CHALLENGING THE ZERO-SUM MINDSET

Transcription

1 CHALLENGING THE ZERO-SUM MINDSET A perspective on how to improve the relationship between Carriers and Freight Forwarders Jesper Adeltoft and Christian Kongerslev Reich

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3 WHITE PAPER 3 INTRODUCTION Intermediaries are known in many industries such as travel agencies and insurance brokers. In most cases, the intermediary is either exploiting market imperfections and/or bridging complexity. The national energy markets in Europe is an example where an intermediary plays an active role. Energy markets have been deregulated and interconnected allowing for energy trading across boarders and sources. Price differences between time of purchase, production and consumption as well as non-transparency allow brokers to exploit the imperfections and earn large sums on arbitrage. In many industries, the supply side views the intermediary as a (temporary) necessary evil that should be fought every day and eventually made redundant. At first glance, container shipping is no different. Freight Forwarders act as intermediaries and market makers; consolidating volume, pressuring Carriers for better rates and taking a 'cut' in the process. So why look closer into this relationship? THE CURRENT RELATIONSHIP DYNAMICS BETWEEN CARRIERS AND FREIGHT FOR- WARDERS ARE DESTROYING VALUE First of all, because the current relationship dynamics are destroying value. Once you scratch the surface, it is evident that the relationship between Carriers and Freight Forwarders is actually far from black and white. It varies across companies, people and even distinct commercial situations. Sometimes they are suppliers and customers, sometimes partners and sometimes competitors. Such ambiguity of the working relationship is sub-optimal in many ways. It means that all parties are inconsistent in their approach to each other and to the market. In addition, it appears to drive a very short-term and transactional approach to each other. It does not have to stay this way. Through clarity, dialog and even unilateral steps, there seems to be significant untapped potential in the Carrier/Freight Forwarder relationship, benefitting not only the players themselves, but also the Shippers. THERE SEEMS TO BE SIGNIFICANT UNTAPPED POTENTIAL IN THE CARRIER/ FREIGHT FORWARDER RELATIONSHIP. BENEFITTING NOT ONLY THE PLAYERS THEMSELVES, BUT ALSO THE SHIPPERS Secondly, the container shipping industry is currently undergoing an interesting development that potentially could have a radical effect on the working relationship between Carriers and Freight Forwarders. The container shipping industry has embarked on a journey toward online booking, greater transparency, online aggregators, etc. All Carriers and Freight Forwarders we talked to had their individual online strategies. THE CONTAINER SHIPPING INDUSTRY IS SLOWLY BUT SURELY MOVING ONLINE POTENTIALLY REDEFINING THE ROLE OF THE INTERMEDIARY In multiple other industries, such changes have resulted in the demise of the 'middleman' or at least in a significant redefinition of the intermediary role. The big question is therefore how this development will affect the Freight Forwarders' role and the working relationship between Carriers and Freight Forwarders.

4 CARRIER DEPENDENCY ON FFW 4 WHITE PAPER HIGHLIGHTS PART 1: THE BACKGROUND AND CONTEXT OF THE ANALYSIS Our approach A few facts on the industry 24.9% CONTROLLED BY FORWARDER PAGES 5 TO % CONTROLLED BY BCO PART 2: THE COLLECTIVE INDUSTRY VIEW ON THE RELATIONSHIP BETWEEN CARRI- ERS AND FREIGHT FORWARDERS The current relationship between Carriers and Freight Forwarders is blurry at best Counterproductive behavior and zero-sum mindset Digitalization and transparency from the Carriers will be welcomed by many and be a catalyst for new value creation in the industry The Freight Forwarders' position in the industry is currently not threatened, but the role and the revenue model must change The courage to invite for co-creation of mutual value will most likely define the winners of the next decade CARRIER SHIPPER FREIGHT FORWARDER PAGES 8 TO 16 PART 3: OUR CONCLUSIONS AS WELL AS OUR PERSPECTIVE TO THE STAKEHOLDERS INDUSTRY Create a bigger pie (for the industry), rather than just taking a bigger piece Work together for mutual benefit Create more clarity in your respective relationships and act accordingly Customer It doesn't matter much what Shippers the Freight Forwarder serves because the Carrier can't reach them. The Freight Forwarder effectively becomes the customer 3rd party sales Sales partner The Carrier could serve the shipper directly but value the Freight Forwarder s role. The relationship becomes that of a sales partner Competitor The Carrier has no The Carrier has no need for PAGES 18 TO 21 dependency on the Freight Forwarders, but value the volume they can access if the terms are right. The Freight Forwarder or value from the Freight Forwarder, making it a competitive relationship becomes a reseller CARRIER ACCESS TO SHIPPERS

