Week 5 LPI and Maersk Case Study PDF

WEEK 5 LPI AND MAERSK CASE STUDY International logistics performance § The global logistics performance index (LPI) It ranks 160 countries’ logistics performance against six key dimensions: The aim of this index is to benchmark countries overall performance on these dimensions and to assess the qual...

WEEK 5 LPI AND MAERSK CASE STUDY International logistics performance § The global logistics performance index (LPI) It ranks 160 countries’ logistics performance against six key dimensions: The aim of this index is to benchmark countries overall performance on these dimensions and to assess the quality of a country's connection to the global market. - Customs: The efficiency of the clearance process (i.e; speed, simplicity and predictability of formalities) by border control agencies, including customs. - Infrastructure: Quality of trade and transport-related infrastructure (e.g., ports, railroads, roads, information technology) International logistics performance - International shipments: Ease of arranging competitively priced shipments. - Logistics competence: Competence and quality of logistics services (e.g., transport operators, customs brokers) - Tracking & tracing: Ability to track and trace consignments; - Timeliness :Timeliness of shipments in reaching the destination within the scheduled or expected delivery time. International logistics performance § By averaging scores in 6 dimensions, the LPI ranges from 1 to 5 points ( 5 points indicates the best performance) § The LPI scores are divided into five groups, which correspond to the sco ring quintiles as follows Logistics unfriendly—includes countries with severe logistics constraints, su ch as the least developed countries (bottom LPI quintile) Partial performers—includes countries with a level of logistics constraints most often seen in low- and middle income countries (fourth and third LPI quintiles). Consistent performers—includes countries rated for logistics performance more highly than most others in their income group (second LPI quintile). Logistics friendly—includes high performers, mostly high-income countries (top LPI quintile). https://lpi.worldbank.org/ § Top LPI economies? § Bottom LPI economies? § Top-performing lower-middle-income economies? § Top-performing lower-middle-income economies? § Top-performing lower-middle-income economies, 2018 § Top-performing low-income economies, 2018 Measuring Logistics Performance § What is required for LPI improvement? Public Border management Trade infrastructure Private Logistics services Regional trade faciliation Key performance index Public private partnerships Action plans Government leadership Integration of supply chains Including government International logistics performance § The Logistics Performance Index summarizes a country’s ability to handle logis tics functions. The higher the LPI, the more efficiently goods can move in that country. § The coefficient of determination (R-squared) of a regression model between L PI and the GDP per capita of a country is 60 percent. International logistics performance § UNCTAD Liner Shipping Connectivity Index (LSCI) This measures 159 countries’ access to container shipping services. Generated from five components: - Maximum vessel size in a country’s ports: Lager vessels require deeper ports and investments - The number of companies providing services to a country’s ports: A higher number of competing companies implies more choices and fore lower freight cots for shippers. - The number of services offered by the liner companies: A higher number of services gives more options to shippers to connect to overseas markets. - The number of ships deployed on services to a country’s ports: More ships are correlated with higher frequencies. - The twenty foot equivalent TEU capacity on the deployed ships: This is correlated with economies of scales and lower freight cots. 10 International logistics performance § UNCTAD Liner Shipping Connectivity Index (LSCI) This measures 159 countries’ access to container shipping services with 5 components - Maximum vessel size in a country’s ports: Lager vessels require deeper ports and investments - The number of companies providing services to a country’s ports: A higher number of competing companies implies more choices and fore lower freight cots for shippers. - The number of services offered by the liner companies: A higher number of services gives more options to shippers to connect to overseas markets. - The number of ships deployed on services to a country’s ports: More ships are correlated with higher frequencies. - The twenty foot equivalent TEU capacity on the deployed ships: This is correlated with economies of scales and lower freight cots. 11 International logistics performance The country with the highest LSCI in 2015 was China, Hongkong, Republic of Korea, Malaysia. This remained unchanged through the year 2023. Eleven of the twelve countries with the lowest LSCI are island states, mirroring their low trade volumes and remoteness. https://unctad.org/news/unctad-maritime-connectivityindicators-review-critique-and-proposal International logistics performance The key underlying trend is consolidation with fewer companies (merges and alliances) offering fewer services and using large vessels. One of the goals of logistics is to facilitate the process of trade, and this in turn can aid the economic well being of all countries Ensuring good logistics systems are in places is a key components in efforts to help developing countries in particular. § Note: google ‘trade facilitation internship’ 13 Key characteristics of maritime logistics § Cost Efficiency For some products, the most economical means of transportation remains conven tional sea freight. This particularly applies to bulk goods and large packaged consignments traveling long distances. When speed of service is not a priority, the affordability of sea freight makes it hig hly competitive. § Slow Speed Sea freight tends to be relatively slow. While recent ships can achieve speeds between 25 to 30 knots (approxim ately 45 to 55 kilometers per hour), it is uncommon for commercial ships to travel faster than 25 knots due to energy requirements. This slower speed results in longer shipping times. Key characteristics § Delay Three main factors: pre-shipment delays, discharge port delays, and unexpected delays (adverse weather or missed tides). Asia/Europe trade routes and trans-pacific experience around 33% of shi ps arriving 1 to 3 days late, indicating low ETA