Stress tests are not exactly new; they’ve been popular, particularly in the financial industry, since the early 1990s.
Back then, they were in-house exercises, but that changed in a hurry during and after the global financial crisis in 2007/2008, when the public became very familiar with them, especially as governments around the world made them mandatory for banks with assets above a certain threshold.
Obviously, they were, and remain, computer exercises, which seek to establish whether a bank is sufficiently liquid to weather a wide range of scenarios, none of them good.
- What happens if oil prices double?
- What happens if there is an unfavorable movement in certain currency exchange rates?
- What happens if GDP, globally or in a given geography, tumbles by a third?
- What happens if interest rates go up by 2%?
- What happens if there is a sharp rise in unemployment?
In global supply web management, a stress test, if one existed and were to be run by a shipper, might instead ask questions like,
- What happens if there is a global pandemic that lasts 2 years?
- What happens if (consequently) demand patterns shift in major import markets?
- What happens if shipping capacity dries up?
- What happens if air freight uplift disappears because passenger travel grinds to a halt?
- What happens if the Suez Canal is blocked for a week?
- What happens if Chinese ports close, or their productivity diminishes by 70%?
- What happens if destination ports are overwhelmed by the demand shifts?
- What happens if freight rates increase 5-fold? 10-fold?
- What happens if there is a global semi-conductor supply crisis?
- What happens if steel prices go through the roof?
- What happens if carriers, in an effort to get empty equipment back to Asia, stop accepting export bookings?
Well, unlike the banking sector, we now know what happens, because as supply web professionals, we are living it. Not as a computer exercise, but IRL, as they say.
And we are not living a given one of those scenarios either. No, some evil person in the stress test control center got the brilliant idea of pressing all the scenario buttons at the same time!
The Joker himself couldn’t have topped this, and while some of the scenarios are of course connected (and you might therefore solve several of them if you address the main issue), others defy solution in the short and medium term.
As an example, if demand patterns and volumes don’t shift, and there’s a chance they won’t, then shipping capacity could remain dried up for up to 3 years (the time it takes to build a fleet of new ships for a string), and freight rates more than likely remain sky-high. It’s pure supply and demand. Injecting more containers into the flow is also an option, and several carriers have pulled the trigger on ordering more, but they are also not put together in a day or two.
Some clap their hands over the fact that relatively few vessels remain for Long Beach and Los Angeles to have cleared the congestion, taking it as a sign that ports have gotten their act together.
This, however, belies the fact that there is an armada of container vessels arriving soon, having been delayed in departure out of China. Essentially, by having a crisis of its own, Yantian bought LA/Long Beach a little breathing space, but that’s all. Nansha became an alternative solution, until they became so overwhelmed that the port has now suspended export gate-in. So, the port crisis in the US, which warrants an entire book of its own, will not be solved even in the medium term, and neither will the crisis in Asian ports.
Essentially, all of us in the supply web are trying to perform the famous feat of assembling an airplane - while flying it. However, absent real cooperation rather than finger-pointing, that is a perfect recipe for sub-optimization, in which every strand in the web has a go at assembling the plane in isolation!
Go ahead, try it: Pick a relatively complicated piece of furniture from IKEA, and invite a friend over to help you assemble it. There are only two rules: You don’t get to see the instructions, and you can’t talk! Good luck.
On the supply-side, the seemingly simple act of moving a container from a warehouse in China to a warehouse elsewhere involves truckers, customs brokers and -authorities, consolidators, carriers, IT service providers, port workers (and their unions), port management, equipment pools, customer service staff, and 3rd party logistics providers. That’s a lot of balls to have up in the air, any one of which can make or break your efforts to manage the web.
And then there are the customers. In this instance, they are obviously at the center of the web, and they are either angry or scared, or both.
Some are literally pressed on their livelihood, having for years run their businesses on a model that relied on low rates for sheer viability, as we have demonstrated in a previous analysis in the Sea-Intelligence Sunday Spotlight.
Some are more well-padded, and/or able to pass at least some of the cost increases on to their own customers but they suffer just as much as the other group from terrible performance when it comes to schedule reliability. Shipping has always been a logic-defying animal and being able to get away with stratospheric cost increases combined with increasingly poor service is just another example of this fact.
A recent article in the Wall Street Journal attempts to rank companies based on their ability to weather supply web storms and finds that there is a high correlation between companies that score highly on the Supplier Relationship Management component of the scorecard and those that are assumed to be positioned to deal well with supply web crises.
SRM is hard. It is not just about a lunch or a dinner here and there, nor is it about lofty and usually quite meaningless statements about “partnership” and “future business opportunities”.
Rather, it is first and foremost about managing the “now”, and the short term, and only when that is working can we discuss medium- and long terms. In this, logistics services procurement and operations differ from many other commodities, where great emphasis is instead placed on innovation sharing and exclusivity, stuff that is not necessarily around the corner, but essential in order to make a supplier strategic.
For logisticians, however, sharing of near-term changes is the name of the game, and many shippers and carriers are terrible at it.
If a forecast drops, shippers do not inform carriers, because they hope that they can make up for it within the term of the contract – and carriers let them get away with it. If a forecast increases, the last 10+ years have conditioned shippers to expect that carriers will receive their additional cargo with open arms.
Conversely, carriers can blank sailings, decline bookings, and unilaterally slash contractually agreed allocations, without shippers having any recourse.
So why share? Because it makes sense, just like the IKEA analogy above. And the sad thing is, every player in the supply web knows it, but their hands are tied by 30+ years of all these bad practices being the norm.
It is hard enough for a shipper to inform management that costs are skyrocketing. If you also have to explain that simultaneously, service levels are going to drop, or already have, then it’s not going to be a good day at the office, or on Teams!
For carriers, struggling for a decade to eke out a living, few line managers feel like having to explain themselves to their management for foregoing the biggest bonanza in container shipping ever, for something as pesky and insignificant as contractual obligations and relationship management.
It is telling that the talk is already of how sweet it will be for shippers when the shoe is back on the other foot, and perhaps that day will come. But we would argue that this mess is a golden opportunity to bring container shipping in line with the rest of the business world. A contract is a contract, and that sword cuts both ways. Information is shared, good and bad, and tolerances are built into the system to allow for reasonable or seasonal swings, on both sides.
Missing in the equation is the infrastructural shortcomings that are now showing up, as the Stress Test From Hell mercilessly displays them for everyone to see. Those are often very complex to solve, however, since that involves politics, environmental concerns, lobbyists and other special interest groups, and long construction lead times. Governments have shown over the past year and a half that they can literally find trillions of dollars on short notice to battle the pandemic but finding a few billion to upgrade the web that holds it all together is an almost insurmountable task involving much handwringing.
So for now, our advice is to start with the information sharing and enforceable contracts. Those were hard sells, especially for shippers, but CEOs who have had to shell out ungodly amounts of money on airfreight and emergency surcharges are increasingly ready for solutions that work, even with the risk.