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Tight capacity and high rates ensure shipper-line friction

Commercial relationships between shippers, carriers and freight forwarders need to be reorganised and realigned during the coming years to ensure smooth transit of containerised shipping, says Mark Millar, managing director of M Power Associates, a provider of industryspecific marketing, consulting and education services, in an analysis of the current situation in the shipping industry A recent survey by Eyefortransport revealed that 55 percent of shippers expect to be able to continue paying the reduced freight rates they negotiated during the recession. However, the same survey revealed that only 14 percent of carriers expected to be able to maintain such low prices. This huge discrepancy in expectations is another confirmation of the tension in the shipping industry. At industry events this year, shippers have been complaining about carriers raising rates and imposing surcharges while restricting capacity and the carriers have been complaining that shippers have unrealistic expectations of post-recession rates.

Post-boom blues Until mid-2008, container shipping lines had enjoyed continuing growth for a number of years. Container volumes continued increasing, freight rates were healthy and the carriers confidently ordered more new ships with even greater capacity. As the financial crisis hit, consumer confidence in Europe and the US crumbled and Asia exports plunged. Manufacturers had less volume to ship and suddenly ships were sailing well-under capacity. With volume demand falling, there was pressure on unit rates while additional new capacity was coming into the market - a potent combination. As carriers adjusted to the situation, hundreds of container ships were idled and rates were slashed to compete for the diminishing amount of business. Schedules were altered and slow steaming introduced in order to reduce costs. Uncertainty arising from the economic crisis resulted in brutally competitive pricing in the midst of unfulfilled commitments on volume and space, thereby putting enormous strain on even the best of relationships in the fight for survival. The shippers enjoyed unprecedented low rates throughout 2009 and naturally wanted rates to stay that low.

Now that the green shoots of recovery are building confidence, more cargo is being shipped. However, with so many container ships still laid up, volume increases in January and February resulted in capacity shortages with the container rates rising once more while cost-saving slow-steaming practices extended transport transit times. Shippers' view From the shippers' corner, the latest complaints are aimed at carriers for keeping capacity idled even though demand increased and reducing service levels through less frequent port calls and slow steaming and at the same time increasing rates and imposing surcharges. Carriers say lines are using creative terminology - over and above regular seasonal adjustments such as general rate increase and peak season surcharges - such as "emergency revenue charge'', an "extraordinary surcharge'' and an "emergency bunker charge'' to impose further rate increases. The numerous charges created a complex and confusing situation, making it challenging for shippers to compare rates and being unable to predict freight costs.

Shippers are calling for more of the laid-up vessels to be brought back into service and for surcharges and rate rises to cease. They feel they are being forced to pay higher rates for poorer service. Carriers' complaints The carriers grumble that shippers are being unrealistic and do not appreciate the difficulties faced by the container shipping industry. New capacity is due to come on-stream and hence there is reluctance to reinstate idled capacity - even though volumes have increased. Slow steaming initiatives not only reduce fuel costs, but also slow down the transit time, reconfiguring trade lane networks. Fewer vessels in service has resulted in reduced port calls on many routes.

Carriers noted that during the recession in the frantic battle to keep some cargo on ships, the rates were reduced to unsustainable levels so much so that the top 20 container lines lost over US$12 billion in 2009, with the industry leader alone reporting losses of over $1 billion. The situation was clearly untenable and it is surprising that there have been no bankruptcies among the major carriers. They had to continually adjust price and capacity in relation to demand. However, the carriers should recognize that it was they who had reduced the rates to such unsustainable levels - and as it turns out, the ensuing price war has helped nobody and hurt everybody. Stuck in the middle Freight forwarders have been caught in the middle of this rumbling disagreement. One senior executive of a global forwarder said they are unhappy with continually being in the crossfire. With rates fluctuating wildly, schedules altering frequently, transit times changing due to slow steaming and increasing volume demand putting strains on restricted supply, the freight forwarders have been continually re-negotiating space, price and service agreements with their carriers and their shippers - putting a strain on relationships. The senior executive also said that freight forwarders are unhappy with both the carriers and the shippers for business activities that undermine the forwarder's role. The term "partnership'' has been overused, with the struggle for survival taking precedent over agreements, he said. Carriers are encroaching on some of the freight forwarders' business and shippers are negotiating contracts directly with the carriers, he added.

