Logistics at Risk! Charter, Outsource, or Vertically Integrate?

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Historically most companies have relied on third party companies to handle most every aspect of their logistics. Whether that be ocean going vessels, long distance trucking, or last mile delivery, there are a lot of specialty companies offering these services.

But the Coronavirus pandemic has upended many of the paradigms that we have considered normal. Supply Chain continuity of supply issues persist and this includes constraints and delays related to logistics capacity and delivery integrity.

The result is that more and more companies are taking matters into their own hands. Instead of relying solely on logistics companies they are taking steps to charter their own ocean going vessels.

While these may be short term measures it does raise the strategic question as to whether companies should in-source their logistics and continue to charter ships.

Continuity of Supply

If you can’t get your goods to market in the short term you will lose customers. If you can’t get your goods to market long enough you won’t have a business.

The Coronavirus pandemic has disrupted far too many industries and commodities to mention. The lockdowns certainly closed manufacturing plants and distribution centres. But they also impacted all modes of transportation. Even as restrictions have been relaxed the capacity issues continue, and this applies to logistics as well.

Most companies engage professional logistics companies for their trucking needs, their ocean going needs, and their rail needs. It’s natural. These companies are the experts. They have invested in all of the resources, infrastructure, systems, processes and expertise to move goods around the world. It’s not as simple as driving a truck or steering a boat. There is a lot of intellect and investment involved.

That notwithstanding, companies have a core and unwavering Supply Chain principle at the heart of their business operations. They want their goods when they want them, where they want them, and how they want them. If they can’t get their goods as desired, any Supply Chain professional worth their salt will consider any legal and ethical option to get their goods.

And while the cost of logistics (along with the costs of any goods or services) is usually tightly managed, when you can’t get your goods in the current environment even cost considerations get somewhat relaxed or even thrown out the window. It makes sense. If you can’t get your goods at current costs, which could have the effect of closing your business, then you will be willing to pay more just so that you can move your goods where you want them.

This is the situation that some companies have been considering in the wake of the pandemic and the ongoing resultant disruptions.

To Charter or Not to Charter

Coca-Cola is the latest company to take logistics matters into their own hands. Because of a lack of shipping containers as well as ocean going carrier capacity, Coke has chartered bulk shipping vessels to transport their manufacturing materials. Costco, Walmart, Home Depot, Ikea, and Target are among the many companies who are also chartering private cargo ships just for the privilege of moving their goods.

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On top of that companies are also buying shipping containers which are also in short supply. Given the rising costs of steel the cost of containers is also higher, but the expenditure is unavoidable if you want to have the means to ship your goods.

Because the loading/unloading capacity at major ports continues to be constrained these companies have had to take the further steps, albeit more costly and longer, of routing these ships to less congested ports.

Notable though is that these options, along with the resource, time and energy to execute them, are predominantly the domain of large companies. Small companies don’t have the leverage and clout and money to take these actions, leaving their fate in the hands of logistics entities. If you are a small retailer and you can’t get your inventory in place for the busiest time of the year, your survival beyond this year could be in question.

The problem is exacerbated by the fact that sourcing decisions for most of these goods where made as long as a year ago, or more. Most companies can’t just change sources on the fly to less logistically challenged geographies. So wherever your goods are being made, that is where you have to arrange the logistics from.

For the foreseeable future, more companies will be taking these steps to charter vessels or charter airplanes, and those who are already doing so are likely to increase the amount of chartering they are doing.

The question is whether this tactical action should translate to a change in the long term strategic direction of logistics management for these companies.

The Future of Logistics

It’s somewhat natural that when things start to go awry, leaders will want to take matters into their own hands and take over control of what is happening. This very tendency is why companies are chartering vessels. They have to get their goods to market, relying on others isn’t working, so they have to step up and take action.

It’s hard to swallow the possibility that your company will fail if you don’t get your goods to market. Logistics is more strategic than ever before.

Amazon is an example of a company which realized the strategic importance of logistics before the pandemic. While historically Amazon has relied on USPS, FedEx, and UPS for instance to handle their delivery needs, in more recent years Amazon has taken steps to develop their own in-house logistics capability and vertically integrate this sector, reducing their reliance on others.

Amazon has leased, and now purchased, its own planes. The fleet is called Amazon Air. Add on to this their own fleet of delivery trucks and shipping containers. This is a part of the overall logistics vertical integration strategy that Amazon is deploying. Amazon Logistics overall “has, in fact, begun shipping more parcels than FedEx, and is nearly at the shipping levels of UPS.” Further Amazon is positioned to offer their own logistics services to other parties.

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The Amazon strategy works for them, but this end to end vertical integration is extreme and an option available to virtually no one else. On the other end of the spectrum is the status quo option, whereby most companies continue to outsource and engage the same logistics providers they have always used, rolling the dice as to whether they will get their goods delivered on time or not.

In between these two extremes of vertical integration and full outsourcing is the option of strategic in-sourcing. The tactical charter of vessels and vehicles that we have already discussed is central to that strategy, and we believe it is the key to the future for years to come.

The impacts of the Coronavirus pandemic will still be felt for years to come. And when that has subsided there will be some other disaster, catastrophe, or global disruptive event that will create localized, if not globalized, supply discontinuities.

The tactical action of chartering vessels should be considered as a long term strategy. It is likely that many companies will revert to their old ways after the pandemic is over. But the threat of supply breakdowns is ongoing. So the need to ensure continuity of supply is unrelenting.

Certainly these companies need to find a way to make strategic, targeted, logistics in-sourcing more cost effective. But it only takes one disaster to consume all of these extra costs, and profits, and much more.

Smaller companies won’t have the amount of business to work on their own to charter their own vessels and vehicles. They should consider partnering with others through industry associations, or other consortia, so that they can secure similar controlled charter services. Additionally they will need to consider geographic diversification of their sourcing solutions so as to give them more logistics options.

Conclusion

Logistics is more strategic than ever before. The proof is simple … if you can’t ship or receive your goods, it doesn’t matter how great your product is, you still can’t get to market, and eventually your business won’t survive.

The tactical actions taken by larger companies, such as chartering ocean going vessels, should be considered as a core element of future logistics strategies. Thinking that things will return to normal after the pandemic subsides is wishful thinking.

Smaller, and larger, companies will also need to strengthen their Supply Chain sourcing strategies to create more robust and more resilient Supply Chains. There will always be logistics disruptions of some kind and logistics at risk. By reimagining your end to end Supply Chain continuity of supply strategy you can improve your ability to mitigate the impact of any external forces on your business.

Logistics at Risk Charter article originally published on October 19, 2021.

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