Worley Blog

WANTED: RISK TAKERS

Posted on: February 11th, 2019 by Clifford F. Lynch

Once again, there is a futures market in the works that the organizers believe will add some stability to the transportation market. The recently announced venture proposes the trading of transportation capacity futures to protect pricing and availability. Citing the capacity shortages that have often plagued shippers, advocates of the futures market are promoting the idea as a hedge against risk. Buy it now and use it later when you need it. If you don’t need it, sell it to someone who does.  I have written about similar ideas that have been advanced in the past when capacity was short in the industry, with the presumption that a firm could lock in future pricing and capacity. These efforts were unsuccessful; and while I am by no means an expert in the futures market, I am skeptical of the current plans, as well. I am concerned that we will get lured into the commodity trap. While the idea might sound good, we need to keep in mind that what works for soybeans and pork bellies might not work for transportation. Many would have us believe that transportation is simply a commodity, but I do not agree.
In its purest form, a commodity is an item that has value and is produced in large quantities with uniform quality. Whether it is something tangible like oil or intangible like electricity, a commodity is a homogeneous, undifferentiated product. When it is traded, it is solely on the basis of price. Some would argue that transportation service fits that category. As they see it, transport service is just a way of getting something from point A to point B. It doesn’t matter who provides the service, as long as the product gets there.
I am concerned that this kind of thinking can get shippers in trouble. As those in the business know, there is much more to transportation than simply hauling something between two points. It’s also about on-time pickup and delivery; it’s about planning and satisfying shippers’ needs in a mutually satisfactory way. Most important, it is about relationships.
Granted, there is a futures market for ocean capacity, but I believe that is quite different from domestic truck capacity. First of all, there is less variability in the product. In ocean service, standard sized containers move over standard routes on pre-determined schedules. Although there may be some serve variability due to weather or unforeseen circumstances at ports, most of the time container movements are fairly predictable. This is a far cry however, from the type of capacity needed to move a shipment of hair dryers to Wal-Mart and deliver it within a two -hour window.
If the periods of capacity shortage have taught us anything, it’s this. When he or she is between a rock and a hard place, the shipper who comes out on top – the one who manages to find a carrier when it needs one – is not the one who wins a bidding war, but the one with the best relations with the carrier. In study after study, it has been confirmed that during these trying periods, those shippers who had fared best were those who had developed collaborative relationships with their carriers. They were the ones who gave carriers timely projections of future shipments, who held regular meetings with their carriers, and who tried to be better customers in general.
It is important to remember that a shipper and a carrier have basically conflicting objectives. True, both want (or should want) their customers serviced well, yet they also want to maximize their own profits. Working through these conflicting objectives to everyone’s satisfaction requires some careful relationship building.
Managing today’s global supply chains is quite complicated. Managers are encountering new technology, new cultures, new currencies, and in some cases new modes of transportation. I have a great deal of respect for those who introduce new ideas into supply chain management, but I also firmly believe that transportation is, and will continue to be, a relationship business.
If you want to trade something, try pork bellies – that market looks a little less volatile than the one for feeder cattle.