5 WHITE PAPER 5 METHODOLOGY OUR APPROACH TO THE ANALYSIS Having encountered the ambiguity of the working relationship between Carriers and Freight Forwarders on several assignments, we decided to dedicate significant time and efforts to understanding it further. The combination of mutual dependency, competition and new market dynamics toward greater transparency made it especially interesting. What strategies would be best for either or both parties in the future? We have defined our approach and ambition as follows: We focus on container shipping and the ocean freight. This is where we had the highest number of observations and the most interrupting dynamics in play. We combine desk research with in-depth interviews. Opinions matter, especially in a shipping context where the personal relationships to a great extent define and shape the interactions between Carriers and Freight Forrwarders. We talk to the right people, in the right companies. The result is significant insight from the most influential Carriers and Freight Forwarders. We get a customer's perspective. The Shippers' view on the relationship between Carriers and Freight Forwarders (including their preferences and expectations) is important in terms of how changes in the industry are likely to play out. It has been quite evident that we are not alone in wanting to investigate this relationship further. Once approached, most major Carriers and Freight Forwarders welcomed the dialog, and many referred us to others in the industry, whose perspective they would also appreciate to be included. Finally, some of the interviewees have reverted with questions and reflections in anticipation of the results. We have interviewed 50+ managers and executives from 30+ companies across Shippers, global and regional Carriers as well as global, regional and local Freight Forwarders in Europe, the Middle East and Asia. WE HAVE INTERVIEWED 50+ MANAGERS AND EXECUTIVES FROM 30+ COMPANIES Many preferred to be anonymous in order to speak more freely; the rest are listed in the 'credentials' section in the back of this white paper. All quotes used in this paper have been reviewed by the respective people, and potential misunderstandings have been double- checked. The interviews have typically been 1-2 hours, face-2-face conversations focused on three areas: Current collaboration Who do you work with, what works well and what needs to be improved? Are you competitors, partners or is it a supplier/customer relationship, and why? Market dynamics What trends influence the working relationship? Have there been any changes lately? Do you expect to change the relationship in the foreseeable future, and if so why? Future models What changes (if any) do you foresee in a future (online) business environment? Finally, we rounded the dialogs off with questions like the following: What should Carriers/Freight Forwarders do more or start doing? What should Carriers/Freight Forwarders do less or stop doing? It is important that this white paper is not a transcript of the interviews conducted. Rather, it is our synthesis of the findings, combined with our subjective view of the working relationship between Carriers and Freight Forwarders. Not everyone will agree with all conclusions but then again not everyone should. NOT EVERYONE WILL AGREE WITH ALL CONCLUSIONS BUT THEN AGAIN NOT EVERYONE SHOULD. Hopefully, readers will find interesting, valuable and useful guidance in the following pages. We invite everyone to discuss and challenge the findings, opinions and conclusions. We are always up for a good discussion.

