Will NYSHEX Lift Container Shipping Service Levels?

Will NYSHEX Lift Container Shipping Service Levels?

A new spot market for container shipping promises to fix many of the industry's service problems.
A new spot market for container shipping promises to fix many of the industry’s service problems.

The New York Shipping Exchange (NYSHEX), due to be piloted in January 2016, aims to overcome the chronic inefficiencies that afflict ocean transportation and add cost to global supply chains.

Gordon Downes, Founder and CEO of NYSHEX, explained the rationale behind the new market in a presentation at MIT CTL’s Supply Chain Innovation Summit 2015, at the headquarters of Flex, Milpitas, CA, earlier this month.

Container shipping changed in 2008 explained Downes. The anti-trust immunity that groups of shipping lines enjoyed came to an end. Also, in common with most industries shipping was roiled by the global financial meltdown.

Extreme freight rate volatility has been a feature of the container trades since then. Downes described a number of related problems that have undermined the industry’s performance over the last seven years.

  • Unenforceable contracts. Most ocean contracts cannot be enforced and carriers are at liberty to impose rate increases and roll bookings as needed.
  • Unpredictable cargo. Shippers have a tendency to overbook and cancel bookings, and not show up at designated loading times.
  • Deteriorating service levels. The performance of ocean transportation has declined in a number of areas. Downes cited a 10% increase in ocean transit times, a drop in schedule reliability of 8%, blanked sailings increasing by 9%, and a 24% increase in the number of cargo no-shows.

It is estimated that $79 billion worth of economic damage has resulted from the industry’s service problems since 2008, he said.

Similar experiences in other industries show that such problems can be overcome. For example, in the airline business passengers routinely booked seats on multiple flights and only used one berth before the introduction of non-refundable fares and dynamic ticket pricing. Deregulation also enabled low-cost carriers to enter the business.

NYSHEX aims to emulate these successes with an alternative to the unpredictable spot market for ocean transportation that offers a number of key features.

  • Carriers digitally offer fixed “all-in” contracts to shippers and forwarders.
  • Contracts specify volume, departure date/s, place of receipt and destination.
  • Shippers can enter into a fully enforceable contract with penalties for non-fulfillment.
  • Contracts can be “re-sold” if the shipper, carrier or forwarder cannot fulfill their obligations.

The new market will come under the jurisdiction of the Federal Maritime Commission, and all rates will be filed with the Commission.

Shippers and intermediaries will be able to book container slots on a screen that resembles airline booking sites such as Expedia. Each shipping line is listed along with the availability of slots, prices, and on time performance for individual carriers. This latter value is set by a panel specially created by NYSHEX. The screen walks buyers through each step in the booking cycle, and flags when action needs to be taken. The site also enables customers to re-sell slots already booked that they are not going to use.

In addition to eliminating many of the service problems that have plagued ocean shipping over recent years, it is hoped that the exchange will deliver new opportunities for improving supply chain efficiency. NYSHEX could be a valuable source of data for transportation management systems, for example, and increasing the reliability of the ocean mode will help shippers to mitigate risk.

But there are some questions marks over the effectiveness of such a market. For example, attendees at the Supply Chain Innovation Summit asked whether NYSHEX will be vulnerable to unwanted speculation. A speculator could buy a number of container slots prior to a peak shipping season, and sell them at a profit as capacity becomes constrained. If this type of activity becomes excessive, the market could be undermined.

It is hoped that the system managers will be able to spot such activity and take counter measures. Also, the demand for shipping is notoriously difficult to predict with certainty, and this might dampen speculative buying activity.

Three carriers and three large shippers in addition to a few low-volume players will take part in the pilot. If NYSHEX is successful, it could help to transform this vital segment of global supply chains.

This post was written by Ken Cottrill, MIT CTL Research Marketing & Development Lead, kencott@mit.edu

 

 

 

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