PSS _ The Bigger Picture

3 Letter Word the Shippers Dread

Peak Season Surcharge (PSS) and Gross Rate Increase (GRI) have gained a popular spot in conversations amongst the shippers’ community. Costing anywhere from a few hundred dollars to thousands, surprised shippers by their frequency, quantum and its dubious rationale. There were hue and cries that reached heaven.

In present times, it is different. Shippers are conditioned when they observe “unusual events” it could be a harbinger to a “PSS launch pad” – waves of surcharges get rained on shippers with little understanding why or when it will cease. Events could range from congestion at ports, terminal labor strikes to geo-political turbulence causing shipping routes to be affected.

This article attempts to address how big a deal PSS is to carriers, revenue and in the grand scheme of things what does it mean. Next, where our attention should be. Lastly, ideas that many probably will shun!

PSS – what’s the real deal?

Disgruntled shippers complain that every year, one will have to pay the exorbitant PSS as there are abundant excuses to charge PSS. With the bread and depth in a poly crisis world there is no shortage of events to trigger PSS.  

Is it necessary to charge? Shippers argue these were not prevalent pre-covid and rather it is a learned invention by carriers, just like blank sailing. Many even argue, it is profit or money-making instrument. Carriers, do have sound responses to this. The impact of congestion and longer routes causes significant inefficiency and cost.

I asked myself a few questions and did some layman’s investigations. Follow me on this and please give me your views.

What is the correlation between PSS and profit per TEU / revenue?

It becomes complicated and interesting as you include volume, cost structures, profitability and freight rates. It appears higher volume throughput does amplify the impact of PSS on both profitability and freight rates during peak seasons. Conversely when the volumes dip or during low season the influence of PSS diminishes.

 The table above further reinforces the congestion seems to be a strong factor inducing PSS.

Jury is out - will they ever come back?

It appears from this rudimentary analysis that PSS could be truly a response to congestions and possibly any extreme events like the Red Sea that leads to a deviation from the planned sailing routes and duration.

However, questions remain if the quantum is justified, duration of surcharges and scope of these charges as shippers do argue trade lanes not affected directly by congestion or “events” are imposed with unjustified surcharges. The ease of implementation and level of transparency of these surcharges leaves shippers dumb-founded and helpless.

Is it the dead end for shippers?

The real question is what can shippers do? Depending on the industry and extent of cost impact, it may get passed on to customers. It is real squeeze to smaller shippers who bear the brunt, “take it or leave it’ situations. There are no governing laws that seems to offer clarity, how this can be understood better or industry associations coming to any constructive assistance.

What is the real challenge?

Do we have to be obsessed with PSS? I am not sure. It surely hits on the margins. However, I feel, the real gargantuan challenge to shippers is not PSS but the ability of carriers to somewhat influence the supply, set pricing and surcharges. with a very “broad coherence”. I should be careful here. I am not suggesting a cartel at works but rather Michael Porter would give an 8.5/10 for power of suppliers.

My point is that maybe we should rethink our perspective.

What can we do? Any absurd ideas?

Regionalization

It is a difficult task to delay shipping during a PSS period, mirroring the tariff fiasco. Costs of PSS are minuscule compared to tariff impacts for most shippers. In the larger scheme of global supply chain, one must regionalize one’s supply chain as much within the parameters of reliable and cost-effective upstream suppliers and localization of manufacturing. Strangely, we see this happening for different reasons.

ACMI in ocean?

I do wonder why the big boys of freight forwarding do not get into targeted ACMI equivalent to ocean, in specific trade lanes. One can argue there are somewhat similar models in time, demise and voyage charters. They operate largely in the same model but with a limited vision and goal.

At the risk of sounding like a naive individual, there is a value proposition. The legal, economic and financial considerations may be big hurdles, but I guess the tradeoff can also be equally rewarding, game changer and offer a formidable competitive advantage. Designing a comprehensive model in a specific trade, coupled with integrated logistics, visibility architecture and over-arching control tower to orchestrate fulfillment may be worth considering.

What do you think?

Rise of nationalism

It is no surprise that countries have woken up to strangle hold that some nations have on maritime trade. Smaller nations do understand the value of this long-term investment. I raised this, just to relate to ACMI conversation. Can you see the parallels?

 Niche players

Not all carriers adopt this similar stance. There is a growing dichotomy between the top tier and the rest. Like many we tend to rush to the big, shiny, fancy and highly touted malls but the gold nuggets may lie elsewhere is the subsequent tiers who are tired of the big waves of the oceans, are nimbler, equipped with better technology and most of all – hungry as a beast.

Negotiation scope and purpose?

Many are still in the old paradigm of negotiating rates and procurement leads the charge well. The alternative view is that we are negotiating a lasting relationship. To enable this the carrots must well be woven for carriers who are keen to develop supply chain capabilities to engage shippers differently. The sticks must also be well crafted to ensure shippers are not handicapped in any relationship. Stability in alliance and partnership only exist when they reflect realities and interests.  Smaller shippers must evolve and rethink how to build creative strategic relationships with a limited portfolio of partners, that fits their idiosyncrasies to better insure themselves as well as maintain the edge in the market.

I will pause here but hope the article offers different narratives and possibilities of thinking through this challenge. Perhaps this truly reflects the colorful nature of challenges, opportunities, frustration and delightfulness the world offers.

Thank you.

Jaya Pillai

VP Global Procurement

(in his private capacity)