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7 WHITEPAPER 7 A FEW FACTS FIG 1 DISTRIBUTION OF CONTAINERISED OCEAN TRADE VOLUMES Top % CONTROLLED BY FREIGHT FORWARDER 34 Top Rest 35 CARRIER VOLUMES Million TEUs 75% CONTROLLED BY SHIPPER 54 Rest FREIGHT FORWARDER VOLUMES Million TEUs Top 10 Carriers Maersk Line MSC CMA-CGM Evergreen Line Hapag-Lloyd Cosco CSCL Hanjin MOL Hamburg Süd Top 10 Freight Forwarders Kuehne+Nagel DHL DB Schenker Pantos Panalpina Expeditors Sinotrans Damco DSV CEVA Note: Source: Market shares for Carriers are based on size of operated fleet by January 2014 (Alphaliner). Carrier volume 2014; Freight Forwarder volume 2013 Container Trade Statistics; Alphaliner statistics; Transport intelligence

8 s 8 WHITE PAPER THE CURRENT RELATIONSHIP BETWEEN CARRIERS AND FREIGHT FORWARDERS IS BLURRY AT BEST Carriers and Freight Forwarders work closely together and depend a great deal on each other in their daily business. However, when interviewing (and working with) them, it is evident that the nature of their current business relationship is far from clear misunderstandings and unmet expectations being a catalyst for distrust and value destruction. IT IS EVIDENT THAT THE NATURE OF THEIR CURRENT BUSINESS RELATION- SHIP IS FAR FROM CLEAR Some of the questions that come to mind are: If Freight Forwarders are customers (as many Carriers say), why do Carriers exclude them from buying certain products and why do the Carriers send their sales people to call on the Freight Forwarders' customers? If Freight Forwarders are an extended sales channel (which many of them say they are) why don't they market the Carrier brand like a sales channel would and should? If Freight Forwarders are competitors (which is what we hear from the Shippers), why do Carriers offer the Freight Forwarders excellent long-term contractual terms, volume discounts and (for some) even include them in the Key Account program? Etc. The fact is that most of them find themselves playing all roles at different times, but few (if any) are conscious of the difference, differentiating deliberately and consistently MOST OF THEM EXPERIENCE PLAYING ALL ROLES BUT FEW (IF ANY) ARE CON- SCIOUS OF THE DIFFERENCE, DIFFEREN- TIATING DELIBERATELY AND CONSIST- ENTLY In the interviews, the dominant views among Carriers and Freight Forwarders were as either customer or sales channel. They are all conscious about not describing the other as a competitor even though they sometimes compete for a given business. Shippers, on the other hand, have a different perspective. Freight Forwarders have special products e.g. freight management/3rd party logistics, but otherwise Carriers and Freight Forwarders are competitors vying for the same business. I DON'T CARE WHAT EITHER SAYS I CONSIDER CARRIERS AND FORWARD- ERS AS COMPETITORS FOR MY BUSINESS Shipper He is a customer I am a sales channel CARRIER FREIGHT FORWARDER SHIPPER They are competitors

