Why logisticians should be global business savants
In recent years businesses have come to appreciate the value of good logistics to give competitive edge, with many board members now having a logistics title, but that does not mean the logistics profession gets meaningfully better, as mayhem in the container shipping world has just revealed. Just as in 2011, when the Japanese tsunami caught many logisticians with their pants down because they had put too many of their supply chain eggs in one basket (Japan), leading to multi-billion pound losses from stalled auto plants around the world, now we have a foreseeable risk from the receivership of Hanjin Shipping Co, South Korea's largest container line and the 7th largest in the world. Fortunately, it accounts for only 2.9% of the world's share of sea container shipping but it threatens to derail the supply chain of global companies that need to send goods well in advance of the year's busiest shopping season.
It will not be a swift mess to untangle because, like airlines, container lines operate in capacity-sharing alliances. That means that customers who booked cargo with other lines, like Evergreen and China Cosco, might all discover that their goods are on Hanjin ships. Meanwhile, around the world Hanjins's ships are being arrested or refused port entry because ports are worried they will not be paid. It could, therefore, take months for owners of cargo trapped on board to retrieve their cargo.
At the root of the container shipping lines' misery is not so much stalled world trade but new ship supply capacity far outstripping world trade growth, leading to a mismatch between supply and demand growth which, says Paul Slater, a Florida-based ship finance adviser, means the whole industry is in "terrible trouble. Frankly, I don't think there's a container shipping company in the entire world that's making any money," he adds.
Hanjin's collapse has caused shipping rates to spike but the benefits are likely to be short-lived. Hyundai Merchant Marine, which itself flirted with bankruptcy this year, said it will take over operating many of Hanjin's directly-owned ships, while its chartered vessels are likely to return to the market for lower lease rates. The risk from this is that unless demand grows faster than supply of vessels then further container line collapses cannot be ruled out.
It's not as though Hanjin's collapse could not be foreseen. Drewry Shipping Consultants said: "We've been warning since 2013 that Hanjin was living on borrowed time because its debt to equity ratio was over 600%."
So what lessons does this have for logisticians? It is not enough for them to know how to ensure goods flow through the global supply chain as smoothly as possible. They must be able to identify all possible risks and put in place contingency plans that either allow rapid recovery or some sort of insurance when goods are delayed by events like Hanjin. The present capacity-sharing alliances of container liners are not in the cargo owners' or forwarders' best interests. What is the point, for example, of logistician studying the final accounts of shipping lines, which should also include the crisis-hit bulkers, to apply formulae that can reasonably predict bankruptcy two years ahead with 90% accuracy, if they don't know in which container line's care their goods will end up? If reform
of the arcane complexity of the industry cannot be had then shippers should see if insurance can be obtained at a reasonable rate to protect them from supply claim risks like Hanjin
There are other measures logisticians should take to warn them of trouble ahead. They could, for example, become more aware of global economic and financials trends, that if left unchecked could create mayhem down the line. Back in January 2007 I warned in print of serious trouble ahead for the banking industry caused largely by their reckless involvement in America's sub-prime housing market. At the time, shipbuilding was on a roll with substantial orders on the blocks. That led to excessive ship capacity overhanging the market because the credit crunch stalled world trade growth. Today's shipping world is still feeling the effects of that. But it is not only shipping that is in trouble. Banks are heavily involved in underperforming shipping loans and so far have suffered heavy losses. Britain's RBS bank is now trying to exit its entire interest in Turkish shipping loans and hopes to be rid of its much bigger Greek shipping exposure. It will be lucky if it avoids a big haircut.