JOC: Difficult solutions to US chassis chaos emerge
Containers and chassis have a symbiotic relationship in the supply chain, so intertwined that freight grinds to a halt when the two are out of sync. The chassis is a linchpin between on-time deliveries and delays, as most recently shown when shippers front-loaded cargo in December to avoid potential US tariffs in January. Equipment shortages arose in January in Los Angeles; Long Beach; Chicago; and Memphis, Tennessee.
The problem is simple even if the solutions are not. Lowering trigger thresholds, building a strategic chassis reserve, and constructing a truly open chassis network would mean higher bills for beneficial cargo owners (BCOs).
The first two options would require more equipment, which could idle for months and months, depreciating in value without generating any return on invested capital. The final idea would also disrupt the exclusive deals between ocean carriers and chassis providers to provide competitive rates to BCOs. Each, though, can prompt a well-deserved discussion on how to stop the equipment shortages from happening time and time again.
The issue boils down to an idiom: you don’t build the church for Easter Sunday. To do so would be a great customer service decision but a poor business one.
Chassis providers are trying to solve the problem by adding more equipment annually.
By the end of 2018, Direct ChassisLink, Inc. (DCLI) had purchased 5,600 marine chassis, upgraded more than 27,000 pool chassis with radial tires, and converted 80 percent of the fleet to LED lights. DCLI has invested $45 million to upgrade its existing fleet and spends millions each year in repairing broken chassis.
TRAC Intermodal bought nearly 8,000 chassis in 2018 and refurbished another 8,000.
Flexi-Van Leasing built more than 4,000 units in 2018 and upgraded 15,000 with radials and LEDs across the country. It also plans to continue to add radial and LEDs and recondition older units.
Demurrage and detention/per diem penalties, nevertheless, have skyrocketed in recent years. In 2014, fees from ocean carriers surged 90 percent. In 2015, they rose another 86 percent because of West Coast port strikes, according to the Federal Maritime Commission (FMC).
After a decline in 2016, penalties rose 30 percent in 2017 to about the same total as 2015. Terminal operator demurrage rates show a similar trend, according to the FMC.
Much of the shortage goes back to when the ocean carriers exited the chassis business — sort of. Evergreen and Matson are the only major ocean carriers still using their own chassis; others tie the hands of truckers by signing exclusive deals with chassis providers. The benefit is that BCOs pay very little for a chassis, but the downside is the ocean carrier keeps its hand firmly in the game by dictating which equipment must be used.
When those limited options are unavailable, terminal and container demurrage quickly follows. Thousands of dollars in unnecessary penalties are racked up per shipper because the terminal becomes a storage yard and a trucker is forbidden from using its own chassis.
Not all demurrage is tied to chassis shortages or union strikes. Fees are also tied to poor weather, customs inspections, or congestion issues. Finding a better chassis business model, however, could reduce the frequency of penalties and minimize disruptions.
Given chronic congestion in Southern California; New York and New Jersey; Norfolk, Virginia; Charleston, South Carolina; Savannah, Georgia; Memphis, Tennessee; and Chicago, everyone benefits by eliminating chassis availability as a contributing factor.
“There is no one problem to be solved across all markets. Each market is unique and faces a different set of supply chain-driven circumstances that can lead to intermodal inefficiencies. Looking for a ‘one size fits all’ solution that is solely focused on chassis will not meet the complex needs of ports and inland intermodal hubs,” DCLI said in a statement to JOC.com.
So, what is the answer? Should shippers hold enough chassis in inventory for the worst-case scenario even if they go unused for months?
Lower the stress-trigger threshold
Every chassis pool administrator establishes a utilization percentage that, when exceeded, requires equipment providers to add more units as soon as possible. It’s a trigger signifying a pool is stressed.
Utilization percentages require some complicated calculations, including how long BCOs hold on to chassis, but it’s a figure that factors in broken equipment. So, if 5 percent of chassis require maintenance and repair, the utilization percentage drops to 95 percent.