9 WHITE PAPER 9 A joint sentiment seems to be that Freight Forwarders are best (bring most value) with the small/medium customers and in complex settings. With the large Shippers and/or point-to-point trades, Freight Forwarders provide little value. Yet, they have significant business on these customers and trades. A JOINT SENTIMENT SEEMS TO BE THAT FREIGHT FORWARDERS ARE BEST (BRING MOST VALUE) WITH THE SMALL/MEDIUM CUSTOMERS AND IN COMPLEX SETTINGS The nature of this working relationship matters because if all were conscious, explicit and consistent in how they interacted with each other, there would be multiple benefits for everyone also Shippers, such as: Improved predictability on vessel utilization improving supply security for the Shippers Both Carriers and Freight Forwarders spending time and resources on creating value for the Shippers instead of managing and counteracting each other Opportunities for making minor adjustments that could benefit the Shippers' supply chain efficiency (administratively or operationally) Significantly reducing administrative waste in commercial and customer service organizations for both Freight Forwarders and Carriers Talking together can pose a legal challenge and is certainly ground for concern. Many of the industry players have both recent and impactful experiences in this regard To address this, we have sought legal counselling on the specifics, but also tried to emphasize the unilateral initiatives from either Carriers or Freight Forwarders that we believe will bring value to the industry. Notes on the legal aspect We have tried to shed some light on the legal issues that could occur when Freight Forwarders and Carriers discuss their working relationship by asking legal professionals. It quite fast became evident that the only clear answer we could get was "there is no clear answer". There seems to be a common agreement on a few overall observations and guidelines: The issues many have seen or experienced are mainly related to Freight Forwarders talking to each other or Carriers talking to each other While recognizing the issues, most interviewees also emphasize the impediments they will face, if they try to do something about it. The most common arguments are: Our counterparts are not ready/willing Our counterparts will consider an approach a weakness and stab us in the back, first chance they get International competition law prevents us from doing anything The first two are primarily rooted in the traditional counterproductive behavior and zero-sum mindset of both Carriers and Freight Forwarders. It will not be easy to change this, but it appears that there is significant willingness. We will address this in the next section. From a general perspective, Carriers and Freight Forwarders are serving two different markets and are thus not competitors Depending on the situation, a specific Carrier and a specific Freight Forwarder could be considered potential competitors and would thus be violating the law by making lateral agreements on their relationship Internal discussions on the commercial logic of the relationship are fine but have the individual case evaluated legally before engaging in a dialog with a counterpart

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12 12 WHITE PAPER COUNTERPRODUCTIVE BEHAVIOR AND ZERO-SUM MINDSET The right mindset can be a catalyst for amazing achievements and development, while the wrong mindset can be an overwhelming barrier for change. The container shipping industry is full of examples on counterproductive behavioral patterns that everyone knows and acknowledges as such: Freight Forwarders double (or triple) book to ensure space on the vessel Carriers overbook vessels and roll cargo Contracts are only honored by the party benefitting from the contractual terms versus current market conditions Freight Forwarders try to play the Carrier's own complexity against them, e.g. combining many local agreements, local rebates, special commodity rebates, etc. Carriers avoid bidding on a tender that is currently served by Freight Forwarders, in fear of repercussions Freight Forwarders offer long-term rates to Shippers, undercutting Carriers and then revert to the Carriers to help fulfill the won contract for themselves, Carriers as well as Freight Forwarders forego the opportunity to create long-term wins for everyone. BY GOING FOR THE SHORT-TERM WIN FOR THEMSELVES, CARRIERS AS WELL AS FREIGHT FORWARDERS FOREGO THE OPPORTUNITY TO CREATE LONG-TERM WINS FOR EVERYONE Everyone we interviewed agrees that breaking these patterns would benefit all. Many have good ideas and see multiple opportunities just waiting to be harvested. However, they consistently point to someone else to take the first step. From an outside perspective, it seems to be up to the largest players to lead the way. They have the most to gain and sufficient mutual dependency to promote a trustworthy atmosphere. The behavior seems to be the result of a zero-sum mindset a perception that taking money from someone else is time better spent than creating value on your own. ZERO-SUM MINDSET TAKING MONEY FROM SOMEONE ELSE IS TIME BETTER SPENT THAN CREATING VALUE ON YOUR OWN An example brought up by many is a recent trend where Freight Forwarders target large Shippers on long-term contracts, undercutting Carriers in the tenders. Subsequently they turn to the Carriers to help honor the contracts at the settled rates. The Shippers do not complain, but no value is created. The Freight Forwarders have basically taken money from the Carrier and given it to the Shipper. The result is a fundamental distrust and it becomes difficult to discuss and negotiate the things that really matter, e.g. optimizing and simplifying flows, creating new specialized products for the customers, etc. By going for the short-term win

