1. Executive Summary
NOL/APL currently offers a comprehensive suite of IT/E-commerce products for its customers. Our Homeport interactive website for instance, allows our customers to generate reports on their shipments, print electronic Bills of Lading, make bookings online, track their shipments and view shipping schedules and tariff rates. These web products have no doubt enhanced our interactions with our customers. They, however, do not provide an effective / efficient channel for NOL/APL to liquidate our perishable product – vessel slots.
Auctions, an established method of commerce for generations, are an effective way to expedite the disposal of items that need liquidation or a quick sale. They offer trading opportunities for both buyers and sellers that are not available in conventional channels.
In this document, we are proposing the use of an auction facility on Homeport to sell containers awaiting empty repositioning. The auction site will specifically target at those customers who are able and will be tempted to bring forward their transportation needs with lower freight prices. The auction facility will serve to induce shippers to bring forward their transportation needs by offering the prospect of lower ocean freight prices at corresponding risks of equipment acquisition failure . It will also allow NOL/APL a greater opportunity for moving containers that would otherwise be moved empty, laden.
The IT infrastructure of the auction site will be made up of four main systems, namely, CCMS, CBART, an auction database and an Internet auction application. CCMS and CBART together will provide the informational foundation for the auction. The auction database (3rd Tier) and Internet application (2nd Tier) will serve as the main engine of this business proposition. The customer interface (1st Tier) will reside on Homeport.
This auction site is expected to create various revenue enhancement opportunities and potential cost savings for NOL/APL and our customers respectively.
Base on the principle of risks and returns, we believe that this auction site will not cannibalise our normal contractual arrangements with our clients based on the simple principle of risks and returns. In normal contractual arrangements, clients are guaranteed of the availability of APL ocean transportation services. The risk of equipment acquisition failure is very low and shippers should expect to pay more for not bearing this risk. They thus earn a lower margin/return on their box of cargo. Similarly, under an auction condition, bidders willing to bear the risks of equipment acquisition failure can expect to earn a higher margin/return on their box of cargo by paying a lower rate per container.
The target customers for this auction site will be NOL/APL’s current customers (based on STAR data pulled from CCMS). During the initial phases, only registered customers with Homeport are allowed to bid at the auction. The frequency of the auction will not be high, especially during the initial phases. Base on current NOL/APL repositioning volumes, the auction can be conducted once a month.
A minimum bid price will be specified for each specific container. A minimum bid price is necessary to avoid reverse auction. Bidders can remain anonymous throughout the bidding process and only the highest bidding price will be published. Each bid will close five days before vessel sail and the successful bidder will receive a confirmation via the web/email.
2. Business Concept and Proposition
Container repositioning refers to the movement and relocation of empty containers from one port to another for the purpose of fulfilling demand at the latter port. Container repositioning is necessary as a result of an imbalance in the supply and demand of containers. Consider the following scenario:
Port of Loading A
Port of Discharge B
No. of empty containers available : 10
No. of empty containers available : 5
No. of containers bound for port B (laden) : 5
No. of containers demanded : 12
No. of surplus containers : 5
No. of containers in deficit : 7
Assumptions : All laden containers from Port A can be unstuffed in time at Port B for outbound movement.
The above scenario illustrates a surplus situation at Port A. Five of the ten empty containers at Port A are going to be moved laden to Port B. This imbalance in supply and demand of containers at Port A means that five containers will have to lie idle and unutilised. There is, on the contrary, a deficit situation at Port B. The number of containers needed (12) is more than what is available (5), leaving ‘revenue untapped’.
Even after turning around the five laden containers from Port A, Port B is still short of two containers. A feasible solution is therefore to reposition two of the five empty containers from Port A to Port B. If the surplus containers are not repositioned, they will not only be lying idle but also incurring costs such as ground rent, maintenance and repairs and opportunity costs.
If we move two of the empty containers from Port A to Port B, along with the five laden containers, Port B will be able to have an additional seven containers at its disposal. This offsets the deficit at Port B and allows APL to fulfil the entire demand at Port B.