There is no uniform trigger point covering all ports and inland rail locations. In some markets, that trigger may be 85 percent. Port officials in Savannah, Georgia, and Charleston, South Carolina, convinced Consolidated Chassis Management (CCM) to lower its trigger from 80 percent to 75 percent. Triggers might be reset at 75 percent in the Gulf and interior hubs such as Chicago and Memphis, according to sources.
Jim Newsome, CEO of the South Carolina Ports Authority, believes the proper trigger should be 70 percent.
“The penalty for not having a chassis is huge. You’re into expensive demurrage of $100 or $150 per day, delays in terminals, and bobtails,” he said. “The idea that you cut the chassis fleet as close as you can to perfection doesn’t make sense to me. Shaving the chassis fleet to the bare minimum necessary drives inefficiencies in the supply chain.”
Some of the utilization problems are the BCOs’ own doing. In January, the chassis supply at the Port of New York and New Jersey was lower than usual as dwell times — the time a chassis is out on the street — went up among BCOs. TRAC sent a bulletin to customers urging them to return long-dwelling equipment, some of which it claimed as out for more than 15 days.
The Pacific Merchant Shipping Association reported dwell times in November averaged 3.5 days, up from 2.5 days last spring. About 13 percent of chassis were out on the street for five or more days, up from 5 percent last spring.
Building a reserve fleet
Another idea is establishing a reserve fleet in cases of emergency similar to the Strategic Petroleum Reserve — an emergency supply of crude oil in barrels located underground in Louisiana and Texas.
This is similar to a lower trigger point because both would require providers to increase the supply of chassis in the United States. Purchasing new chassis, however, is getting more expensive because of tariffs on Chinese-made units and rising US steel prices because of tariffs.
TRAC has been pivoting toward this idea with what it calls a “safety stock inventory.” Extra roadable chassis are stored in key markets but not placed into active use until its pool is stressed.
“[The chassis] may sit months or even an entire year and never move. We’re willing to make the investment in anticipation of spikes in demand,” said Val Noel, TRAC’s chief operating officer (COO).
Flexi-Van also has ready reserve units in large markets.
The problems with a reserve fleet are similar to lowering triggers.
Who pays for the new units? How often is the reserve used, and are the proper amounts deployed in the right locations?
An analogy is supplying water in supermarkets before a hurricane or blizzard. Pictures on television and social media show empty shelves, so why wouldn’t a supermarket always have enough water in stock? Under the supply chain model, a supermarket chain will transport essentials from other cities ahead of the storm. It doesn’t make financial sense to always carry gallons of water and pallets of batteries in inventory when such storms happen a few times per year.
The same applies to chassis. Is it smart for them to collect dust? It might be a wise customer service goal but an unwise and costly business decision.
“It’s a tough balancing act for us or anyone,” acknowledged Shawn Tibbetts, COO of the Virginia Port Authority, which owns the Hampton Roads Chassis Pool II. “We plan for the peak, but then we look at the valleys in demand as opportunities to upgrade the fleet, maintain it, and make the pool as efficient as possible.”
Gray pools are not truly open
Even in existing gray pools, also known as interoperable pools, the main contributors are TRAC Intermodal, DCLI, Flexi-Van Leasing, and the North American Chassis Pool Cooperative (NACPC).
Other chassis providers such as TAL International, Milestone Equipment Holdings, American Intermodal Management (AIM), and Star Leasing are permitted to contribute to gray pools, but it would make no sense.
Even if their equipment were used, they wouldn’t book the revenue under “box rules.” When a drayman uses a TRAC pool chassis on a Maersk Line container, DCLI actually gets the revenue. An electronic data interchange (EDI) message is sent when a trucker leaves the terminal. The equipment provider collecting the money is based on whose box is hauled. In the Maersk example, DCLI invoices the customer even though a TRAC pool chassis was used.
