LTD Management
Logistics & Supply Chain Management Consulting Global Solutions That Work

Shipper-carrier alliances

World Wide Shipping
By THOMAS CRAIG
President LTD Management
www.ltdmgmt.com

There has been a lot written about it and discussed about it. What is ashipper-carrier alliance? Is there really such a thing? Or are they just momentary movements onthe pendulum of shipper-carrier relationships? Marriages of convenience, not love?

For purposes of this article, we say there are few, real shipper-carrier alliances. This conclusion isnot based on empirical analysis, not based on hundreds of surveys and interview. Rather it isintuitive, based on the process and the purposes of shippers and carriers.

An alliance, by definition, involves a bond between parties, an association to further the commoninterests of the members. Interesting. Common interests. There would seem to be one. Shippershave business and need carriers. Carriers need business and want the shippers. This is a fact. Inthe logistics supply chain, the shipper-carrier relationship is important to the success of the supplychain. Even just taking the narrow view of shipping, shippers and carriers need each other.

So given this common need, why aren't there more alliances, especially in international logistics? International is a complex process which would seem to be an ideal opportunity for creating alliances. Why does it become a topic of articles instead of a routine business occurrence? The reason lies in theissue of common interests. This is what we will discuss. We will discuss five issues which impact andimpede alliances.

Despite the apparent mutual need, there really aren't common interests. Instead there are competinginterests. What are some of these competing issues and why do they occur?

ISSUE: Price. Price is the fundamental cornerstone of shipper-carrier business. It initially defines eachparty's purpose for the relationship. Price gets a carrier in the door. Shippers look hard at price, perhapseven more so today where conceding a price increase is not received favorably by many companies. Thisis true whether it is in the context of Transportation or Logistics. The price a shipper pays is important. Shippers send out bid requests. The process can be adversarial, with winners and losers. Parties negotiateprices. The logistics manager is measured, directly or indirectly, by the prices his company pays fortransportation and other logistics services. Service is important, but it is difficult to completely and fullymeasure its impact in the supply chain. Transportation prices are easier to measure. Freight bills are paid. This is the hard evidence, backed up perhaps with contracts, of how effective the transportation portion ofthe logistics organization has been.

Contrasted to this is the carrier's position. He is measured by the rates he has established with the shipper. The carrier is trying to generate a profit. This is a different goal than the shipper has. Both parties beingmeasured by the same statistic, price. This has the potential to create conflicts and adversarial relationships,not alliances.

ISSUE: Lack of Continuity and Stability. Stability and continuity is the cornerstone of a good businessrelationship. Business dynamics, from economic forces or whatever cause, create change and can causeconfusion. Look at the 90's for international--the Gulf War and wild swings in the U.S. dollar. Thesecreated significant swings in cargo capacity and in demand for services. For various reasons, there has beenmore stability in domestic logistics than in the international. Deregulation has been in place longer, andbetter with domestic than international. All in all the domestic situation has helped to create stability andcontinuity with shipper-carrier relationships.

To add to the potential conflict is the lack of continuity to the process. Every year there is a new servicecontract to negotiate. This process is a frenzy with each party jockeying for position, not only between theparties but among the other participants to the service contract negotiation process. Who has the best rates,from a shipper or carrier perspective? How can there be an alliance built during such a huge effort? Thereis no intimacy, no one-on-one. The process itself contributes to the lack of alliances.

Just look at the negotiating process for ocean rates in the eastbound trans-Pacific trade for 1995 versus1996. They are diametrical opposites. The steamship lines sought to maximize revenues during servicecontract negotiations. They wanted to get as much price increase as they could. There were severalreasons--catch up from prior years' negotiation results, ride the wave they saw of full ships for the comingyear and get all they could before additional capacity started coming on in 1996. The carriers playedhardball. It was an adversarial environment. Take or it leave it seemed to be the philosophy of negotiations. Bad feelings were generated with their shipper customers. This year the carrier's are more agreeable toworking with shippers. They act like last year never happened. Unfortunately, this isn't so. Some shippersare now paying back the carriers for how they were treated before. This is not an alliance. How can therereally be alliances with this atmosphere of hostility?

And, if this is not enough, with the other modes of transport, shippers usually send out new bids for hisbusiness. The process is how he validates that the company is paying competitive prices for its transportation services. So the alliance process is hindered by the continual bidding and negotiating thatgoes on. Carriers who do not participate in a shippers' freight may be aggressive in going after a portionof it. They can crowd out the incumbent with great deals.

Compounding the situation is that some shippers have no loyalty to carriers. They will change carriers fora lower price. Service is assumed so only price matters. This is especially true during a buyers' market. Oh sure, this shipper may be hurt when the market changes and capacity becomes tight. His rates may beso low that the carriers can now select better-paying freight and let the low-rated freight sit. That happens.