However, moving the containers empty means that not only is there no customer bringing in the revenue of moving this container, APL is bearing the cost (both fixed and variable) of moving these containers. As such, if we can, we should always strive to move the containers laden instead of empty. Moving them laden at minimum revenue will allow APL to at least cover the variable cost if not the fixed costs of moving these containers.
To fulfil the above proposition, we need to induce the demand for transportation service from Port A to Port B. One strategy is to induce customers to bring forward their transportation need by reducing the price of moving a container from Port A to Port B i.e. subjecting it to market forces.
Business Proposition: Create an auction site for customers to bid for the containers that would otherwise have to be moved empty.
3. Feasibility and Strategic Analysis
The current repositioning of containers yields the following drawbacks:
- Empty repositioning
- Low container utilisation
- Costs incurred are high
- Turns per year are low
- No revenues
- Containers over 30 days
The auction site will allow the containers the opportunity to be moved laden and generate the revenues to reduce the negative cost impact of repositioning. It will serve well to create the revenue enhancement opportunities and potential cost savings for NOL/APL and our customers respectively. They include:
Revenue Enhancement for NOL/APL : Cost Savings for Customers :
- Revenues earned
- Lower prices
- Repositioning costs recovered
- More efficient rate approval process
- Optimising equipment utilisation
- Turns per year improved
3.1. Potential Revenue Enhancements for NOL/APL
Profit and Loss Improvements
Let’s consider the repositioning of containers within Asia. The current minimum cost of repositioning a dry 20’ container from Tokyo to Singapore is USD200 (for surcharges such as bunker adjustment factor and terminal handling charges). Let’s assume 1,000 dry 20’ containers were repositioned empty from Tokyo to Singapore every year. The total cost of repositioning these containers were:
Total cost of repositioning = 1,000 containers x USD200
= USD200,000
The current potential revenue from moving a 20’ dry container from Tokyo to Singapore is about USD350 . If these containers have been moved laden under normal sales conditions, the total potential revenues for NOL/APL will be:
Total potential revenues = 1,000 containers x USD400
= USD400,000
Under auction conditions, assuming 50% success rate at minimum bid price , the movement of these containers will potentially reduce the cost of repositioning by half:
Total cost of repositioning = USD200,000 - (500 containers x USD200)
= USD100,000
At 50% success rate, as long as the final bid price per container is at least 67% of normal sales price, NOL/APL will be able to recover the costs of repositioning all 1,000 containers. In summary, we can liquidate large number of perishable vessel slots before they become obsolete very quickly.
Equipment Utilisation Improvements
Container Utilisation = Total Laden Containers ¸ Total Number of Containers
Giving a container the opportunity to be moved laden instead of empty will definitely improve its utilisation and reduce equipment idling costs and opportunity costs.
3.2. Potential Cost Savings for Customers
In many instances, prices in auctions are lower. This may happen especially in when the seller’s objective is to sell as quickly as possible. In this case, as NOL/APL is trying to sell a perishable item – vessel slots, the prices for containers on the auction site can be expected to be lower than in their physical markets.
Consider the same scenario, the shipper in most cases can expect their costs to be significantly lower than the market rate .
3.3. Cannibalisation of Contractual Sales
Though prices on the auction site is likely to be lower than in the physical markets, we believe that this auction site will not cannibalise our normal contractual arrangements for several reasons.
Principle of Risks and Returns
In normal contractual arrangements, clients are guaranteed of the availability of APL ocean transportation services. The risk of equipment acquisition failure is very low and shippers should expect to pay more for not bearing this risk. They thus earn a lower margin/return on their box of cargo. Similarly, under an auction condition, bidders willing to bear the risks of equipment acquisition failure can expect to earn a higher margin/return on their box of cargo by paying a lower rate per container.
