With the ocean transport market facing prolonged and widespread structural disruptions, shippers must focus on bringing some order back to their procurement and carrier management processes. But what can they do?
In the many interactions between Drewry consultants and shipper customers around the world, two issues in particular seem to surface time and again.
- “What can I do in this seller’s market?” and;
- “I’ve never seen a shipping market like this before in my career – are there any new rules or best practices we should follow [as we conduct business]?”
Without doubt, for transport procurement and logistics operations professionals, managing the ocean transport requirements of a company today is tough and hugely frustrating. Having to explain excessive transport costs, chronic under-performance and delays to top management is certainly no easy task.
Drewry supports both large and small Beneficial Cargo Owners (BCOs) throughout the bid process from procurement management and best practice advice to cost benchmarking and service performance management.
Below we highlight four measures shippers might consider as they begin their 2021/22 bids and agreements:
Drewry Supply Chain Advisors: Ocean Freight Procurement Support
Priority Step 1: Go to bid early and give the process more time
The lesson from the 2021 round of transpacific contract negotiations is that BCOs who launched their bid early fared better in securing capacity and “tolerable” contract rates than BCOs who waited “to see how the early negotiations turn out” – and ended up being told, on some occasions, that the market was “sold out”.
Drewry research indicates the same level of bid completion risk and market dynamics in end-2021 bids (particularly those affecting Asia-Europe) and in early 2022 (for transpacific negotiations).
Separately, when Drewry provided bid support to shippers, we found that starting the bid process early allowed BCOs to get better alignment on how the shipper and the carrier can work together under the new contracts, including looking at reciprocal commitments on volume, capacity and forecasting. This proved useful in an environment of under-supply.
Also, allow more time at the end of forthcoming bids to make sure you can deal with any rejection by carriers of your awarded volume (a growing risk) and reallocate in the last days of the bid.
Priority Step 2: Switch from spot rates back to contract rates as soon as possible
Particularly for small shippers and for those working with NVOs, a huge pain point in recent months has been the inability to either obtain fixed annual contract rates or to get NVOs (most, not all NVOs) to adhere to their promised fixed annual rates.
Many NVOs are openly saying that they cannot provide 12-month validity of rates.
Reconsider your vendor base; exploit any opportunity to aggregate and leverage volume and how you then engage with vendors. The aim is to ensure that promised fixed rates do not become temporary rates subject to unpredicted GRIs and surcharges. [NB Drewry is considering a survey of its global shipper community to establish the “minimum volume” requirements to enter into fixed annual rates].
When should you switch back to contract rates? If you are a small shipper, monitor Drewry’s rate benchmarking data to determine when the market softens on your main lanes, you may then find you have a better chance of getting back to favourable contract rates.
Priority Step 3: High volume shippers should go for a 2-year contract with their core, preferred providers
Drewry has analysed the benefits of longer contracts for both shippers and carriers in the current market and made the recommendation to some larger customers to adopt 2-year contract durations in their next bid.
There is an emerging trend towards longer contracts – previously a rare practice.
Several major carriers are proactively asking BCOs to move to multi-year contracts and Drewry believes 2-year-long contracts can be beneficial to some larger shippers, but only if they can satisfy some level of rate stability.
As well as providing shippers with indices for their index linked contracts which are normally accepted by carriers, we also have considerable experience of defining index-linked contract clauses and indexing mechanisms, as longer contracts may require an indexing clause.
For multi-year contracts, the indexing mechanism should also include an agreed, independent index. Below is a chart showing the history of the Drewry Container Freight Rate Insight global index vs the average carrier reported global freight rate:
Blended Global Carrier Rate vs Drewry’s Global Freight Rate Index Quarterly % Change
Source: Drewry Supply Chain Advisors
Priority Step 4: Become a ‘shipper of choice’
The pendulum has moved and it is now up to shippers to try and align their practices and requirements to become a ‘shipper of choice’ for their ocean carriers and the NVOs.
The old view that getting maximum ‘free time’ was good for a company must be questioned. Now, a shipper holding on to the carrier’s container for lengthy periods will move to the back of the queue when there is a scarcity of equipment.
Make sure your practices are as ‘carrier-friendly’ as your peers’ practices via the Drewry Benchmarking Club. Review your requirements and contracts so you do not ask for free time that is not actually needed operationally and impose burdensome or overly costly requirements or risks on your carrier vendors.
There are opportunities for most BCOs to review their practices – including forecasting and free time – as a way to secure a better service and more reliable capacity from the carriers.
All 4 priorities, if addressed carefully and using contemporary best practices and advice, have the potential to give shippers more control and to demonstrate that they are leaving no stones unturned in their endeavour to stabilise the situation and benefit their business’s overall ocean transport category.
