Demurrage and Detention are on everyone’s minds in ocean logistics today. The FMC proposes to regularize the information and timing of billing practices.
This could be very helpful in reducing the chaos of D&D billing today. It’s impossible to tell exactly which incidents happened when, and even who should pay. Those kinds of questions must have evidence to settle them, and it’s not being provided in bills. That results in long conversations and debates over the bills. It’s a huge time-waster, and fertile ground for complaints, refusals to pay, and legal action. These add cost while reducing consumer value.
In any principal-agent situation, when the cost of monitoring rises too much, the overall deal can’t be made. D&D charges are part of the cost of monitoring ocean trade. And in principal-agent models, monitoring costs often take the form of data collection and verification.
For years, ocean container traffic flowed fairly smoothly, and the events that triggered D&D charges did not happen very often. In those days, perhaps we could get away with settling claims by email and phone discussion. But with massive congestion worldwide, and only weak motivation to pick up empty containers, those days have changed.
We need accurate information for the parties to be able to resolve the D&D charges, and get the right bills paid by the right party. The FMC has it about right to take this first step, to regularize the bills.
Once that happens, if the D&D problem continues to be big, firms will recognize the value of investing in correct data gathering, and sharing it, and establishing standards for handling it.
John Gallagher, Washington Correspondent Monday, February 7, 2022
This article spells out some of the issues in demurrage charges rail lines are charging for cargoes that are not being removed from their premises.
Demurrage is charged, say the rail lines, when cargo is left at a rail terminal beyond a specified number of days. Charges vary by railroad. The chart they provide, reproduced below from Supply Chain Dive, shows how the seven Class I rails charge demurrage rates.
How individual railroads charge for demurrage varies
$100 to $225, depending on container dwell time, facility and whether the equipment is for domestic or international use
SOURCE: Letters in response to the STB, as linked. Union Pacific did not disclose its specific fees in the letter, but its rates are available online.
Shippers complain that sometimes the demurrage is due to the fact that rail lines have canceled trains that they previously were running. The shift by all of the Class I rails to some form of Precision Scheduled Railroading (PSR), a system of lean operations in which only the movements required are made, is responsible. If a shipper delivers a cargo, but then the train is canceled, who is to blame?
And it’s understood that regardless of what they say, all of these rail lines have adjusted capacity in line with the principles of PSR, even if they won’t call it that. But setting capacity based on experience is not easy when we are experiencing not only a surge in customers, but also many abnormal conditions throughout supply chains that disrupt the standard patterns. Decisions about PSR, such as reducing the number of locomotives or yard staff or engineers, are based on forecasts, and forecasts are always wrong; so it’s a question of whether the rails have left enough slack in the system to handle the variation in the rest of the system. The answer appears not.
One particularly vexing problem with the current system is being addressed by the Surface Transportation Board (STB) which governs rail operation in the US. In the past, demurrage was viewed as something infrequent that did not matter much, and railroads did not develop systems to capture and bill for it in a regularized way. But now, it’s essential that the accounting for it be accurate and transparent, and that bills be sent in a way that shippers can handle digitally and determine the facts from their side about each incident. More accurate and standardized billing is key. That’s what the STB wants to achieve by regulating the nature of demurrage charges by rails.
Already in place at the end of 2020 are new rules requiring bills to be sent to shippers rather than intermediaries, and
“provide machine-readable access to minimum information on billing, including details on the billing cycle covered by the invoice, the car involved, the commodity being shipped, and railroads’ original estimated time of arrival for the cargo in question”
As expected, some rails complain this will lead to more litigation and questioning. Of course! But in fact no one wants the delays that cause demurrage, and it’s in everyone’s interest to understand exactly what happened to cause the problem. The new billing standard will clarify a lot, and get into shippers’ hands so they can do something about the problem.
I think it is a big step forward in the rail arena. I wish it were as clear in ocean shipping, in the port and terminal arena.