The revenue is even in the end because TRAC would collect revenue, for example, when a DCLI chassis is used on an APL container.
Since AIM, Milestone, and Star Leasing don’t have any contracts with ocean carriers; however, they wouldn’t be paid in the gray pool. They have their own depots. The clock begins when the chassis leaves and ends when it is returned. No EDI message is sent upon exiting the terminal.
One option would be to eliminate box rules to create a fully unrestricted open choice in CCM pools.
Flexi-Van fully supports the idea, but DCLI opposes it. DCLI told JOC.com that neither box rules nor choice improves or impedes availability, and neither is relevant to chassis supply.
Use the airport model
One way to even the playing field is to find ways to allow AIM, Milestone, Star, and TAL to better compete on daily rentals to truckers. A solution can be found in the airport car rental industry.
Currently, DCLI, TRAC, Flexi-Van, and CCM pools have “counters” and “cars” on the “airport” grounds, while AIM, Milestone, and Star Leasing are relegated to offsite properties. Naturally, any short-term user would use a provider on the airport grounds.
But at the Port of New York and New Jersey, traditional chassis providers have been kicked off terminal grounds. The same could occur in the future in Los Angeles.
Gene Seroka, executive director of the Port of Los Angeles, said moving chassis to near-dock sites would free up as much as 80 acres of terminal space for containers. The port has identified several parcels that could qualify and is exploring those options.
Nathanial Seeds, CEO of AIM, said he would consider establishing a joint off-site location if more ports end up doing the same. The idea is co-locating outsiders in a building near the traditional pool depot. Each would have a counter and a lot, similar to how Avis, Budget, Hertz, and other rental car companies co-habitate in an airport. In this case, AIM, Milestone, Star, and TAL are the rental companies.
“If the chassis providers were no longer on the terminal grounds, this proposal would make sense. You would be competing on service, quality, price, and innovation like the car rental companies. We know the chassis space needs this desperately,” Seeds said.
Southern States model
One proposed model championed by the Georgia Ports Authority, South Carolina Ports Authority, and NACPC would establish a Southern States Chassis Pool. It would be a gray pool but not completely open.
Only NACPC, TRAC, DCLI, and Flexi-Van could contribute to the pool under the proposal presented to the Ocean Carrier Equipment Management Association, which has been skeptical of the idea. Milestone and AIM would be allowed to contribute to the Southern States Chassis Pool because NACPC would handle the invoicing on all transactions and disperse the founds to the appropriate chassis provider.
The real benefit of the Southern States model is at-cost price. Regardless of which chassis is utilized, a flat price would be established for BCOs, likely between $13 and $16 per day based on current pricing.
The two port authorities already oversaw the addition of 4,000 chassis last year, and Georgia will open a new 12-acre chassis yard before this year’s peak.
Assuming control of the problem
“If you are a global logistics director and you have any sort of consistent, measurable volume, you must have your own chassis fleet,” said Andrew Nutting, senior logistics manager with 1A Auto, whose previous stops included Bob’s Discount Furniture and TJX Companies.
Shippers wouldn’t necessarily need to buy their own chassis, which costs between $10,000 and $15,000 per unit. Nutting said having a chassis fleet under their control is the key.
Leasing chassis on a long-term agreement is a popular alternative. Milestone offers such an arrangement, as do most other equipment providers.
DCLI believes a better solution would be building out the digital supply chain platform to track assets. DCLI is an investor in the Blume Global platform, formerly known as REZ-1.
There are immediate benefits for BCOs using their own chassis at marine terminals, which ground containers. Some inland rail terminals mount boxes onto chassis beforehand, so a “flip charge” is assessed to put it on another chassis. Typically it’s about $50 or $100.
“The return on investment for a chassis is less than three years. If you anticipate being in business for the next three years and importing containers, go buy chassis or lease them. It just makes total sense,” Nutting said.