These days, once a product makes it to land, its journey across choppy waters has just begun. A new market has emerged—chassis rentals—and guess who will be paying for this $2 billion-plus annual offering? Importers!

Container chassis are trailers used to transport shipping containers from ports to inland facilities. The chassis industry is in the midst of a sea change that has the ability to flood retailers with higher costs—millions of dollars annually—and operational risks.

But on the wild seas, many importers—retailers and brands—are waiting to act. Instead, leading importers who act now will find themselves in much calmer—and cheaper—waters.

CHASSIS CHURN

Following the Great Recession, ocean carriers have increasingly divested the chassis they’d owned for decades—chassis that had been baked into the cost of ocean freight contracts. (See Exhibit 1.)

zoom iconExhibit 1: Ocean carriers rushed to throw chassis overboard.As carriers toss their chassis overboard, third-party equipment companies have picked up the slack—leading to a fragmented market and driving up costs. Chassis rental rates have increased roughly 40% over the past five years and are expected to continuing rising through 2018 and beyond. It’s not inconceivable that daily rental rates will hit or surpass $30 in the near future.

Plus, chassis that remain in ocean carriers’ hands are quickly becoming subject to a “merchant haulage” model—meaning chassis costs are no longer part of the ocean contract and instead have become another expense for importers. It’s difficult to gauge the true impact of chassis exclusion from ocean contracts. Many importers don’t expect ocean carriers to reduce ocean rates in proportion to chassis rental costs.

The impact could be significant, especially for high-volume importers with higher chassis dwell times. For example, an importer with 50,000 containers (~ 100K TEUs) of annual volume and an eight- to 10-day dwell time could pay as much as $12 millionto $15 million in annual chassis costs.

The three companies who’ve purchased most of the chassis—Flexi-Van, TRAC and DCLI—have established “gray” pools, which allow for interoperability across the companies and the port, and dedicated fleets. The operational readiness of these pools varies significantly by port, with East Coast ports seeing fewer issues than their West Coast counterparts. Port authorities are actively working with the pools to improve their operational efficiency, but many retailers are not convinced.

Meanwhile, the overall quality of chassis in rental pools is decreasing as lower-than-expected earnings scare chassis equipment providers away from new investment. The average age of the U.S. chassis fleet is 15 years, fast approaching the high-water mark in chassis life expectancy of 20 years. Plus, the older a chassis gets, the more expensive it is to maintain: It costs four times as much to maintain a chassis that’s over 10 years old vs. a new one.

In response, major shippers are buying their own chassis fleets to supplement the pools, helping them gain market control, counter rising costs and ILWU issues, and limit supply risk during peak season.

All of this leaves retailers and brands who are without a plan on a sinking ship.

POTENTIAL LIFEBOATS

While most importers are waiting for the waves to stabilize, a few first movers are testing the waters on three different chassis models, as illustrated in Exhibit 2.

zoom iconExhibit 2: Retailers can choose between several chassis models—or combine them.Renting. Renting chassis at a daily rate as needed from gray pool networks at each port.

Renting chassis provides the most operational flexibility, but still leaves brands vulnerable to rising prices as supply dries up, the fleet ages and labor issues grow. Rental rates are expected to rise 5% to 10% year over year for the foreseeable future.

Leasing. Leasing chassis for one year (or more), either through dray carrier or directly from equipment providers.

Leasing balances flexibility with cost savings and fleet reliability as long as the dedicated fleet is properly sized for inbound volume—this requires a good grasp of dwell time and volume variability.

With costs averaging between $16 to $21 a day, leasing can often be cheaper than renting, and retailers can outsource leasing to dray partners to minimize operational overhead and liability.

Buying. Maximizing savings and securing chassis supply by purchasing a fleet of new or used chassis for dedicated use.

Owning chassis will provide shippers with the lowest daily expense—roughly $14 to $16 a day—but comes at the cost of initial capital investment, reduced flexibility and increased operational complexity.

As illustrated in Exhibit 3, each model comes with its own capital, operational and qualitative pros and cons.

zoom iconExhibit 3: Evaluating chassis models based on cost, operational concerns and other factors.THROUGH THE PERISCOPE

A Kurt Salmon survey of 20 retailers and brands showed that shippers are divided on their current supply models, with 38% using gray pools, 37% using ocean carriers and 25% using a dedicated fleet.

However, shippers were less divided when it came to their concerns about chassis: Forty-two percent were worried about rising costs, while 25% fretted about availability issues.

Given these concerns, it’s no surprise that 56% of retailers surveyed intended to lease at least some portion of their chassis requirements within the next two to three years, as illustrated in Exhibit 4. Of those who are planning to lease, 60% say they’re going to outsource the lease to a primarydray or 3PL.

zoom iconExhibit 4: Majority of retailers will lease in the near future, and many of those will use 3PL.This choice also reflects a lingering uncertainty—many retailers and importers are waiting on the market to stabilize and their competitors to move first.

For the importers willing to make the first move, there are considerable advantages in the form of lower long-term rates.

TAKING THE PLUNGE

For leading retailers ready to sail into relatively uncharted waters, there are three key steps to determining the best course forward:

  • Analyze annual chassis requirements, incorporating inboundvolume and facility processing time variance.
  • Study both “chassis included” and “chassis excluded” oceancarrier rates, or “door” vs. “port” rates.
  • Calculate impact on transportation spending and operationalrisk to determine whether a dedicated fleet could drive value.

For many retailers, the best course forward may be a rent/lease hybrid, which can provide the best of both cost savings and operational flexibility. Doing this successfully means taking four key variables into account:

  • Operational complexity. The operational complexity of managing a leased fleet can be significant. Importers can alleviate much of this complexity by outsourcing management, maintenance and insurance requirements to a dray provider or 3PL.
  • Rental rates. A lease program will return sizeable savings only if the differential between daily market rental rates and daily negotiated lease rates is at least $2 to $4.
  • Fleet size. Close analysis of annual seasonality, monthly volume distribution and dwell times is essential to ensure proper fleetsizing. An oversized fleet will lead to unnecessary fixed costs.
  • Measurement. It’s essential to agree on performance expectations and KPI reporting requirements with the fleet manager to ensure that the leased fleet is optimally utilized. We recommend starting with KPIs like location tracking, percentage of fleet being used, split or bobtail moves, and maintenance downtime.
SIDEBAR: CASE STUDY: LARGE BIG-BOX RETAILER FINDS SAVINGS WITH LEASED CHASSIS

Situation: A national big-box retailer was concerned about the impact dwindling chassis supply during port congestion and rising chassis rental costs were having on its supply chain costs and efficiency.

Solution: The retailer partnered with a strategic dray provider to establish a fleet of 650+ chassis on the West Coast.

Results: The retailer has kept its chassis fleet 85% to 90% utilized, erasing availability issues and creating $1 million in savings over rental costs. Based on these strong results, the retailer is looking to expand its fleet and potentially buy a portion of the fleet to drive further savings.

2016 FLASH UPDATE: Due to current market factors—excess capacity, fuel prices, etc.—many retailers have been able to negotiate chassis units into their ocean contracts; however, as the carriers adjust capacity and macro components change, the chassis issue will likely be on the front burner again. Retailers should take steps to create a plan that ensures chassis supply while managing costs going forward.

23 May 2016