Ships are getting bigger, they're retiring sooner, and new developments are increasing capacity, efficiency, and speed to build these behemoths. So why did shipment schedules have a record low for integrity/reliability in 2020? Put simply, why was freight late? Vice President of Global Ocean Services, Scott Kelly, talks about this longstanding reality of the maritime industry and what can be done to get ahead of the issue.
Chris Parker (Host): Hello everyone, and welcome to The Expeditors Podcast, where you can hear about front of mind topics in the logistics and freight forwarding industry through the lens of a global logistics provider. I'm your host, Chris Parker, and we are celebrating our very 10th episode with a regular good old fashion interview. Today I've brought in the Vice President of Global Ocean at Expeditors, Scott Kelly, to talk about the difficult reality of shipment schedule integrity in the ocean transportation world and to get a better understanding of why it happens and what you can do to mitigate issues when they arise. Scott, thank you so much for joining me today.
Scott Kelly: Hi, Chris. Thanks for having me.
Chris Parker: What's been your career journey with Expeditors and before? Walk me through how you started in transportation, all the way to Vice President of Ocean.
Scott Kelly: I started out joining the asset side of the business and worked for three very large shipping companies prior to joining Expeditors. So I was on the asset side and the operations, as well as the sales and marketing ends, as well as the management end of managing ships, terminals, and sales and customer service organizations. I jumped over to the forwarding side about 23 years ago, and I joined Expeditors, and I never looked back. So it's been 23 years of fun and no regrets.
Chris Parker: Good. So why Ocean? What about it excites you? What caught your attention when you started out?
Scott Kelly: The truth is when I started out in the business, I wanted to see more of the world other than Boston, where I grew up. And learning about cultures, learning about trade, and understanding what makes things tick and work around the world was fascinating to me. So that was really what piqued my interest. Then I was recruited by a shipping company, and I thought, gee, this is an interesting business. Let's give this a try. And fortunately for me, it was the right pick at the right time.
Chris Parker: That's great to hear it. Very cool. Well, since you have lived Ocean for so long, I'm going to ask you, as we start into this topic, let's get a better understanding of how ocean transportation works. What's the life cycle of a container ship?
Scott Kelly: Well, it's changed over the years. A lifecycle of most ships, not just a container ship, is about 25 years. On average, container ships are bought and operate for 25 years. What we've seen in the last 10 is that carriers, because of the cost of fuel and the efficiencies of new vessels, carriers and charter companies that charter the ships, are scrapping vessels, selling them for scrap at a much earlier pace. So the average lifespan of a ship today is 16 years.
Chris Parker: Is it because they're working too hard, or they're breaking downs sooner? Why scrap them so early?
Scott Kelly: Usually, maintenance, repairs, cost to operate, and efficiency. The hull designs, the engine designs, everything's much more efficient today, and fuel can be up to 40% of a shipping company's operating cost. It's their biggest cost. And so when they look at a new ship and the price of a new ship, it's just a mathematic formula. They look at the cost of a new ship versus the cost of maintaining and operating an old ship versus how big these vessels are. I mean, over the last 20 years, ships are almost operating twice as large for the same cost in terms of slots. So there's a lot of opportunities for them.
Chris Parker: You said they're a lot more efficient nowadays. The pace of innovation and improvements for ships, do you feel like that's speeding, up or are we leveling out and finding a nice, steady pace to keep container ships around?
Scott Kelly: No, it's most definitely advanced. The ability for CAD design and analysis and also manufacturing is so much faster than it was 20, 30 years ago. So 20, 30 years ago, it would take about five to six years to build a ship between ordering, planning, shipyard planning, and building. Today it's about two and a half years.
Chris Parker: That's crazy fast. Wow. Okay, yeah. Help me understand, I guess then, so that's the lifecycle of a ship. What about the life cycle of a shipment? Not so much the containers themselves, but when a container ship itself starts from point A to point B or rather comes back around to point A, what does that look like?
Scott Kelly: Well, that's a function of what's called a rotation. So the ships have strings. They may run anywhere from one to eight to 12 strings in a given trade lane. And those rotations have fixed schedules. So they go on a rotation, and generally, the carriers seem to like to optimize anywhere from eight to 12 ship rotations. So what they try to do is they set up a rotation A, at the places where they feel they have marketing strength and volume, and B, where they can gain some efficiency relative to running the vessels themselves and cost because ship side costs are the second-largest cost. So they want to run those ships into various ports at the times when they can load up, maximize revenue and mitigate costs.