13 WHITE PAPER 13 DIGITALIZATION AND TRANSPARENCY FROM CARRIERS WILL BE WELCOMED BY MANY AND BE A CATALYST FOR NEW VALUE CREATION IN THE INDUSTRY The container shipping industry is notoriously behind most of the world when it comes to digitalization, automation and transparency. In most industries, we have been able to find, book, order and pay for products and services online for the past ten years, as consumers as well as businesses. In shipping, we are still only scratching the surface. Online aggregators have tried to consolidate shipping information making it available to everyone. For the small, low complexity shipments, they have made a difference. For the large majority, however, the information available cannot bridge the complexity of multiple national standards and intermodal networks that is the reality. Everyone in the industry expects different aggregators to continuously attempt to crack the code for global transparency, and while they recognize that some might eventually be successful, they remain very skeptical. Rather, most people believe transparency has to come from within the industry, driven by Carriers and Freight Forwarders. TIME HAS COME AND GONE FOR THE ONLINE AGGREGATORS THEY WILL NOT MAKE A REAL DIFFERENCE IN THE INDUSTRY Freight Forwarder The last movers in the industry are Carriers. It seems there are three dominating reasons for this: 1) It is more complex than it may sound, e.g. to make realtime, relevant quotes in an industry with such rate fluctuation and global complexity 2) There are virtually no clear standards for products, services, charges, etc. making digitalization (and product comparison) quite challenging 3) The Carriers are concerned that the large Forwarders will see it as an aggressive move primary value-add. Thus, the adverse effects of transparency are by far outweighed by the administrative savings and speed to market. ONLINE TRANSPARENCY FROM THE CARRIERS WOULD BE A GIFT ENA- BLING US TO CREATE MORE VALUE FOR OUR CUSTOMERS Articulated in different ways by all large Freight Forwarders interviewed Many actually also emphasize that digitalization pushes Carriers to streamline their internal processes. Such improvements would also be welcomed by all. I THINK THAT ONLINE TRANSPAR- ENCY WILL HELP OR FORCE CARRIERS TO A NEW LEVEL OF EFFICIENCY Shipper When asked who might be adversely affected by digitalization and transparency, many point to the less advanced Freight Forwarders. Large Freight Forwarders have multiple revenue streams and manage the global complexity for their clients Small Freight Forwarders deal with (local) customers who would never book directly with a Carrier anyway The less advanced, medium-sized Freight Forwarders primarily work as market makers, and the ocean freight mark-up is their primary revenue source. Transparency will certainly place significant pressure on this model Finally, most interviewees also emphasize that the Freight Forwarders should revisit their revenue model to align pricing with real value-add. This will be the focus for the next section. Testimony from this analysis shows that the last reason is a misunderstanding. Actually, the large global Forwarders welcome the transparency. All emphasize the complexity surrounding the sea voyage and that their ability to manage this complexity is their