Target Customers
The auction site is not meant for general public speculation. The auction site will specifically target at those customers who are able and will be tempted to bring forward their transportation needs with lower freight prices. Potential customers may come from the make-to-stock, multi sales-echelon industries such as the chemicals industry, the mass-market retail industry or small shippers who are shipping less-than-container (LCL) loads with freight forwarders/co-loaders. Most if not all chemicals manufacturers have contractual sales agreements with their customers. These agreements are binding in terms of volumes and time period. Coupled with long manufacturing lead-times, most chemical manufacturers are able to make-to-stock. Mass-market retail products such as those from Kimberly Clark and Rubber Maid are less vulnerable to fads and changes in trends. Their production are therefore more stable and make-to-stock for savings in transportation is a worthy business proposition. Small shippers, especially those with 15 to 20 cbms per shipment, may find the opportunities for cost-savings at the auction (see following example – shipment from Laem Chabang to Singapore).
Freight forwarder/Co-loader per cbm rate = USD10
Full box rate obtained on the auction (assume) = USD150
Auction per cbm rate = USD150 ¸ 20
= USD7.50 per cbm
Total savings (for this shipment) = (10 – 7.50) x 20
= USD50
A dry 20’ container can take ~ 25 to 28 cbms. If a shipper has only 20cbms, they can either ship them LCL with a freight forwarder of buy a full box but ship it unloaded completely. If the cost per cbm of shipping the cargo in a less-than-fully loaded full container is cheaper than shipping them LCL with a freight forwarder/co-loader, small shippers can consider using the auction as an alternative to shipping their LCL loads.
4. IT Infrastructure
The above potential value-adds and benefits to both NOL/APL and our customers prompted us to look further into the technical feasibility of this business proposition. We assessed both the probable network infrastructure and database model for the auction site.
4.1. The Network Infrastructure
The main components of our network infrastructure are our mainframe systems, our web server and the user’s computer (see diagram below).
Figure : NOL/APL Auction Site Network Infrastructure
The foundation of the infrastructure will be made up of two existing databases - Cargo Container Management System (CCMS) and Container Balance Analysis Repositioning Tool (CBART) and a new database called the Auction database. These three databases together form the third tier of the entire infrastructure.
The second tier of the infrastructure will comprise the Internet Auction Application. This application will be separately developed and can reside on a web server. This will be the engine that converts/match the data from the various databases into information for the front-end user and transforming the data input from the end user into data elements for updating in the database.
The first tier of the infrastructure is the web browser/interface. It will be an interactive web front that allows a dynamic two-way communication between the customer and NOL/APL.
The following paragraphs will illustrate how the auction site will work. CBART is the database that will merge the data from CCMS (e.g. inventory and vessel slots) and origins (e.g. demand forecasts and actual demand) to form the basis for the auctions to take place.
CBART is APL’s repositioning system that contains each region’s equipment projections and repositioning plans. Base on the information from CCMS and the sales teams in the origins, CBART will produce a repositioning plan for feeding into the Auction Database. The auction database will contain information such as number of containers, container type, trade lanes, vessel sail ETD etc.
The Auction Database will feed the Internet Auction Application with the repositioning plan and slot information. This however will not automatically generate the beginning of an auction on the Internet Auction Application. NOL/APL will need to assess what deficit ports and empty services need to be filled, depending on the costs and demands involved. While the repositioning plans from CBART takes these factors into account, not all repositioning plans will turn into repositioning auctions.
The Internet Auction Application will reside on APL’s Homeport website. The user will input their registration details on the web page interface. The CCMS database will supply the information about the eligibility of the customer to access our Auction database. As CCMS is linked to Homeport, we can restrict the eligibility of the auction customers to those who are already registered with Homeport. Customers would use the same Homeport User ID and Password to gain access to the auction site.
Upon authenticating their identity and eligibility to participate in the auction, the user will be given access to the web page that allows them to input their desired bidding details such as bid quantity and bid price. Upon successful bidding, the winner will receive a booking confirmation from APL via email.
4.2. The Auction Database
The technical details of the Auction Database are discussed in this section.
The Auction Database will comprise 3 main entities, namely, Container, Customer and Bid. The entity relationship diagram above illustrates that each container can receive multiple bids before it is finally awarded and closed. Each customer can make more than one bid for a specific container but each single bid can only be placed by one customer (see diagram on following page).
