Customer need for speed and cost efficiency is driving innovation in freight forwarding. The market has been tough for ocean and air freight – but will the wind be taken from their sails? Alexandra Leonards explores the challenges generated by this customer demand, and the impact it has on the supply chain.
The freight forwarding market is being driven by the turbulent global economic situation, says Eurogate Logistics’ managing director Adam Nagy, who highlights the fact that customers are reacting to the uncertain international outlook.
Businesses, on a global scale, are tirelessly seeking out more efficient and cost-effective operations. According to the latest Agility Emerging Markets Logistics Index, 61 per cent of logistics industry executives say they are unclear about the direction of the global economy, or expect more volatility this year. It is unsurprising then that costs and productivity are top of the agenda.
Customer demand is playing a significant role in changes that are happening in technology and the land freight industry.
“There is an increasing amount of choice open to supply chain managers as technology drives new efficiencies in the industry,” says Gerry Daalhuisen, vice president of product management at Kewill, the transport management software company. “Projects like the new Silk Road initiative are making it easier for road freighters to move items from Asia into Europe, for example, which in turn is putting pressure on ocean freighters to compete on costs.”
The Silk Road Initiative, also known as the Belt and Road Initiative, is a development strategy proposed by China for the re-construction of a historic route connecting Asia, Europe and Africa.
“There is a train connection planned between China and Europe, for example, which will drain revenues from ocean forwarding when complete – although individual capacity is far greater, shipping will not be able to compete in terms of speed,” says Daalhuisen.
“This is just one example of the new trend towards multi-modal freight forwarding which has arisen in recent years, driven by customers’ increasing demands for a rapid, always-on freight service.”
Growing pressure on ocean forwarders to cut costs has resulted in cargo ships making slower journeys to reduce fuel costs. Of course, this ends up with longer delivery times, which is the opposite of what customers want.
The expansion of land freight routes is not the only pressure on the industry. The upcoming implementation of an amendment to the Safety of Life at Sea (SOLAS) convention, which requires export containers carrying cargo to have their weight verified before loading, is another blow to many ocean freight-forwarding companies.
“Our challenges are our customers’ challenges, and arguably the biggest challenge faced by shippers at the moment is the forthcoming amendment to the Safety of Life on Sea (SOLAS) convention,” says Dan Pancheri, commercial manager, Yusen Logistics.
“This rule takes effect 1st July this year and will mean that any UK exporter wishing to ship goods by sea will either need to pay an additional cost for laden containers to be weighed on route to the quay, invest in cargo weighing equipment themselves and/or then have their weighing equipment calibrated and certified by the Maritime & Coastguard Agency (MCA).
“This represents a massive challenge globally and our team in the UK are currently working with a number of customers to ensure a seamless transition come 1st July.”
As well as this, in response to concerns raised by the European commission about the General Rate Increases (GRI) system, shipping lines have offered to publish more details on container rates. Although this will generate more transparency, it may cause confusion for shippers.
“Container rates are fluctuating so much at the moment, it’s hard to keep track of them. A quote today, can be invalid tomorrow with changes for most lanes made on almost a weekly basis,” says Nagy. “Publishing more details on container rates on a regular basis could lead to confusion among shippers.
“Detailing so many different charges, can also cause confusion as it is difficult, especially for first-time, inexperienced, small shippers, to know what extra charges are actually valid for their shipment. A more condensed, precise way of quoting would be more beneficial.”
Advancements in the land freight industry are also having a knock on effect for air freight.
“The air freight market continues to grow at around 2.2 per cent year-on-year, but that trend is likely to decrease as innovations in the road freight industry squeeze air forwarders,” says Kewill’s Daalhuisen.
Developments in technology have also had a significant impact on air freight forwarding. Nowadays, company’s are using solutions like cloud computing and superfast mobile connectivity. This enables forwarders to deliver increasingly flexible services and operations. These businesses can now change delivery options on the go and receive up-to-the-minute information.