Scott Kelly: So those rotations happen with a number of port calls, one way and then the other if you will. They call it a head haul and a back haul. And then those rotations happen according to a ship schedule. So that's all well laid out. It's called a pro forma ship schedule, and they lay out where the ships are going to go, and when they're going to go into port, and then they further lay out berthing times, which is the time that the container ship can pull up to the berth, tie up and discharge and load. So it's down to that level. In ports, it's not a queue where first in gets first in and the next guy's in line. There's very specific tie-up times set up. And that's because A, the operator on the yard side, on the land side, needs to manage the flow of containers, and they also need to ensure that they have labor and plan for labor to load and discharge that vessel.
Chris Parker: So now that we're talking about schedule reliability, how are those things measured when they're crafting these schedules out, getting down to that berthing time level? What's being measured in order to build out those schedules?
Scott Kelly: Well, on time is considered within 24 hours of the schedule. So that is what's considered on time. Today on a global level, we're seeing the ship schedules, the integrity of those schedules, running at about 40% of the schedule that is set up pro forma. So, 60% of the time, the ship is early, late, or just not there when it's supposed to be there. And that's a function of a lot of environments, a lot of things that have changed the environment. So that's a function of the huge, massive volume that's coming out of Asia to the United States and Europe. Those are the two big trades that are struggling right now with the schedule integrity. And if you look at most of the world's cargo travels east/west, not north/south. So the major challenges are Asia to United States, Asia to Europe and Europe to the United States, east/west.
Scott Kelly: And because of the enormous influx of volume, heavily driven by automotive and retail, we're seeing that there's been a number of challenges in the business that have caused the ship schedule integrity to change. And what's caused that is A, the volume, B, congestion in the terminals, C, equipment availability, and then D, dwell times. Dwell times are very, very challenging to the industry at the moment in key origin and destination ports. It's better in some places and worse in others, but it's very, very challenging. And that's a function really of the volume.
Chris Parker: So there's too much volume then, at sea than the ports can handle? You said there's not as much equipment out there. Are there too many ships out on the ocean right now?
Scott Kelly: No. There's enough ships. It's interesting. If you really look at the number of ships and the number of containers for equipment availability, the supply/demand ratio is almost balanced. There's a little more demand than supply. It's tight if you just look at it at pure numbers. The challenge is that the ships are not on time and the equipment is in the wrong place. And that's where dwell times come in. So what we're seeing with dwell times in a place like the Pacific Southwest is that we're seeing dwell times go in the terminal from the ship side to out gate, go from three days to nine days, seven to nine days, depending on the terminal.
Chris Parker: Wow. And that has to be throwing things way out of whack afterward. I mean, you are either late, and everything is almost exponentially impacted afterward in the rest of the rotation.
Scott Kelly: Correct. And in addition to that, we also look at out gate from when it goes out to when it's returned to the terminal empty. And that time has gone from three to 10 to 12 days, depending on the location. So if you think about that in terminal alone, where you go three to nine, you need three times as much equipment to service the same business.
Chris Parker: Wow.
Scott Kelly: So what we're finding and what's causing container shortages at origin is that the cargo is sitting in containers at destination for much longer periods of time, because, at the moment, warehouses and distribution centers are full, and labor's been challenging, caused by COVID. Inconsistent labor to be able to discharge those containers.
Chris Parker: Yeah, absolutely. Wouldn't anyone be able to just look at these numbers and say, "Hey, let's do a reset on these schedules and get everything back on time"? I mean, what could that look like?
Scott Kelly: It's absolutely what the carriers are trying to do. They're trying to get back on schedule immediately. The interesting thing about that though, is they'd likely bring in even more ships to help supplement and service the business. But the fact is is that every ship that can travel and carry a container currently is in use. It's underused. It's being used, and it's chartered. So there's no slack capacity out there to go charter a couple of vessels and run them, a one-off special run to help alleviate challenges. At the moment, the terminals at origin are doing fine in Asia. They're a little congested, and they're backed up in Southeast Asia, particularly. China seems to be okay, a little tight, but the destination terminals are challenged.
Chris Parker: Got you. Yeah. I mean, Michelle Weaver, a couple episodes ago, she joked about seeing LAX just tied up and tons of container ships waiting to get unloaded. I cannot imagine how many customers would be upset further down the line as it has to make other stops and how those delays just compound.
Scott Kelly: Right, exactly. Like I said, those ships are waiting, and they may have had a berth time that they missed. So now they're waiting for an opening. And so again, it's this backup situation. You've got terminals full because the cargo isn't flowing out fast enough, and then you have ships waiting to tie up to the terminal. Until the terminal clears out, they can't bring a ship in and discharge it because there's no place to put the containers. And so what we're seeing, careful, when ships are tied up in LA, their average wait time is about six days.
