Recently, two strange things happened within the space of one week.

First, a letter from the CEO of Hyundai Merchant Marine (HMM) surfaced in the press. It essentially said that it would be only fair, for HMM suppliers to cut into their own margins to solve HMM’s financial troubles.  The letter offered a vision in which all HMM stakeholders would make an equitable contribution to assist in the recovery of a money-losing enterprise.

The guys chartering their vessels to HMM must have been either laughing or crying… probably both. All their financial modelling, diligent planning, and promises to shipyards and all other suppliers were no longer worth their spreadsheet analysis and reams of printed reports. No sir. Instead, they were expected to go out and hit their own suppliers for concessions, just so their customer can buy themselves a slightly longer financial rope. Let’s call it “an equitable cascade of pain”.

The second event was equally stunning. The CEO of Maersk publicly admitted that Maersk is about to lose its crown as “the biggest”. But only just, and only for a little blink of an eye – maybe only as long as one financial quarter. Why? Because throughout 2017 Maersk will add about 30 newbuilds and recover the crown. In the meantime, they will send charters back to their owners. Far better than asking them for “equitable contribution”, I guess. Not to mention what all that extra capacity will do to keep container rates competitive for a few more years.

So, while the two superpowers are fighting for the world domination, what should the others do to avoid the future of HMM? As I said many times before, cutting costs leads only to cutting more costs until the cycle exhausts itself and the line becomes so irrelevant that it goes belly up. And, in the case of “equitable contribution”, it also takes down a few of their suppliers with them.

So, the answer to the riddle lies definitely on the revenue management side. For all the liners that are not trying to be number 1 or number 2, the best way to fight, survive, and flourish against the big boys is on the revenues front. You see, once the major players become so huge and so loaded with all those big ships, their ability to remain profitable becomes more and more elusive. They might have missed their equilibrium between the size and the market share they must gain to fill their ships at whatever profit, or loss. In reality, they become the prisoners of their own size. They cannot walk away from unprofitable business because they would lose the scale. And losing the scale would lead their customers to abandon them, or pay them less for their services. And that would mean loss of competitive advantage. The check mate is complete.

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That is the reason, why hope remains for liners that are “not number 1” and “not number 2”. And that hope comes from data. Not the big, not the bigger, but the massive data. The only time a line can master higher profits out of their revenues, is when it uses the power of all that data to outsmart their competitors.

As it happened, that very same week when those two events came into public view, I sat down with another line and discussed how to use internal pricing knowledge, IT technology, “big” no, make it “massive” data, and some smart mathematical optimization to survive this morass and come out ahead of their competitors. Let’s refer to this approach as price optimization.

Before I explain the optimization part, it all has to start with data. Some of that data belongs to the line. It contains historical prices (winning and losing), contract details, vessel utilization, customer demands, commodity, and historical business KPIs results. If we only had historical data, we could extrapolate that data forward. This is called “predictive analytics”. Those analytics don’t predict anything. They simply use data that we have to calculate data that we don’t have. To truly predict, we need to go further, into the realm of prescriptive analytics.

Going further requires the power of mathematical optimization, the work I really love. Modern optimization exploits progress in mathematics and progress in computing power. The optimization world records that stood for years are suddenly being broken, again and again. While old IT solutions had to limit themselves to only a few factors to complete optimization in days, modern solutions allow consideration of all factors influencing price and perform optimization in minutes. And that in turn means that the most profitable pricing can be prescribed in seconds.

If you are running a shipping line, consider this. Next time your sales people attempt to quote the shipper the lowest price possible to satisfy their urge to close the deal, have the price optimization engine make a far more profitable decision for them. Your company’s bottom line will thank you for it.

If you found this topic interesting, leave your comment or suggestion. I look forward to responding to your feedback.