“In past decades all that was required to run a freight forwarding business was a telephone and a computer,” says Daalhuisen. “In 2016 customer service and speed is paramount: buyers no longer care whether a package comes by land, sea or air, or a mixture of the three, air freighters need to invest in visibility and value-add services if they are to remain competitive in today’s market.”
Cargo volumes dropped after the financial crisis, and ever since, companies have been looking for savings and better operations within their freight transport network.
“Increased environmental awareness is also playing a part in driving this change,” says Eurogate’s Nagy. “As a result we have certainly noticed a move away from air freight to sea freight and it’s a trend that’s escalated since the recent slowdown in China.”
These types of changes are easy to spot within industries like pharmaceuticals and electronics.
“In some cases companies are changing the way they operate to enable them to take advantage of the sea freight option which usually has a lower shipment cost,” says Nagy. “For example, one of our customers is now holding much larger reserves of stock to make sea freight possible.”
So there is some good news for ocean forwarders.
In February, after sanctions were lifted in Iran, transport requests came pouring in. Major airlines are now introducing new services into Iran, and Turkey also has increased flights – so it’s not all doom and gloom for the air freight industry either.
But forwarders are facing new challenges. One notable development is the move by hauliers to set up their own freight forwarding services.
“What’s changing is that traditional asset-based operations such as hauliers are beginning to offer their own freight forwarding services,” says Nagy. “This is because customers require them to work on a similar broad scale and not just sell their own solutions.”
It was recently revealed that Amazon registered its Chinese business as an ocean freight forwarder. The retail giant did this to give it more control over shipping between Chinese factories and US customers.
“Delivering products direct from manufacturers to consumers is not a new concept, but this is the first time we have seen this drop shipping model on a global scale,” says Sian Hopwood, senior vice president B2B operations, Kewill. “By removing the middleman, retailers can reduce costs and provide customers with an always-on, always-available shopping experience which traditional models can’t sustain.”
But freight forwarders face an even bigger threat – the cutting out of the middle man altogether. The growing phenomenon of 3D printing means that some businesses might not even need their goods to be transported. “As this technology develops, mass manufacturers will increasingly be able to design products on one side of the globe before printing them in bulk at the point of sale, reducing the need for freighters in certain markets,” says Kewill’s Gerry Daalhuisen. “Freight forwarders need to be equipped to become supply chain managers, acting as service providers rather than just shippers.”
But Nagy says that manufacturers and retailers are looking for a specialist that is able to deal with complex requirements and find the best solution in every country. “This is where the leading freight forwarders continue to add real value.”
Moving back into Europe
On-shoring, or near-shoring, is slowly tiptoeing back into the market – with manufacturing moving beyond the Far East, and back into Europe.
“We’re seeing the creation of clusters upstream in the supply chain which in turn is driving regionalisation, with certain freight forwarding companies specialising in particular local industries,” says Gerry Daalhuisen.
Operators have seen a growth in the popularity of on-shoring particularly in the fashion business. Fashion retailers are looking for cost effective transport solutions, which will be predominantly full load transport solutions.
Typically, garments are consolidated at sites in Romania and then transported to distribution centres in the UK, Germany and so on. This optimises the trailer loads, cutting down carbon footprint.
The growth of Turkey’s logistics sector demonstrates this move from East to West well. According to Globe Express Services (GES), which has opened a new office in Mersin, Turkey, the country has been opening up rail and coastal freight, as well as international highway corridors to assist the movement of a greater volume of traffic between its neighbouring countries. And an industry study found that its local sector will be worth between $108 and $140 billion by next year.
“Turkey’s logistics market is consistently showing sustained growth, generating many highly valuable opportunities for GES and other global industry players,” says Mustapha Kawam, president and CEO, GES. “The sector is expected to expand further, buoyed by the government’s on-going economic diversification efforts to stimulate development in various key areas such as logistics.”
Eurogate’s Adam Nagy says that the trend towards on-shoring is something his company has particularly experienced in its operations in Central and Eastern Europe.
“But it’s not a universal one,” he says. “Businesses are making shrewd decisions, with many now operating factories in locations around the world to suit their particular requirements in the context of a global marketplace and supply chain.