Direct contracts About 10 years ago, only companies moving more than 10,000 containers per year would have a direct contract with the shipping lines - space and price negotiations being directly agreed and contracted between carrier and shipper. These days, shippers with volumes as low as 500 containers, are entering into direct contracts with carriers, thus to an extent bypassing the wholesaler role of the freight forwarder. This has put a strain on traditional relationships between shippers and freight forwarders because their customers are choosing to deal directly with their suppliers in a bid to save costs and cut out the middleman. Many of the shipping lines have also established their own freight forwarding and logistics units to negotiate with shippers, thus bypassing the forwarders. The traditional tri-partite structure of the industry - shipper, forwarder and carrier - is coming under increasing threat.

The way forward The industry is now in a tense situation - adversarial relationships, combative negotiations and plenty of friction. Containerized shipping moves over 90 per cent of global trade, so all the parties involved need to find ways to work together. We could see a re-organization and re-alignment of commercial relationships between shippers, carriers and freight forwarders during the coming 24 months depending on how the economy recovers through 2011. All three constituent groups need to diligently review and reconsider their arrangements with their business partners and make conscious choices - on a case-by-case basis - between "strategic" and "transactional" relationships. There will likely be more transactional business, with the various buyers and sellers shopping around on a more ad hoc basis, expanding the size of the spot market, but with all parties having a clearer understanding of the purely transactional nature of these deals. There will also be some re-alignment within the strategic relationships, resulting from the enormous strains induced by the economic crisis. We see various major shippers reconfiguring their allegiances with forwarders and likewise some major forwarders realigning their commitments with carriers.

In the major account sector, companies will likely get more selective about who they work with - suppliers and customers - and be very clear with their business partners about the nature of their relationship and related future expectations and responsibilities, both in good and bad times. The global economic crisis has exacerbated tensions to create this adversarial environment in the industry. The volatile supply and demand situation will not greatly change until later this year, when we should see some steady economic recovery on a global basis and therefore some stability in the markets. This will enable more predictable demand, leading to better balanced supply, improving equilibrium in the market, enabling those that have survived the crisis to settle down into their new relationships - whether they be transactional or strategic.
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Recovery may mean revised business practices

Over the past two years, the state of the economy and the deep recession that gripped the nation and negatively impacted the hotel design community has been much discussed. But while the severe economic downturn that began two years ago had many feeling uneasy early on, it has more recently also forced companies in all segments of the industry to review best practices and begin thinking differently about how each does business.

The practice of thinking “outside the box” was most evident during the recent HOTEL BUSINESS DESIGN® Roundtable that focused on the changing dynamics in how and where hotel furnishings are sourced. The august panel of designers, architects, purchasing agents and owners discussed how issues such as labor shortages in China, the sharp rise in shipping costs in recent months and the issue of sustainability have led all segments of the hotel design community to shakeup their thought processes when it comes to sourcing furniture for guest rooms and public spaces.

Five years ago, few would have thought that United States-based furniture manufacturers would see the strong renewed interest many of have seen recentlyfrom the hotel design community. As labor and shipping costs have risen dramatically over the past six to 12 months, the playing field in terms of sourcing products made in the U.S. versus those made in China has leveled a great deal.

And as the landscape of sourcing has been altered some over the past year, the mindset of those buying the products and those manufacturing the products has needed to change as well. The old ways of doing business may no longer work, and for those companies too stubborn to think differently may find themselves on the outside looking in when competing for jobs in today’s tight marketplace.

The change in thinking, if not business practices, appears to be needed with some furniture suppliers, based on feedback from Roundtable participants. Many noted that while they want to work with American manufacturers some panelists expressed frustration over the inability of some suppliers to make goods to certain specifications and the slow response time of others to requests for proposals on jobs.

While we know that dollars for investment in capital equipment today have been right-sized by the banks, we encourage suppliers working on both sides of the Pacific to continue looking for ways to upgrade equipment and streamline processes to more quickly respond to bids.

Being the last one to alter a mindset in response to changes in a given marketplace could make some companies little more than distant memories. And that’s something nobody wants.

©2001-2010, and ICD Publications, Inc.
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Obstacles in Asia may mean opportunities for American manufacturers

The changing dynamics now impacting China’s manufacturing base is forcing furniture suppliers and hoteliers seeking new products to alter their thinking about where they make and source items such as case goods. Today, rising labor costs in China combined with the higher cost of shipping between Asia and the United States is leading to higher prices of products manufactured overseas and beginning to level the playing field between products made in the two countries, when looking at total cost.

