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.
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.
Source: Drewry