Chris Parker: Wow.
Scott Kelly: Now they may or may not all always be anchoring, but when they do anchor, and we're averaging about 20 to 27 containers a day on anchor in LA waiting for berthing times. But when they do sit, they sit for six days, and that means they totally missed their berthing time, and they're in the queue for the next opening that they may have.
Chris Parker: And yeah, so further destinations, later on, they're just getting pushed further and further back of the line.
Scott Kelly: Which exacerbates the schedule integrity problem. So if you think about it, I mean, we're very, very busy right now, but if you took 30 ships and put them back in the transpacific trade for the week that they're sitting, that capacity would ease things up pretty significantly, but again there's a challenge of the volume, the berthing times, the throughput, and the dwell times. So, we built a number of tools for our customers to help them isolate and understand dwell times so that they can expand their supply cycles, expanding them at the moment seven to 14 days to ensure that they're planning and they have their warehouse labor, they understand where their cargo is, and they understand when they're going to get their hands on freight.
Chris Parker: If delays are unknown and they're almost expected at this point, why is it hard to track and mitigate before the ship even comes to berth? I mean, can the terminal not shift the schedule around to find a good slot for them or anticipate that? Why is it hard to, I guess, account for all of it?
Scott Kelly: Well, the challenges is there's multiple sources of information for ship schedules, ship location, and ship location relative to where they are versus their berthing time. We are building tools at the moment to isolate, pull all the different data sources together and build out models that will give our customers better insight to when they're going to be able to see that cargo on the ground at the destination terminal and handle it and get their hands on it.
Chris Parker: Got you.
Scott Kelly: So, without talking in specifics about how we get the data, but there's a number of different sources, including from the carrier. That's one of them, but there's multiple other sources that we are working with to isolate and understand when can the customer expect to see the cargo available. I would want to point out that we have built out and are currently giving our customers information about dwell times in the top 30 ports in the world. So we have that information so that they can build in expected loss in transit time because of congestion and because of how long cargo is sitting. So, we know that at the terminal level, all the way down to the terminal level, specifically which terminals are more congested than others, and what we're seeing for dwell time from shift side to out gate, and then out gate back, and also ship side to out gate to rail, which is important, because there's a little bit of dwell time loss there as well. It's about seven days or so.
Scott Kelly: We have all that information as well, as information on how long ships are sitting waiting. And that's all being published every Monday. Our sales and marketing teams have all that information, and they can get to all our customers, and that's available right now.
Chris Parker: Yeah, yeah. We've talked about the issues as a whole, but today, I've read some articles that were saying this past season was one of the hardest in terms of shipment schedule integrity, down as far as I think I saw like 35% or 39% or something like that.
Scott Kelly: 39%.
Chris Parker: What caused that, and why is that different than what we've seen in the past?
Scott Kelly: Like I said, the cause is extremely high volumes, inability for carriers to bring in extra ships to service the extra volume because every container ship in the world is currently being used. So there's no free charters out there that you could pick up. And then the terminal congestion and dwell time problem. And so, like I said, when a ship sits for a week, the entire string's schedule integrity is lost. One ship could cause the entire string, eight other ships to have schedule integrity problems. So when you have eight other ships having the same problem when they get to a destination location sitting and waiting, then the entire merry-go-round, if you will, is way off. And it is like a merry-go-round; it just goes in rotation. So then each ship and each port is running late. It's not on time. And then they're all waiting for berthing times when they can get into a terminal, their terminal, and tie up and discharge or load. So that just exacerbates the situation.
Chris Parker: Given all the impacts that are happening, how is the industry responding? How can we, as forwarders, respond to these kinds of things to get the schedules back on time?
Scott Kelly: That's a great question. So Chris, the first thing is that right when a customer makes the booking, the booking integrity, meaning you book 10, you show up with 10 on the ship with the type of equipment that you're looking for, that integrity itself changes about 30% of the time.
Chris Parker: Really?
