Oh...You Still Sign Carrier Contracts?
Every spring international shippers, freight forwarders, NVOCCs and steamship lines engage in a decades old procurement ritual known as Contract Season. The preparations often begin months in advance as economists issue forecasts of upcoming trade volumes and fuel costs which all parties eagerly read, hoping for the slightest hint of cost savings or yield maximization.
By February, a whole new language emerges as buyers and sellers of container capacity speak of GRI, BAF and other three letter codes that will impact the landed cost of the world’s merchandise for the next year. The negotiations typically conclude by the end of March or April with signed contracts promising preferential rates in exchange for confirmed capacity allocations.
But by May, most of those contracts aren’t worth the paper they’re printed on. Welcome to the container shipping business!
What Logistics Pros Think About Carrier Contracts
We’ve heard from a lot of people within the industry about the impact of carrier contracts on their business. For example, the head of a shipper’s association complained that carriers don’t welcome any additional containers from his group above their negotiated allocation. Our take: when a seller doesn’t want more volume from a customer, someone probably wrote a bad deal.
We’ve spoken to the head of container pricing at a mid-sized NVOCC, who manages buy and sell pricing for over two dozen annual container shipping bids for thousands of container shipments. “That’s just the way it is” she says, “but something does need to change. We can’t keep doing things the same way.”
When discussing carrier contracts, the head of full container at a global top-five forwarder quickly becomes agitated as he explains the struggles of securing capacity on vessels departing China despite all the volume his company commits to in its annual worldwide container contracts. Translation: he bargained too well.
Container shipping contracts have only one job: to communicate rates for shipping goods between two places in the world. It turns out contracts are pretty lousy at doing just that.
But in the age of instant pricing and “one-click” purchasing, the continued reliance on decades old shipping contracts suggests that they must hold value for someone in the shipping process.
So let’s take a look at some of the winners and losers in the great container contract shipping game.
Sorry, but you lose if you are a...
Freight Forwarder/NVOCC:
We’re constantly amazed by the crucial role freight forwarders play in facilitating the smooth movement of the world’s goods across oceans. And while the industry is clearly having its moment in the spotlight, sadly we still see far too many cases of a forwarder’s value being tied to a $50 discount on a container rate.
You don’t need 12 shipping contracts to be a “full service” forwarder or NVOCC. You probably don’t even need half of that. The time and effort spent on negotiating, maintaining and complying with contracts comes directly at the expense of sales and profits for freight forwarders, and it’s no longer sustainable.
At CoLoadX, we help our freight forwarding customers benefit from new innovations in container pricing that deliver savings per shipment, buy and sell pricing flexibility and lower fixed costs. For us, the logic is simple:
Cargo capacity is a commodity. Freight forwarders add value to that commodity. Thus, every dollar spent on procuring cargo capacity directly subtracts from freight forwarding value.
We free freight forwarders up from the grind of shopping for rates so that they can focus on what makes them most valuable: the full service needed to deliver unmatched value to their customers.
Learn how CoLoadX can help your freight forwarding business reduce fixed costs and increase your revenue.
Shippers/BCO’s:
Is it time yet for your biennial global bid process? Have all your global logistics managers uploaded their spreadsheets to a massive shared file that will require an outside consultant to come in and manage for a fee?
Did you do such an awesome job of negotiating your contracts that you can’t get loaded out of Shenzhen and are now paying a premium while staring at dashboards that report available weekly rates and capacity which no one can actually access?
Or, even worse, did you apply all the standard deviations to last years numbers properly, only to find that market demand tanked and your contracted rates are now inflating your landed cost of product?
There are better ways to go about managing procurement than this, and it’s time for a lot of shippers to stop and ask themselves: “do we want a container contract or do we want a great rate and service that works for our business model?”
At CoLoadX we offer shippers new ways to manage their container costs that increase profitability and simplify shipping costs.
And Just Who Wins on Carrier Contracts?
Carriers
Let’s face it, nobody’s shifting their business from ocean freight to air freight en masse, and the costs of marketing and contract administration are so low compared to fuel costs that carriers have virtually no motivation to give up the status quo in pricing. Also, it turns out there’s decent money to be made from inefficient pricing mechanisms. Who knew!
Freight Payment Auditors
You know it’s a weird business when the folks who overbill and the ones who get them to refund that overbilling are both on the winning side! Freight payment auditors deliver a lot of up-front value to their customers, but much of that value comes from the inefficiencies of container contract terms, conditions and calculations.
Rate Management Solutions
Yup, there’s an app for that! In fact, solutions like those from Cargosphere and Catapult do a really good job of managing carrier contracts, automating markups and generating quotes. Additionally, several smaller vendors and custom systems exist, and collectively they deliver time savings and workflow efficiency to their customers. Unfortunately, there’s little else these guys could do in a world without carrier contracts.
But it’s not just rate management solutions that feel tied to inefficient carrier contracts. It’s the ocean freight supply chain at-large. Can we do anything about it?
Your Simple Goal: Buy Smarter
While procurement is a strategically significant function for a business, and it can enable necessary pricing power and leverage, one can’t help but wonder how much companies lose because of container pricing inefficiency.
Add into the mix elements such as manual processes for redundant rate shopping and monitoring, opportunity costs and compressing gross margins, and we think it’s time to consider a better way.
We’re here to get you started. Our goal is to help you optimize your logistics business. It starts with breaking dependencies on legacy inefficiencies.
Let’s talk it out before you get pulled in to another carrier contract season.
If you're tired of losing out on carrier contracts, we're here to help. Find out if CoLoadX's all-new service is right for your logistics business.
By: CoLoadX on April 17, 2019, 3:29 p.m.