We are halfway through the 2017/2018 trans-Pacific contract season, and it’s time to start asking some serious questions regarding your contract rates to guarantee successful 2018/2019 contract negotiations.
- Am I on track to meet volume commitments this year?
- Are my carriers performing at their peak?
- What peak season issues could I potentially run into?
- How do my contract rates compare to the market rates?
- Should I outsource for my tender next year?
- If so, what type of company should I consider?
Shippers and carriers alike need to be prepared for significant competition. They need to be aware of new capacity and the balance of supply and demand that hasn’t been factored in, and how the market will affect contract rates. In addition, there is still a large amount of new vessel supply that is expected to make its way into the market over the next two years, and, with the alliance reshuffling being triggered by last year’s carrier consolidation, we can expect that changes are going to happen.
Am I on track for to meet volume commitments this year?
Carriers typically look for shippers who can provide a good forecast of volumes throughout the year to assist with planning of both equipment availability and vessel optimization. The better the forecast, the more a carrier will enjoy doing business with you time and time again. Increase communication with your carrier throughout the year regarding volume forecast changes. You will see a better mutual understanding and improved efficiencies.
Tip: You should at a minimum conduct quarterly review discussion with your carriers to ensure continued understanding of each other’s needs and requirements.
Are my carriers performing at their peak?
In addition to discussing changes in sourcing that may affect the way you fulfil your volume commitments during these quarterly meetings with carriers, it also provides a great opportunity to review a carrier’s performance against any specific key performance indicators (KPIs) that you may have in place. KPIs are vital when reviewing performance and managing your carrier base. Looking at each step in the process, from container release in Asia to the on-time arrivals at a port of discharge, reviewing vessel delays, and more should form part of the carrier’s KPIs.
What peak season issues could we potentially run into?
It may be a little late to look at peak season performance now; however, you can learn from any issues that happened this year and use that knowledge to limit issues next year. Typical issues include: short-shipments and rollovers caused by a vessel departing without loading all containers (during peak season this does not happen very often); a vessel was overbooked and higher paying containers were loaded in place of lower contract freight; or weather-related vessel departures from ports.
Traditionally, contracting applies no surcharge during the peak season; however, what if your supply chain experiences disruptions such as outages?
For example, if your current carriers are sea freight, be prepared that your best — although expensive —option is going to be air freight. In that case, it may be worthwhile to offer a surcharge during the peak to ensure you containers are loaded on board.
Tip: Be prepared to rethink your strategy at any moment.
How does my contract rates compare to the market?
Compare your rates to the market’s, using the Shanghai index or Drewry’s, and examine how the spot market rates compare to your contract. You should then be able to see where your rates land and determine if you have over or under paid compared to the market level.
When looking at competitive rates for the volume of cargo being shipped, benchmarking is an ideal guide. The results, however, will depend on whom you ask and what type of data they use to provide the results.
Should I outsource for my tender next year?
If you decided to outsource, be aware that many companies claim they can provide direct rate comparisons, but steer towards companies that can provide both a benchmark and tender alternative to obtain rates on your behalf.
Why can a company offering tendering services get better rates than a direct shipper? The answer is relatively simple.
These companies specialize in performing tender exercises for their customers on a regular basis. That then gives them access to market-level data, applicable to carriers. This process helps keep carriers from providing uncompetitive rates, knowing that the tendering company has already gathered information on their pricing models while the rates themselves remain confidential. It ensures shippers are always receiving competitive rates.
Therefore, the results of using an outsourced tender ensures a reduced cost and considerable amount of time saved for the company achieving a painless tender as well as achieving a great result for your company. You can confidently walk away knowing that your rates are competitive with others in the market.
Who should I consider for my tender for next year?
With numerous changes made this year to trans-Pacific partnership agreements, specifically in alliance membership, as well as the consolidation of carriers, the landscape is starting to look different for next year’s tender round. With fewer carriers and only three main alliances, there will be a limited amount of space for independent carriers.
That’s why it’s important to base your carrier decision on your needs communicated and not necessarily a history or perceived value a carrier may bring. It’s always good to be a big fish in a small pond; however, the trans-Pacific is a very big pond.
Over the next year, anticipate larger vessels arriving on the trade, with more ultra-large container vessels being deployed on the Asia to Europe trade lane. Vessels with 20,000 and 21,500 20-foot equivalent units (TEUs) are being introduced to the trade, displacing vessels in the 8,000 to 14,000 TEUs.
This additional capacity, which will without a doubt carry over to the Pacific Trade lane, and the ambition of at least one independent carrier to double their current service offering, will ruffle some feathers in the industry. With additional capacity and the balance of supply and demand, we can learn from history that the pendulum may swing back into the shipper’s favor.
Remember, there are only a few months to go before the negotiations commence. Be prepared and use time wisely to build up your relationship with carriers and being aware of new alternatives.
Henry Gorski is the Ocean Category Manager for enVista. He has spent the last 30 years working in international supply chain management for companies including Evergreen Marine Corporation, Orient Overseas Container Line (OOCL Logistics) and Mediterranean Shipping Company.