An NVO-brainer

An NVO-brainer Including an NVO in your carrier mix may be a good strategy.

      As a shipper who negotiated global ocean contracts exclusively with ocean carriers, the idea of negotiating a contract with a non-vessel-operating common carrier came about in 2009 for my former company's intra-Asia trade.
      We found that many of our intra-Asia, origin-destination pairs would be better served by a number of ocean carriers with whom we had no previous business experience. We also knew from our conversations with several of these carriers that they would not agree to all of our terms and conditions. Therefore, one solution was to negotiate with an NVO and use its contracts with the various ocean carriers that did provide the service we needed in those trade lanes. Partnering with the selected NVO turned out to be a good solution.
      From my experience in using an NVO and, given the current state of the shipping industry, shippers who traditionally negotiate ocean contracts directly with ocean carriers may want to consider allocating a certain percentage of their cargo to an NVO service contract.
      Negotiating with an NVO could provide shippers the following benefits:
      ' Having an NVO manage non-core, carrier relationships gives the beneficial cargo owner (BCO) access to more shipping opportunities and alternatives without having to have direct contract relationship with the carriers.
      ' The NVO is a sounding board to obtain market intelligence and to take advantage of the NVO's rates in certain trade lanes at different times during the year when it's competitive to do so.
      ' The NVO helps to manage seasonality, equipment needs, sourcing shifts and transit requirements through its flexible and multiple carrier options.
      In looking at each of these advantages in more depth, the NVO allows the BCO to develop more strategic partnerships with fewer carriers. In today's cost reduction environment, developing an NVO partnership provides the BCO with access to more carriers without having to expand its bid process beyond about four or five
carriers.
      In the volatile shipping realities of carrier networks, capacity changes and equipment imbalance, NVOs can move with the market in real time and provide additional market intelligence to their clients.
      The NVO is essentially an independent insurance broker. Like insurance brokers who have access to numerous underwriters to provide their clients with the best insurance coverage-cost for their home, life, car or recreational vehicles, the NVO uses its global volume commitments with an array of ocean carriers to meet its service commitments to the BCO. While individual ocean carriers provide rates based on how their assets are being utilized (i.e. container turn time, delivery destinations that match their export cargo needs, consistent monthly volumes verses high seasonal shipping patterns, etc.), the NVO, unconstrained by assets, is able to get the best rates from any of the transpacific lines. In other words, the NVO compliments the BCO's mix of carriers and is not a substitute for direct carrier negotiations and the valuable partnerships the BCO develops with its primary carriers.
      In talking to several NVOs, they are gaining more and more BCO business by building partnerships based on delivering what they promise.    Because NVOs do not have the carriers' infrastructure of asset ownership, NVOs have more flexibility in meeting the BCO's delivery requirements with lower margin requirements in their rate offerings.
      I suspect the growth in the NVOs' transpacific business may be the direct result of one or more of the following reasons:
      ' Many of the sales representatives ocean carriers laid-off over the past 18 months have joined NVO companies. Guess on which shippers they are making sales calls!
      ' Many BCOs suspect and fear that the continuous restructuring of the trade lanes in 2009 will continue in 2010.
      ' The Transpacific Stabilization Agreement announced emergency rate increase on Jan. 15 was essentially a wakeup call to BCOs that the certainty of their annual contracts has changed.
      A BCO not used to working with an NVO is probably wondering if it can get the same contract terms and conditions from an NVO that it receives from an ocean carrier. The answer is yes and no.
      If you are seeking a 12-month contract, the NVO will base its rates on what general rate increases (GRI) and peak season surcharges (PSS) it can expect to pay over the 12-month period. In some cases, the NVO will approach one or more carriers with whom the BCO would not be negotiating a service contract to obtain a fixed annual rate for the known BCO. If this is not possible, the NVO will provide an annual rate knowing it will be using its broad carrier mix to try to mitigate any GRIs or PSSs during the 12-month period.
      Given the uncertainty of the market in 2010, a BCO may get better overall rates from an NVO if the BCO requests an initial contract length of only six months. I know of other NVOs who prefer to operate on a best commitment understanding with the BCO and then work hard throughout the year to give the BCO the most competitive rates. While this latter approach provides less certainty to the NVO's 2010 ocean spend, it eliminates any buffers built into rates to accommodate any GRIs and PSSs which is an advantage for the BCO.
      My research found NVOs are not alike, but their behavior is similar in negotiating the best rates and service for their clients.
      There are essentially two types of NVOs:
      ' One that operates like the independent insurance broker, basically getting the BCO the best rates from a variety of carriers. They have very little infrastructure investment outside of an office staff that manages bookings, issues bills of lading, offers origin consolidation for less-than'containerload cargo, and provides destination customs brokerage and arrival services. These NVOs differentiate themselves by the number of global containers they control and efficiency of their back office and customer service.
      ' Another that sells multiple services beyond just ocean transportation, e.g., origin consolidation, air freight, destination brokerage, destination warehousing and trucking. These NVOs may be the BCOs' air freight forwarders, so they are in a position to offer ocean as a bundled service option to clients.
      For those who read my January article ('An Endurance Race,' online at www.AmericanShipper.com/links) I recommended negotiating contracts with ocean carriers that create less variation in the cyclical ocean freight rate fluctuations. Does including an NVO in a BCO's negotiation process contradict this point of view? Not really, as I believe a BCO should try to have rate stability for a large part of its annual ocean freight, but it may want to allocate a portion of its cargo to an NVO that moves with the traditional supply/demand cycle. This balance will ensure the shipper is getting a good deal over time and helps validate whether it has a good long-term model that results in less variation in rates over time.
      John Isbell is vice president of Starboard Alliance Co. LLC, a global supply chain and logistics company, and can be reached at john@starboardalliance.com.