14 14 WHITE PAPER THE FREIGHT FORWARDERS' POSITION IN THE INDUSTRY IS CURRENTLY NOT THREATENED, BUT THE ROLE AND THE REVENUE MODEL MUST CHANGE Is container shipping like the travel industry where the travel agent became redundant when the online services took off? None of the Shippers we have spoken to can imagine a world without Freight Forwarders. NONE OF THE SHIPPERS WE HAVE SPO- KEN TO CAN IMAGINE A WORLD WITH- OUT FREIGHT FORWARDERS First and foremost, Freight Forwarders play a unique role in freight management, having experience from multiple supply chains and access to knowledge that can help Shippers realize untapped potential in their own supply chain. Secondly, shipping is still very complex, and Freight Forwarders make the world easier for Shippers, removing many concerns and enabling the Shippers to think of their own business rather than shipping. FORWARDERS BRING IN A LEVEL OF KNOWLEDGE, EXPERIENCE AND FLEXI- BILITY THAT IS CRUCIAL TO OUR SUPPLY CHAIN AND THAT WE CAN'T GET ANY OTHER WAY Shipper One would think that information technology and aggregators like Shipstr.com would threaten the Forwarders. However, the industry is saturated with inconsistent standards making it virtually impossible to automate on more than a minor part of the world at a time. Lacking standards on everything from customs clearance to transportation time and surcharges makes large-scale automation impossible. Attempts at streamlining are being made by several shipping associations, but there is nothing indicating that global standards will emerge anytime soon. Freight Forwarders relieve Shippers of the agony of complexity in a way no other industry player can at the moment. There is, however, a significant mismatch between where Freight Forwarders add value and where they make their money today. A significant part of the revenue comes from services where the Freight Forwarder redistributes value from Carriers to Shippers, but has limited value-add. Almost all Shippers and Freight Forwarders we have talked to seem to recognize that this is not a sustainable situation and the Freight Forwarders' revenue model will have to change sooner rather than later. Aligning the Freight Forwarders' incentive with the value they create for their customers appears to be a win-win for the entire industry. I PAY THE LEAST FOR THE SERVICES THAT ARE THE MOST VALUABLE BUT THAT IS THE FREIGHT FORWARDERS' OWN FAULT Shipper When speaking to Shippers, it is evident that they do not expect to take over more of the logistics themselves. Rather they expect Freight Forwarders to continue bringing new and more value to the table. Also, they clearly indicate that the Freight Forwarders who cannot keep up will be left on the shore. The single most articulated expectation is that the Freight Forwarders will use their unique access to information to create significantly better understanding of the Shippers' own industry dynamics and the patterns of the supply chain. Thus helping the Shippers create value in their own business. OPTIMIZATION OF THE SUPPLY CHAIN IS ONE OF THE BIGGEST LEVERS FOR COST REDUCTION WE HAVE LEFT WHOEVER CAN HELP ME REALIZE THAT HAS A BRIGHT FUTURE Shipper CARRIERS SOMETIMES FORGET THAT THE OCEAN LEG IS THE LEAST COMPLEX PART OF OUR SUPPLY CHAIN Shipper

15 WHITEPAPER 15 THE INDUSTRY IS SATURATED WITH INCONSISTENT STANDARDS, MAKING LARGE-SCALE AUTOMATION IMPOSSIBLE FOR NOW SOME OF THE ISSUES ARE INDIVIDUALLY INSIGNIFICANT, BUT THE NUMBER OF THEM IS OVERWHELMING Customs clearance: There are no global standards for how customs clearance should be made or by whom Transportation time: There are no standards for how to measure transportation time making product comparison a manual process Surcharge and VAS: The same surcharge can have as many different names as there are Carriers and the same name for a value-added service can mean as many different things as there are Carriers and Freight Forwarders Deviation/delay: There are no standards for who monitors deviations/delays, who notifies the Shipper (when and how) or who takes charge of corrective actions Port/terminal codes: There are no global standards for port or terminal codes or whether/when to use local language or English Invoicing format: Invoices come in as many formats as there are suppliers and there are no global standards for terminology

16 16 WHITE PAPER THE COURAGE TO INVITE FOR CO-CREATION OF MUTUAL VALUE WILL MOST LIKELY DEFINE THE WINNERS OF THE NEXT DECADE Some of the changes we have touched upon can be done or initiated unilaterally, but many will require dialog, listening and collaboration. Significant value lies in improving the interfaces between Carriers, Freight Forwarders and Shippers, e.g. Shipment patterns that put constraints on a Carriers' asset utilization. The Shipper could change the pattern, often with no consequence to itself, but is unaware of the problem and has no incentive to change it Shippers tying up a lot of capital in shipments and/or incurring unnecessary costs in the supply chain due to inoptimal network configuration. Individually, the Shippers can change little and they are unaware how pooling knowledge with others could unleash untapped potential What these and many other examples have in common is that releasing the value will require much more sharing with counterparts and co-creation of solutions. FREIGHT FORWARDERS SHOULD EN- GAGE ACTIVELY IN HELPING US OPTI- MIZE OUR LOGISTICS Shipper Shippers, Freight Forwarders and Carriers each have many opportunities to capture new value by sharing it with others. Sharing is counter-intuitive and there are multiple good arguments not to do it, but the industry is running out of old-world options to break out of the zero-sum mindset. In our interviews, most ideas circle around these three keys to value creation: INFORMATION SHARING For one player to openly share how value/cost is created in their business, what are the main pain points and what are the hypothesis on how collaboration could potentially help? CO-CREATION Re-thinking the dynamics of the current collaboration, what can we do together to mitigate the pains or unleash new potential? VALUE SHARING Being open to the fact that new added value preferably should benefit all parties. This means that efficiency gains, quality improvements, etc. should be shared between the players. It requires discussions on how improvements can be measured and how value can be shared to incentivize all involved parties in an aligned manner.