“In some cases this has resulted in on-shoring, particularly where operating costs are lower, lead times are shorter or there are tangible tax benefits.”
In turn, there has been further demand for road transport. Eurogate has responded by chartering its own services – the company’s Polish operation now handles 50,000 full load shipments every year.
Keep the customer satisfied
Fulfilling customer needs and keeping customer loyalty is a key challenge facing the industry. But arguably this pressure, alongside developments in IT, is generating a more exciting and efficient industry.
“SMEs and young, tech-savvy innovators are increasingly employing the ‘control tower’ model, integrating shipment management platforms, tracking systems and rapid communications to gain visibility of the supply chain,” says Daalhuisen. “New developments in IT are opening up exciting new avenues for freight forwarders to develop their service offerings and engage successfully with a new and demanding customer base.”
As well as this, companies are engaging in greater collaboration to ensure services are efficient and diverse. Instead of competing for customer loyalty, forwarders seem to be using collaborative projects enabled by technology to integrate shipping stages and advance buyer experience.
“As our customers’ business models are becoming more sophisticated, so are their logistical needs,” says Yusen’s Dan Pancheri. “Where once a freight forwarder would define themselves by cost and coverage, these days they are more often selected based on their value-add proposition.
“Therefore the dynamic with shippers is moving away from a supplier/customer relationship and more towards a partnership approach. Cost is obviously still important, however a more integrated approach with a shipper’s business will often uncover price efficiencies that may have otherwise been overlooked.”
Adam Nagy says that a key challenge for a company like Eurogate is raising awareness about the specialist nature of the services it provides.
“Building strong client relationships that are underpinned by consistently delivering solutions and regular communication is key to tackling this,” he says.
As the supply chain becomes increasingly complex, this has never been more important. Many retailers now ask for products to be picked for store at origin and shipped directly – store ready from the country of origin.
Clothing manufacturers have been doing this for 30 years, but it’s a trend that is growing, says Nagy. This means freight forwarders must establish relationships worldwide to meet complex customer requirements.
Tough decisions for DHL Global Forwarding
The risks associated with implementing a new IT system were brought sharply into focus in October last year when Deutsche Post DHL revealed that it was abandoning its New Forwarding Environment (NFE) IT programme – and writing off €345 million in its Global Forwarding, Freight division as a result.
DHL is one of the world’s largest freight forwarding organisations with sales in 2015 of €14.9 billion. When the project was launched in 2012 it was described as a business transformation programme to underpin top-line revenue growth, while standardisation and industrialisation would allow significant bottom-line cost reductions.
Instead of the existing complex pricing and contracting procedures, NFE would enable a modular product offering with a transparent adaptable product and tariff structure designed to market needs.
In terms of routing, it would replace local and sub-optimal routing with IT-supported routing decisions based on global data transparency.
And manual and reactive processes would be replaced by active event management with industrialised processes, incident management, and proactive notification.
Once it became clear that the system was not providing the benefits expected, DHL took a €308m write-down of assets, plus €37m of provisions to cover the roll-back of NFE in the countries where it was piloted.
DHL’s forwarding business is now getting back on track. In its annual results for 2015, Deutsche Post D HL said that the division had seen a stabilisation in earnings in the third quarter of the year followed by an improvement in earnings in the final quarter.
Group chief executive officer Frank Appel said: “In the forwarding business, we undoubtedly still have a lot of work to do. But we are on the right track. The operational and structural measures that we introduced last year to improve the operating performance of the division are clearly gaining traction.
“Fourth quarter EBIT in Global Forwarding, Freight increased for the first time year over year since 2013, and that in fact significantly. I am confident that this positive performance will continue in the coming quarters. However, for full-year 2015 we recorded, as expected, negative EBIT, mainly due to the substantial one-off charges we recognise in connection with the IT renewal in the division.
“The reorientation of our approach was necessary and had a short-term negative impact on our results, but it is the right approach for the division. We are now moving forward with smaller, pragmatic steps and have already implemented some initial changes.”