Some shippers do not care if they beat rates down to non-compensatory levels. They view get the lowestprice as their purpose. So what if carriers lose money? So what if a carrier goes out of business? Someoneelse will come in and want his business. No alliances here, just low rates.

But it's not always the shippers fault. Carriers confuse the situation and create instability also. What is thecarrier seeking from the shipper? Does he seek the shipper's business to gain additional market share or ishe trying to maximize his revenue? These are not the same goals. Market share can precipitate rate wars. Carriers gain share, shippers gain low rates. In the short term, it is a "win-win," but it is not an alliancebuilding win-win.

Even within that purpose, market share or revenue, how consistent is the carrier? Is he reasonably uniformin his approach? So that each year with the mutual understanding, the carrier and shipper can agree to pricesfor the coming period. Or are there inconsistencies and fluctuations, even wild ones, in his approach toprice? Inconsistency is an enemy of alliances. There is no common interests then.

With maritime, there is the annual frenzy with negotiating service contracts. This process has been set forthby the carriers. They have created an environment that creates instability. Shippers will not commit to dealslonger than one-year, and the carriers do not really entice them to. There is too much uncertainty in pricingfrom year-to-year. Against this background how can there be alliances?

ISSUE: Defining the Customer. Just who is the customer? This seems like an obvious answer, but withforwarders and other third-parties this may not be clear. Forwarders work with shippers. They quote pricesand services to them. They work directly with shippers. However, with few exceptions, forwarders do notcontrol the service they are selling or providing. Carriers, not forwarders, provide the actual transportservice. These may be airlines or ocean carriers. So to the carriers the forwarder is the customer. Yet tothe forwarder the shipper is the customer. Confusing? Yes, it is. The shipper does not see the carrier, andthe carrier does not see the shipper. This ambiguity makes it difficult to structure an effective alliance.

ISSUE: Organizational Shortcomings. This is a good one, and it has nothing to do with price orservice. Sometimes the carrier or shipper organization members become a problem in building an alliance. An agreement between a shipper and carrier, to be effective, requires the active participation and consentof all aspects of their mutual organization. Sounds good. However, this does not always happen.

The carrier may squabble internally. One region may get credit because the agreement was signed in theirterritory. Yet the primary shipping point may be in another territory. So the carrier members fight, so theycan each get a greater share of the revenue credit for themselves. Servicing the shipper, the customer, is lostin these squabbles. The result, one region wins and the carrier itself loses.

Shippers are not immune from internal strife. A shipper, especially if he is a large company, has multipledivisions and shipping points. To develop an effective agreement, all the internal groups must agree for thecommon good of the company. But this does not always happen. One division may not want to lose itsidentity in the process. They are not comfortable with being part of the team. So they find reasons not tocooperate. As with the carriers, one sections wins and the shipper loses.

ISSUE: Size Differences. An alliance means a one-on-one relationship between shipper and carrier. Yetfor ocean carriers there are impediments. There are the steamship line conferences. Ocean carriers gettogether on price, capacity or whatever. This is not the environment for a one-on-one. One shipper tryingto get the consensus of the conference carriers. A shipper questions why he has to do this. He may feel hisneeds are lost in the conference workings. When he wants to build an alliance with one carrier, he does notfeel that the relationship must run the conference gauntlet.

There is also a growing difference in the size of the carriers and the size of shippers. This size shows in theconsortia that the carriers have and are forming. Large carriers become even larger with the alliance. Andcarriers are bringing on larger vessels. The consortia and the vessel size create a gap between shipper andcarrier. Shippers can wonder whether the carriers can actually develop an alliance, given the size difference. Is the carrier working to build an alliance or to put more containers on the vessel?

Compounding the shipper concern is that the growth in shippers is with the small business. Economicgrowth is coming from small businesses, while large firms are merging and downsizing people. At the sametime, carriers and their consortia are growing. It is possible that the size-gaps will create a barrier betweenthem and shippers. Carriers are not focusing their sales efforts on small businesses, yet this is where thegrowth is happening. The many small shippers do not dominate the containers though. We have a Pareto-type of situation with shippers and containers which can be a barrier to building the bonds necessary for alliances.

SO WHAT LIES AHEAD? What does the future hold? Can shippers and carriers change their ways,counterproductive and short-sighted as they have been?

It should change. But to do so, both shippers and carriers must show statesmanship. Jim Poon, Chairmanand Managing Director of OOCL (Europe) certainly hopes things change. He says, "Rather than hurlingrhetoric upon rhetoric, it is now time to have a meaningful dialogue directly with the shippers to plan a jointcourse which is acceptable to all parties and is not biased in either direction."