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18 18 WHITE PAPER CONCLUSIONS AND RECOMMENDATIONS The insights from this study suggest that Carriers and Freight Forwarders can do a great deal (both unilaterally and together) to improve their working relationships and create new value in the industry. In the following, we have written our recommendations directly to the Freight Forwarders and Carriers, respectively, under three common headers: 1. Consider what you can do in your own business to create a bigger pie, rather than just trying to take a bigger piece 2. Work together for mutual benefit 3. Be clear on the relationship you have with each other and act accordingly CONSIDER WHAT YOU CAN DO IN YOUR OWN BUSINESS TO CREATE A BIGGER PIE, RATHER THAN JUST TRYING TO TAKE A BIGGER PIECE Freight Forwarders Focus efforts on where you add the most value Shippers with complex shipping patterns Smaller Shippers without strong supply chain functions Start aligning your revenue model with your value creation (efficient freight management creates a lot of value, negotiating lower rates creates no value). Ensure that you actually charge for the services where you add the most value Consider additional revenue streams based on where you add the most value to Shippers Carriers Reduce complexity in the operating model, e.g. the number of micro-decisions and surcharges a Shipper faces even on a simple shipment from port to port. Work with other Carriers and industry authorities to create industry standards, e.g. on shipping documents, quoting and surcharge terminology. WORK TOGETHER FOR MUTUAL BENEFIT Freight Forwarders Help Shippers identify value potential in their respective supply chains and help them realize it. Invite Shippers and Carriers in for co-creation of innovative solutions and approaches to shipping in the future. If you wonder why Carriers do not invite you in to hear all your good ideas stop wondering and take the initiative. Carriers Invite Shippers and Freight Forwarders in for co-creation of innovative solutions and approaches to shipping in the future. There are multiple avenues to pursue, many of which have no competitive implications e.g. back-office alignment. If you wonder whether you should invite a Freight Forwarder in to share ideas stop wondering and get started. BE CLEAR ON THE RELATIONSHIP YOU HAVE WITH EACH OTHER AND THEN ACT ACCORDINGLY Two dimensions seem to explain the logical relationship between a Carrier and a Freight Forwarder: Carrier dependency. For most carriers, there are some Freight Forwarders who (can or do) provide enough volume to create some level of dependency on the asset utilization and thus profitability. Carrier access. The volume that Carriers get from Freight Forwarders sometimes comes from Shippers that the Carriers could not access efficiently on their own and other times it comes from Shippers they could just as easily have served directly. These two dimensions provide good guidance for the dynamics of the relationship and are illustrated on the next page.

19 CARRIER DEPENDENCY ON FFW WHITEPAPER 19 Customer It doesn't matter much what Shippers the Freight Forwarder serves because the Carrier can't reach them. The Freight Forwarder effectively becomes the customer Sales partner The Carrier could serve the shipper directly but value the Freight Forwarder s role. The relationship becomes that of a sales partner 3rd party sales The Carrier has no dependency on the Freight Forwarders, but value the volume they can access if the terms are right. The Freight Forwarder becomes a reseller Competitor The Carrier has no need for or value from the Freight Forwarder, making it a competitive relationship CARRIER ACCESS TO SHIPPERS