During HOTEL BUSINESS DESIGN®’s recent FF&E Sourcing Roundtable (see story on p. 14), panelists covering the areas of ownership, architecture and design, purchasing and product development spoke of the increase conversation in recent months about the pros and cons of sourcing products made in the U.S. or in China.

While the sustainability and short lead time angles mentioned by some suppliers is a topic that was discussed at the HOTEL BUSINESS DESIGN® Roundtable, panelists felt that quality issue was not as much a factor in choosing where to source products as domestic suppliers indicated, with most speaking highly of the products made in China and Vietnam. And some vendors say the conversation regarding furniture has not significantly changed.

Following the Roundtable, held during the 2010 HD Conference & Expo in Las Vegas, HOTEL BUSINESS DESIGN® spoke with furniture suppliers at the show seeking their input on the issue of sourcing case goods in the U.S. versus China and why it is more prevalent in conversations with hoteliers and designers today. While suppliers said the itemto-item cost of products produced domestically versus those made in China still heavily favors the latter, the jump in shipping costs through the first half of 2010 have brought the total cost more in balance, although they still favor China slightly.

“When you look at the upfront cost for products, there can be a 30% to 40% savings on first cost,” said Kevin Crahan, vp, sales & marketing for Flexsteel Hospitality. “But what they are overlooking is shipping and how much it now costs to bring items in the United States.”

According to reports from product suppliers, the cost of a container has nearly doubled over the past year and no one expects the costs will retreat.

While the more recent rise in shipping costs have forced many to recalculate the total cost of sourcing products from overseas, those suppliers that have stayed true to their American manufacturing roots have seen this pay dividends over the past two years. “We’ve seen a jump in interest in our products because we manufacture domestically,” said Jeff Lazar, CEO of JLF Lone Meadow. “We still hear a great deal of concern about the quality of products made overseas.”

Lazar feels the continued growing interest from hoteliers in products made in the U.S. show a shift in a cycle that for the past several years has largely favored Chinese made products with pricing being the driving force.

Domestic suppliers noted that they have also seen added concerns about quality of products sourced from overseas, with some U.S.-based suppliers believing the ability for designers to oversee quality control efforts as having a great impact on deciding what vendors to work with. “And that is something we are not shy about telling people about,” said Bruce Prock, vp of sales & marketing for Bertolini, referring to highlighting what he feels are the higher quality control standards of products made in the U.S.

Beyond what he said are more questions about the quality of products made overseas, Prock commented that other factors such as sustainability and carbon footprint as it relates to the shipping distance of furniture to a job site have also impacted the increased attention on products made in the U.S.

In addition to sustainability issues, companies with domestic manufacturing capabilities noted that some designers Hotel Business Design, | The Business of Hospitality Style. Page 1 of 2 and hoteliers are attracted to having products suppliers close to home to shorten shipping lead times. “We have warehousing in Florida and our ability to have offer custom upholstery in the U.S. is attractive to some looking for a quick turn-around with their order,” said Theresa Swett, president of David Francis Furniture.

Overall, the real key when it comes to product will remain what offers the best value. “It’s not a complicated issue; it’s about offering products that are a compelling value,” said Edward Tashjian, chief marketing officer with Home Meridian International, parent company of brands including Pulaski and Samuel Lawrence. “While costs are going up in China, we’re also sourcing products from other Asian countries such as Vietnam and Malaysia that don’t have the same cost increase issues.”

©2001-2010, and ICD Publications, Inc.
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Cost fluctuations, sustainability changing import vs. domestic sourcing paradigm

The issue of sourcing furnishings for guest rooms and public spaces at times can be an overlooked aspect of a new build or reconstruction project across the world of hotel design and development. But today, the topic of where products are manufactured is talked about with greater frequency with several factors driving the discussion.

Atop the list in the conversation about country of origin for FF&E is cost. While China for many years has been the low price source for furniture, lighting and other in-room accoutrements, there has been a change in the prevailing winds in recent years particularly with case goods as increases in labor costs, a jump in shipping prices and a diminishing factory base have combined to push pricing up.

While product-to-product pricing when comparing items made in China and the United States still favors the Asian nation, when combining shipping costs and other factors, there is far less difference in overall price today than in past years.

