those who are not so familiar with this terminology – the “Cut-Off” basically means:

the final day on which the container with the goods / merchandise fully loaded, Customs and other documentation procedures fully complied with, and delivered to the Port or Container terminal where the specific Ship to which this container is to be loaded, is due to berth and load the cargo. The “cut-off” day is generally pre- advised and also advertised through various media by the Shipping Lines themselves as well as by the relevant Container Terminal / Port authorities.

Historically, this date originally was set on a monthly basis. However, with the increase in frequency of Vessel schedules, and the Vessel schedule integrity being more credit-worthy, it was possible for the Shipping Lines to reduce this period from one month to, first fortnightly, and then finally to a weekly “cut-off”. Of course the introduction of information communication technology also played a key role in this whole process of change

Currently the practise is a weekly “cut-off” - meaning the fully loaded container must arrive at the container loading terminal before this specified date if it is to be loaded on that particular ship. If not, it is likely that the container will be delayed by another six days before being loaded on to the next weekly caller. This is now a globally accepted practise, which the Shippers have accepted by default. Based on this practise the Shippers have in turn worked backwards on their production lines and the related logistics support services so as to meet this deadline.

The inability to meet this deadline can be very costly as the delay will inevitably mean an additional six days before this specific container even gets loaded to the next vessel. In effect there will be an additional delay of six days even before the container leaves the loading port. Thereby the delivery at the discharge port could be even further delayed with any other weather related and way-port related delays which are sometimes inevitable.

Reasons for change

With regard to reliability and delivery of cargo on time, the Shipping Lines have set an appalling industry standard. This is the fact that only about 50% of the containers arrive on time. This means that only one of two containers will arrive at the destination on time. Although this poor performance directly reflects on the Shipping Line, the reasons for this poor performance, does not lie solely with the Shipping Line. This can be attributed to many reasons including the role played by all the other stake holders in the supply chain. Most times the Shipper himself will fail to deliver the container on time to the loading port / container terminal. There could be documentation errors / delays which could all be topped up with delays and roll-over situations at the port itself.

Whatever the reasons, the fact remains that these delays are the main cause of the unreliable and high late delivery rate of containers. These delays come at a huge cost which is finally borne by most of the stake holders in the supply chain, which may also flow down to the ultimate customer at the Store.

Proposed daily cut-off

The proposed introduction of the Daily Cut-Off is set to commence effective from the third week of October. There is no doubt most of the large scale shippers not excluding the competing Shipping Lines will all be eagerly awaiting this launch. In principle what this proposal seeks to deliver is absolute reliability – that too with a guarantee which is covered by a pre-agreed penalty per each container that is delivered beyond the contracted date.

During the introduction to the industry it was very clearly emphasized that Maersk Line decided to implement this practise after much engagement with the stake holders, feedback from customers and including their in-house research. It is due to this background research that the Shipping Line is confident and ready to put their neck on block and provide a delivery date guarantee backed with a penalty for any delayed delivery. As can be expected there is also a mention of a penalty based on different elements, for “no-show” containers. This is understandable given the fact that almost 30% of booked containers do not turn up anyway. This will be a win-win, as it will bring in the necessary commitment both from the Line and the Shipper to ensure timely delivery.

Implementation

The current practise is for the shipping lines, freight forwarders and shippers to talk in terms of transit time. But under this new concept of “daily cut-off” and absolute reliability, the focus will be on “transportation time”. The definition for the transportation time has been clearly spelt out as “cut-off” date to the cargo availability date at the port of discharge. Therefore the number of days taken for actual cargo availability will be longer than the current transit time. This is mainly because other delays some of which are beyond the control of the Shipping Line, have been built in as buffer time. End of the day the Shipper gets the benefit of a “daily cut-off” meaning he can deliver the containers direct from the production line to the port on a daily basis, with a guaranteed availability date to the consignee at the other end – thus totally eliminating a storage inventory. In effect the shipping line becomes an extension of the production line process.

The savings that could accrue and the efficiencies that would be introduced to the whole supply chain management process are innumerable and too long to mention here. But there is no doubt that third party logistics service providers in particular would be watching this development with much interest.

Maersk Line who is known to have 20% of the market share in the Asia / Europe service has committed to allocate 25% of their tonnage which amounts to 70 Vessels for this new venture dubbed as Daily Maersk. As far as Maersk Line is concerned they already have this number of ships on this trade route, with a solid schedule network. Therefore no additional tonnage would be required to sustain this premium service.

Additionally some of the new Maersk triple E – 18,000 TEU class of Vessels due to be delivered in 2013, have been ear-marked for this service.

Initially and for some time to come the daily cut-off service is limited to four ports in Asia and three ports in Europe, and that too only on the west-bound leg. Given the volumes and types of cargo being moved on this trade lane it makes sense to adopt this approach which certainly would enable to set up a benchmark on the success of this product. The potential to implement this on other trade lanes will be based on this benchmark. But many analysts are of the view that this is a long way coming, due to the inability of the other major players to commit the minimum capacity of tonnage that will be required to provide this service, plus the cargo volumes to justify such a product.

Timing for the introduction

With the introduction of this service scheduled for late October, the timing for the launch of this new product is already being questioned by some industry experts. The fact that the industry is moving into the low season, and most contracts are running out by the next two quarters, are the reasons given for this concern. Another valid reason for this concern is the fact that there is already excess capacity on this trade lane. The idle containership capacity which is estimated around 250,000 TEU plus right now, is expected to double upto 500,000 TEU by the first quarter of 2012. Hence the possibility of a premium charge for this service is not a real possibility at least for the time being.

Competitor reaction

It will indeed be interesting to see how the other Shipping Line competitors would react to this revolutionary move. Whilst Maersk Line does not want to speculate on competitor reaction, there are some slot-sharing consortia that may be able to offer the same product – but it will be a much more complex issue given the fact that the Vessels are not owned / operated by one party.

On the other side of the coin, Maersk may not be able to charge a premium for this service at least just yet, given the excess capacity that is currently in this trade. Similarly if the rates remain competitive, it will be the small time shippers who will stand to gain during the initial stages of the launch. Also a consolidation among two or three other major players to match the daily cut-off would bring more blessings to the big time shippers. In this game Shippers like in any other business would not like to put all their eggs into one basket – thus giving the competition some reprieve at least for the time being. We can expect some interesting times ahead for the big league Shippers, but whether this innovative move will earn the tag of being the second-best revolution in shipping, next to the introduction of the marine freight container – only time will tell.

References:

• www.maersk.com
• Daily Maersk
• Alphaliner
• Lloyds List

(The writer is a Fellow of the Institute of Marine Engineering Science and Technology – FIMarEST, UK and a Fellow of the Chartered Institute of Logistics & Transport – FCILT, UK.)