Scott Kelly: Yes. Which causes more challenges relative to supplying the equipment, relative to planning a ship, relative to getting up and loaded on a vessel with some scheduling with some load integrity, meaning you booked, you get on the vessel. So, first of all, is shipper booking integrity. That's the first part. The second part is I think a big part of that challenge is the terminals at destination, the congested terminals at destination, the dwell times is a big problem for the carriers. On the head hauls, they’re loading the ship with cargo. On the back hauls, they’re loading very heavily with empty equipment. They’re not even loading export cargo; they’re loading empty equipment to get back to Asia. And the biggest challenge that the carriers have is actually getting that freight off their terminals. Today, a fully loaded terminal, fully used, is about 85% of the square yards or square meters of the terminal itself. So if 85% of the ground is covered with containers, that's considered full. Today in LA, we're seeing those terminals in the mid-90s. And it's rare that you even used to see container terminals full to that level, to the mid-80s.
Chris Parker: Yeah, they're just packed to the gills over there.
Scott Kelly: Yes. And what ends up happening is when they're packed to the gills, that's when cargo gets buried.
Chris Parker: Yeah. Which takes time to dig it back out, I would imagine. Right?
Scott Kelly: Well, two things I would say can really help us in our business, is one, booking integrity and two, dwell time and pulling cargo off when it's ready.
Chris Parker: So it sounds like there's then a level of data that needs to, a strong relationship with data that customers should be having with their ship or with their forwarders or with the carriers that they're working with, to make sure that all the information is accurate. How can they decrease the margin of changes that they're having as they're sending out their containers?
Scott Kelly: The data certainly helps us manage what's happening and understanding what's happening, and it does help us and our customers plan for arrival, discharge, and delivery. But in today's world, you don't just get freight off the dock with pressing the enter key and looking at your data. You have to actually have people with boots on the ground, talking to the operations and the terminal managers and prioritizing containers and looking for solutions to help the terminals and help ourselves and our customers get the freight off dock. And that's where our local operations really come in and show their strength. It's all those local relationships that we have. Because each terminal is different, but there's one common denominator among them all. They want freight out the gate. They do not want freight sitting in the terminal. They don't want to build demurrage. They want freight out the gate.
Chris Parker: Absolutely. It makes total sense too. What can customers be thinking about, or what should they be thinking about, I guess then, to become stronger shippers? Aside from getting their booking integrity up, how can they be preparing for these delays? Or is that even the right approach to this, to be thinking that way, preparing for delays? Is there another approach that they can take to this?
Scott Kelly: Yeah, it's a great question. If you look at the forecast, we anticipate that congestion in these challenges will go on for the next four to five months. The last time we saw congestion like this, it took four months to unwind all the congestion that happened in some very large terminals. We're heading into peak. So July is when peak starts. August, things really pick up. So, if we’re already congested, we think that this is going to be a continued challenge all the way to September or October.
Scott Kelly: What can our customers do? Our customers, with our help, can take a look at their cycle times and start to understand and expand their cycle times to reflect the actual truth that transit times are now expanded, and the congestion is the cause, which is, as I mentioned, a function of volume, of COVID challenges, both at the terminals, but also in the warehouses, and dwell time.
Chris Parker: So given all these variables, what's been your takeaway from all of this and, as an organization, what's Expeditors, what's our answer to this?
Scott Kelly: Well, providing our customers with better data and better information about their cycle times is where we're focused. If you look at the resources for information about where vessels are and what their rotations look like, and how they are tracking for schedule integrity, the sources of data is very fragmented. So, our desire and our focus is to provide our customers with better data, as it relates to schedule integrity, both at origin, destination, transit integrity, expected delivery, all built from the various sources of data that we have, combined with some machine learning, to give our customers a better viewpoint of when they're going to be able to get their hands on their cargo, and understanding that they need to communicate within their organizations that freight will arrive early, late, or on time.
Scott Kelly: And as we progress and as we get through this challenge as an industry, there'll be other challenges in the future, but giving our customers a better understanding of when they can see and get their hands on their cargo is where our focus is right now. And we'll be rolling out additional tools in the near future, which should help our customers understand exactly what's going on with ship schedules.
Chris Parker: Well, very cool. Thank you so much today, Scott, for talking to me about this. If people went to get in contact with you or to learn more about our ocean product, where can they find you?
Scott Kelly: Well, they can find us at our corporate headquarters in Seattle, Washington. You can also find me on LinkedIn, and feel free to contact me if I can help you.
Chris Parker: Cool. Well, thank you so much for your time, Scott, and take care.
Scott Kelly: Thanks, Chris.
Chris Parker: Thanks for listening to today's episode. If you've got any questions or want to learn more about today's topic, check out the show notes for more information. And before you go, make sure you're subscribed on whatever podcast app you're using so you won't miss the next episode. To learn more about Expeditors, you can find us on LinkedIn, Facebook, Instagram, and Twitter, or simply visit us at expeditors.com. Take care, and I'll see you next time.