20 CARRIER DEPENDENCY ON FFW 20 WHITEPAPER Carrier Freight Forwarder Carrier Freight Forwarder Key Account treatment Premium offerings Contact Equipment Free time Premium terms Focus on own brand Commoditizing the ocean product Honor agreements Loyalty to supplier Prove the value Educate FFW in VP Provide sales support, e.g., online collaboration, incentives Shipper dependent offering Co-creation/longterm mindset Loyal to Carrier VP and segmentation Use Carrier brand in offering Honor agreements Co-creation/longterm mindset Customer It doesn't matter much what Shippers the Freight Forwarder serves because the Carrier can't reach them. The Freight Forwarder effectively becomes the customer Sales partner The Carrier could serve the shipper directly but value the Freight Forwarder s role. The relationship becomes that of a sales partner 3rd party sales The Carrier has no dependency on the Freight Forwarders, but value the volume they can access if the terms are right. The Freight Forwarder becomes a reseller Competitor The Carrier has no need for or value from the Freight Forwarder, making it a competitive relationship CARRIER ACCESS TO SHIPPERS Carrier Freight Forwarder Carrier Freight Forwarder Short-term focus Capacity filler Differentiated pricing Arm's length Focus on own brand Commoditizing the ocean product Transaction mindset Loyal to incentive Arm's length Fight for customers Position against Freight Forwarder Standard terms Capacity filler No leniency Fight for customers Position against Carrier Commoditizing the ocean product No loyalty

21 WHITE PAPER 21 Reality is such that a Carrier and a Freight Forwarder would most often have a mix of all four relationship types. It might not be practically possible to simply narrow down the relationship to one or the other. It could easily vary across trades, regions, commodities, etc. However, the closer the parties can get to obtaining clarity on what game is being played and what rules each party can be expected to follow, even within a subset of the total cooperation, the higher the value potential. Some of the questions that both Carriers and Freight Forwarders should ask themselves in this process are: Even though many agree that engaging in this dialog will benefit the whole industry and the Shippers in particular, there is an widely spread reluctance to do so. The main reason is fear that authorities will interpret it as a violation of free competition. While each individual case must be subject to its own legal evaluation, the overall legal feedback is that there are many opportunities for dialog within the boundaries of the law. That said, perhaps this could also be a call out to the authorities: "The righteous focus on fault play has become counterproductive for the development of the industry, and actually destroys value for the shippers it is time to revisit it!" Is it sustainable to have three of four different relationship types with the same counterpart? Is it preferable to have multiple relationship types with the same counterpart? What logics could be used to clarify the relationship types with specific counterparts? (Dependency vs not; Shipper segments; Trades/Geography) What relationship type should apply to whom and where? What behavior should be experienced as consistent in each relationship type from our side? What behavior would we expect as consistent in each relationship type from our counterpart? How will we show these expectations through own actions?

22 22 WHITE PAPER CREDENTIALS This perspective would be of no interest without the generous and open contributions from all the companies and people involved. We are very grateful and would like to extend our thanks to every single one of the contributors. Many have asked to be anonymous in order to share their view and opinions more freely. The list below thus only represents a fraction of the companies that have contributed but the gratitude goes to you all. MEC Intelligence has provided market data and insight as well as supporting interviews and we thank you for the effort. Contact For further information on this report and related themes, please look at our website or contact Jesper Adeltoft Jesper.Adeltoft@quartzco.com Christian Kongerslev Reich Christian.Reich@quartzco.com CMA-CGM COSCO DAMCO DB SCHENKER DSV GT-NEXUS INTRA JYSK KUEHNE+NAGEL MAERSK LINE METSO TESCO UASC UNIFEEDER

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24 24 WHITE PAPER y COPENHAGEN STOCKHOLM OSLO Ryesgade 3A Birger Jarlsgatan 7 Wergelandsveien Copenhagen N Stockholm 0167 Oslo Denmark Sweden Norway (0)