Figure : Entity Relationship Diagram for NOL/APL Auction Database
The database schema below details the data elements and linking keys in the database. This is an initial database schema that serves as a springboard for more ideas. As can be seen from the diagram below, the customer login ID would serve as the primary link between their identity and their bidding information. Through the login ID, we will be able to determine the owner of a specific bid.
Figure : Database Schema for NOL/APL Auction Database
5. Implementation Strategy
The process of building and implementing an auction application will be complex for two reasons:
- The number of features can be very large
- There is a need to integrate the auction application with our office processes and legacy systems
In this section, we will discuss some of the issues involved in implementing this auction site.
5.1. The Auction Process
We propose an English type auction where buyers bid sequentially on one item (in this case, a single container moving from one port to another) at a time (see figure on following page).
Figure : The Container Repositioning Auction Process
In the initial phases, the auction can be held once a month. This frequency is chosen so as to allow time for administrative purposes such as checking and controlling after each auction exercise.
5.2. Registration and Profiling
As mentioned, during the initial phases, the auction will only be opened to existing customers already registered on Homeport. Participants will need to login to the auction site using their Homeport User ID and Password.
Base on the STAR data pulled from CCMS and probably some amount of management discretion, we will determine the eligibility of the user. Upon authenticating their identity and eligibility to participate in the auction, the user will be given access to the web page that allows them to input their desired bidding details such as bid quantity and bid price. The web page will list the details of the containers that are up for auction. Information includes vessel ETD, voyage details, container type and port pair etc.
5.3. Pricing
A minimum bid will be specified and the auction will continue until no more bids are rendered or until the auction time is over (in this case, five days before vessel sail). The bid increment can also be fixed to facilitate administration. As the product (i.e. vessel slots) in concern is perishable, there will not be a need to provide a search engine for past transactions and history.
The bidding history and successful transactions can however be collected and exported to a data analysis tool for further internal analysis.
5.4. Post Auction Notifications and Communications
While the auction is still ongoing, bidders/buyers will receive email messages or beeper messages each them they outbid the highest bidder. The notification message will include the bidder’s login ID, the container reference number, voyage details and the bid price.
When an auction closes (five days before vessel sail), post-auction activities such as email notifications and arrangements for bill of lading issue and payment take place. The winner will be the one with the highest bid, assuming that price is the only criteria. If other criteria such as payment arrangement and available pick-up date are considered, the winner will be selected from amongst the high bidders. The winner of the bid will receive a booking confirmation from APL via email.
This booking confirmation will require a response from the successful bidder. The response from the winner of the bid will trigger the subsequent series of activities (such as trucking arrangements if any) involved on a normal sales process.
The bidding and booking information that are already captured on the auction database can be “reused” subsequently for the issue and printing of electronic bills of lading and billing and invoicing. A utility can also be included in the auction database to automatically calculate the total freight charges and other relevant surcharges.
5.5. Other Implementation Issues
Electronic auction systems must manage all aspects of the trading activities, from initiation to settlement and delivery. NOL/APL must not fail to integrate both price discovery and order completion into their operations. Failure to do so can encourage unfair trading behaviour and opaque trading practices. Various etiquette rules should also be established to govern and ensure fair business conduct.
In countries where there are legal restrictions to selling containers directly to customers (i.e. agency or freight forwarding arrangements), NOL/APL might not be able to implement this alternative sales channel.
6. Conclusion
Electronic auctions have been in existence for several years on local area networks and were started on the Internet in 1995.
Electronic auctions allow dynamic pricing. Sellers can quickly flush inventory (in this case, perishable vessel slots) and liquidate idle assets. Buyers may end up with the power to procure goods and services at the prices they desire. The endgame is to accurately assess and exploit market supply and demand requirements faster and more efficiently than the competition.
The various potential benefits for NOL/APL and our customers illustrated in this document clearly justify greater attentions and research into this business proposition of an auction site for container repositioning. Putting empty containers up for auction not only provides NOL/APL an opportunity to earn otherwise forgone revenue, it also goes a long way in redefining the way we do business. It also triggers the need for the company to re-look at some of our current business processes and attempt to seek alternative and more profitable ways of doing business. The further research if not implementation of this concept will help provide a case and point.