reliability. Transatlantic routes have higher schedule reliability due to shorter dista nces and fewer port calls. Low schedule reliability invites challenges for supply chain managers, lea ding to increased inventory and last-minute adjustments for terminal pic kups and deliveries. Terminal operators must allocate more space to buffer the lack of reliabil ity, while inland transport providers face fluctuations and uncertainty in servicing port terminals. Key characteristics § Difference from ETA in days Key characteristics § Accessibility The limited accessibility of the water carrier usually necessitates pickup or delivery by another mode of transportation. Service can also be disrupted by weather. Rivers and lakes freeze during the winter months in the northern states, which can interrupt service for sever al months. Drought conditions can lower water levels and restrict traffic flow. Conversely, heavy rains can cause flooding, which is also disruptive to servic e. § Overall, water carriers are an attractive alternative for low-value traffic, where transportation rates are a significant part of the total delivered c ost and price of the good. A case of Maersk – Boom and burst years § Late 1990s to 2000s: Strong growth fueled by buoyant export-import activities, open trade p olicies, and emerging markets. China became a main driver with large ports and import activ ities § China’s Role: China emerged as a major seaborne trade driver due to exports and commodit y imports. § Optimism and New Vessels: Shipping companies ordered vessels to meet demand, encoura ged by bullish market conditions. § Oil Prices and Bigger Vessels: Rising oil prices led to larger vessel orders to offset bunker fuel costs. § Delivery Timing Challenges: Market conditions sometimes weakened by the time ships were delivered. § Post-2008 Crisis: Market demand dropped. Ship liners didn’t reduce orders. Ships arrived aft er the crisis hit. Overcapacity made. Freight rates down. Oil prices remained around USD95 p er barrel. § CRUDE OIL PRICES (PER BARREL) FROM 1986 TO 2016 Source: US Energy Information Administration, https://www.eia.gov § SUPPLY AND DEMAND GROWTH IN CONTAINER SHIPPING Source: Data from United Nations Conference on Trade and Development, “Review of Maritime Transport 2021 A case of Maersk – Maersk A case of Maersk – Maersk § Maersk Group Origins Founded in 1904 by Danish magnate AP Møller as a shipbuilding company. Initially focused on core shipping businesses. Diversified into logistics, oil, and gas services over time. § Key Milestones Flourished during the 1920s oil boom with a successful oil tanker business. Maersk Line launched trans-Pacific operations. Navigated economic cycles, including World War II and global trade surges. By 2016, Maersk Group was the world’s largest shipping conglomerate. § Subsidiaries Maersk Line: Leading container shipping division covering major trade routes. Maersk Oil: Significant player in the oil industry. APM Terminals: Provider of port and terminal services worldwide. A case of Maersk – market turbulences § Impact of Low Oil Prices on Maersk Falling oil prices since 2014 severely impacted profitability of Maersk Oil Heavy losses reported as oil prices dropped by half in 2015, affecting project cost r ecovery. Pressure on oil field owners to cut production, raising uncertainty in securing futur e contracts. § Overcapacity Challenges in Shipping Industry Container shipping industry revenue down over 16% from peak in 2008. Measures like slow steaming and laying up ships adopted to cope with oversupply. Industry faced additional challenges as shipping companies ordered larger vessels, worsening oversupply. Alliances (conferences) formed to utilize each other’s route coverage. § Market Response: Mergers, Acquisitions, and Bankruptcies Tough operating environment led to mergers and acquisitions for survival. Notable mergers include COSCO Container Line with China Shipping Group and Hap ag-Lloyd with United Arab Shipping Company. Hanjin Shipping's bankruptcy highlighted industry challenges, prompting further co nsolidation efforts. A case of Maersk – China factor § Impact of State-Owned Enterprises in China Chinese state-owned enterprises (SOEs) play a significant role in strategic ind ustries like shipping. Chinese government directed a merger between COSCO and China Shipping to create the fourth-largest global ship liner, showcasing state-driven econo mic policies. § Chinese Government's Influence on Shipbuilding China's government-directed initiatives aimed to boost shipbuilding capacity , making it the world's largest. State-supported consolidation led to closure of less competitive shipyards, el iminating about 19% of capacity by 2015. Class activity § Maersk has a good option: alliances. § Considering mixed signals in global trade and the econo my, let's identify the pros and cons (advantages and disa dvantages) of joining an alliance. § Please see the next two slides for further critical inform ation. Alliance in maritime logistics § Alliance An alliance refers to a cooperative agreement among ocean carriers. It’s a strategic partnership that allows these carriers to cover different trade routes globally through collaboration. Carriers in an alliance can share vessels, networks, and port calls, which hel ps them to optimize their operations and reduce costs. Alliances are essential for maintaining competitiveness and managing the c apacity in the liner shipping market. They’ve become increasingly common, with major alliances like 2M, THE All iance, and Ocean Alliance dominating significant portions of global trade2. Alliance in maritime logistics Major shipping alliances 2024/2025 Alliance Members Details of alliance Gemini Cooperation Maersk & Hapag Lloyd This new alliance will begin in January 2025, where Maersk will step away from the 2M alliance, and Hapag Lloyd will leave THE Alliance. 2M MSC & Maersk % Ocean Alliance CMA-CGM, Cosco Group, OOCL and Evergreen THE Alliance Hapag Lloyd, NYK, Yang Ming, MOL, K-Line, HMM Formed in 2015 to ensure competitive and cost-efficient operations. This alliance comes to an end in 2025. Formed in 2017 and renewed for 10 years ending in 2027. Recently extended again until 2032. The alliance has 330 ships, out of which 111 ships are operated by CMA CGM. The alliance has a capacity of 3.8 million TEUs. Launched in 2017, THE Alliance has 241 ships calling more than 1,150 ports and coverin g 3.3 million TEUs. With the new Gemini Cooperation forming in January 2025, Hapag Lloyd will be leaving THE Alliance next year.