“In the last couple of months, the shipping rates have increased and the overall situation is in constant flux,” Mark Friesen, principal with Beyer Brown, said during HOTEL BUSINESS DESIGN’s® recent Roundtable focused on the issue of sourcing products either domestically or overseas. “Budget has always been the big argument against buying products domestically, but it seems as if we are revisiting the issue more often.”

The other big issue having an impact on a product’s country of origin is the growing desire for hotel owners to tap into the sustainability movement and seek LEED certification for a property. One factor in gaining points toward a hotel becoming LEED certified is having FF&E manufactured 500 miles or less from a given property.

“Many owners today want to be LEED certified or at least want to be able to have a sustainable story to tell,” said Jeffrey Jensen, principal, design director for HKS Hill Glazier.

“Our clients are looking for quality products and we like to give them what they want,” added. Giancarlo Giacchi, senior designer, interiors, WATG. “But today we are dealing with rising transportation costs and also a greater focus on lead times. As a result, we are seeking more information from domestic sources.”

But while rising transportation costs, growing uncertainty with the Chinese manufacturing bases, and perhaps even the issue of patriotism is leading to many hoteliers to at least consider using U.S.-made products in their properties, availability and even product quality is an issue, roundtable panelists said.

Igor Krnajski, senior vice president, design & construction for Denihan Hospitality Group, noted that his company recently wanted to source case goods domestically for a five-star project but ran into two obstacles. “The first challenge we found was that domestic manufacturers could not compete on price,” he said. “The second was that we had some concerns about the craftsmanship of the products.”

Other panelists. agreed with Krnajski, noting that American furniture manufacturers are challenged to produce products that have the design and quality needed for properties at the five-star level. “Many of them think the have the capability to do that, but the don’t.” added Ted Carroll, president of The Carroll Adams Group. “We also don’t get many questions from [the manufacturers] on what they need to do to make furniture for the upscale properties. They do ask about pricing the most.”

Added Jennifer Ramsey, president of Ramsey Purchasing, “There are manufacturers that do some excellent work for us. But when we put their products in a model room next to products from a company manufacturing overseas, the quality is at a bit higher level in terms of detail and finish than those made domestically.”

A point of frustration raised by other panelists who are looking to utilize American-based suppliers, is what they said is the slow turn around time in responding to bids. “We did a 400-room property and reached out to two manufacturers in the U.S. and two from off-shore, and the off-shore sources got back to us in 48 hours while the U.S. companies took seven to 10 days,” said Sean Hatch, president of Hatch Purchasing Corporation. “And with U.S. companies, we had to do four or five follow up calls to get more information. From my standpoint, this is a huge issue and something some companies need to address.”

While panelists said American manufacturers are challenged to produce product for use in upscale establishments, they are seen as viable sources for furniture to be used in properties that are classified below the high-end levels. “There is a three-star project we are working on currently and are strongly looking at a source based in Pennsylvania that is very price competitive,” noted Krnajski.

While the discussion on product sourcing has largely been focused on the U.S. versus China, some panelists noted that, when possible, are looking for manufacturers located near the project. “In some cases we are also looking at South America for product,” said Ricardo Moreno, FF&E designer with Kay Lang & Associates. “And it’s all about getting the most bang for the buck without any extra drama.”

Jensen noted the effort to source product from suppliers located close to a given project is something he sees as a growing trend in the marketplace. “We work on projects all over the world and in one case with work we were doing a small boutique hotel in Nicaragua, we were able to get many things made by local artisans,” he said. “It is a positive for a current job, but also builds relationships and could lead to work for other jobs down the road.”

While the U.S. and China are both viewed as providing numerous resources for case goods, panelists noted the U.S. is still the preferred source for upholstered goods. But beyond these furniture categories, there are few remaining domestic sources for accessory items such as lighting, wall décor and other materials, which can be a point of frustration for some.

“The lead times on lighting can be as much as 16 weeks,” noted Hatch. “Lamps are pretty basic items and it should not take that long to get them.”

Cory Thomas, vp of business development for Monolith Companies, pointed to granite as something that companies are unable to secure in the United States. “The cost of Granite from overseas is much lower,” he commented.

And the other big issue facing the manufacture of some products domestically is the tighter environmental rules enforced in the U.S. by the Environmental Projection Agency. “California’s new VOC [Volatile Organic Compounds] law is now in effect and likely to go nationwide. That will have a long term impact on how and where products are made,” Moreno said.

©2001-2010, and ICD Publications, Inc.
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