Shippers make difficult choice between service contracts and spot market pricing
By Chris Gillis and Chris Dupin
Memphis, Tenn.-based cotton shipper Dunavant Enterprises made the difficult decision this year to avoid putting all of his company's containerized freight into liner service contracts.
'We've been real careful this year,' said Don Lake, vice president of exports. 'We've signed very few contracts for the year, which is atypical for us.'
Dunavant is not alone. Many American shippers have taken a similar approach to liner carrier service contracting in the 2009 shipping season. The dismal global economy has robbed these companies' logistics managers of their ability to comfortably commit to binding long-term contracts for ocean transportation. Instead, they're opting to pluck rates and service off the spot market.
'In this market, it's very tough for us to accurately forecast our volumes,' said David Fisher, global logistics leader for Johns Manville, based in Denver. 'We are hesitant to make volume commitments. It's difficult predicting what's happening within the market and also understanding what the true price of ocean freight is.'
Johns Manville generally maintains a $5 million budget for ocean transport and ships upwards of 2,000 containerloads a year. Unless the market starts to improve, Fisher said the company will stick to the spot market for buying freight transportation.
• Carriers face shifting contract dynamics
On the spot market, shippers still have two choices for soliciting ocean freight transportation: go direct to liner carriers or seek out non-vessel-operating common carriers. NVOs generally buy container space wholesale from liner carriers in the form of service contracts and retail it back to shippers.
'We're aiming a lot more business at our NVOs,' Fisher said. 'We've generally found that we'll get the same level service and the rates faster from NVOs. Because NVOs do not require shippers to commit to specific volume, we are able to test the market more dynamically.'
McCormic & Co.
|'Competitive rates are only part of the equation. Going-out-of-business rates are no good if you can't move your freight.'|
On the contrary, Lake said, 'we've never gotten a better deal from the NVOs. The carriers have been receptive to our business because they've got to be. The market is what it is.'
Even those shippers who are compelled for various economic and operational reasons to maintain service contracts have requested changes within those structures from the liner carriers.
'We traditionally work directly with the lines. However, the current environment may necessitate a change in our business model,' said Timothy Brotzman, manager of international transport for Sparks, Md.-based spice giant McCormick & Co. 'We are reducing volume commitments and maintaining back-up services for flexibility and reliability.'
Recession's Path.After the 1998 Ocean Shipping Reform Act took effect, many shippers eagerly took advantage of the legislation's confidential service contracting environment. It was not uncommon for liner carriers to accept contracts with volume commitments of as few as 25 containers.
|'We're aiming a lot more business at our NVOs. We're generally found that we'll get the same level of service and rates faster from NVOs.'|
global logistics leader,
The inability of many shippers to sufficiently forecast where freight rate levels are headed ' up or down ' has compelled them to become more open to the option of using NVOs.
'Without a contract, a shipper can take advantage of today's market,' Fisher said. 'If you're tied down to a contract, you can't get out of it without possibly being subject to liquidated damages to the carriers.'
No matter how shippers divvy up their volumes this season, NVOs say they have experienced a significant increase in interest in their services this year from shippers.
'The market has dealt us a new hand of cards that I haven't seen in my 20-year career,' said Steen Christensen, senior vice president of ocean freight in North America for DHL Global Forwarding. 'The number of RFQs (requests for rate quotations) is significantly more than we normally would get during a time when we're negotiating service contracts.'
Thomas Keene, vice president of BDP Transport, the NVO arm of BDP International based in Philadelphia, and a 25-year industry veteran, concurs. 'We are seeing a substantial increase in demand for rate quotations from shippers who may not have looked to a non-asset-based transportation option before the onset of the recession,' he said.
|'We've never gotten a better deal from the NVOs. The carriers have been receptive to our business because they've got to be. The market is what it is.'|
'Indeed, spot rates are now growing in popularity as shippers of all sizes look to exercise all options in the interest of cost control,' Keene added. 'Even large volume contract agreements negotiated directly between shippers and ocean carriers as recently as a few months ago appear to be coming up short of the more competitive market moving rates available in the spot pricing category.
'It's not business as usual anywhere that I know of, no matter what the size or scope of a company's trade activity,' he said. 'Liquidity ' cash in the bank ' is the mantra and transportation is one of the variable costs that procurement and sourcing teams have honed in on in a big way. For some, it's a matter of survival.'
There's no set pattern as to the types of shippers, commodities or trade lanes where large NVOs are experiencing this increase in business. 'Everyone, it seems, is going down the same road to wanting to save money,' Christensen said.
'For those companies performing well in the current environment, they want to try and mitigate some of the variability of the market and take advantage of the flexibility an NVO can offer to limit locking themselves in on rates and surcharges,' said Jeffrey Scovill, corporate vice president of global forwarding for C.H. Robinson Worldwide, based in Eden Prairie, Minn. 'The services they are asking for continue to be the same, but a more integrated approach to how they accomplish those services is key.'
'Shipping has become so complicated,' said Peter Gruettner, president of Extra Logistics, in Lakewood, Calif. 'I believe the shippers want to focus on marketing their products, retain cost with a consistent partner such as a freight forwarder, and avoid the carriers' bureaucracy.'
NVOs point out that their level of customer service in many regions far exceeds what is currently available to shippers from the liner carriers. 'As carriers cut back on local sales and service, they're inadvertently outsourcing this business to the NVOs,' said Joseph Saggese, executive managing director of the North Atlantic Alliance Association, a shippers' association of more than 30 freight forwarder-affiliated NVOs.
Alvin Chang, logistics manager at A.C.T. Logistics in New York, told American Shipper that some shippers are coming to NVOs because some carriers have recently consolidated port offices into regional service centers or reduced staff.
However, Fisher of Johns Manville warned that shippers shouldn't believe that NVOs are any easier to deal with than the liner carriers in terms of obtaining rates and services. 'As a shipper using an NVO, you still have nearly all of the same tactical responsibilities that you would with the liner carriers,' he said.
To Be Determined.No doubt, the crunch in shipper inquiries for rates and services is putting increased pressure on NVOs' internal operations and will test the delivery of their services.
'It is critical now more than ever before that the NVO or 3PL has a good grasp on operating costs, supply chain inefficiencies, distribution channels, and information management/mining to assist the customer in understanding their landed costs and unique ways to address and service their customers,' Scovill said.
'Beyond a competitive spot rate for space, shippers are beginning to see the efficiency, especially in a cost-constrained environment, in bundling an array of value adds, including shipment tracking and visibility, trade and security compliance, outsourcing at the desk-level functions, and performance metrics and reporting available to them,' Keene said. 'Individually or collectively, all of these tools make for a more effective supply chain as shippers position themselves to accelerate out of this recession.'
The large NVOs, in particular, continue to invest in technology despite the economic slump. 'The technology level is increasing the comfort to more customers coming to us for service,' Christensen said.
Will this increased shipper interest in NVO services translate to actual increases in long-term business? That's the big question on many NVO executives' minds these days.
'In this market environment, transportation managers are ready and willing to think and act outside of their traditional comfort zones,' Keene said. 'We are seeing major cultural shifts in the thinking and values that an NVO can bring to their operation. Paradigms are shifting. Whether this is a cyclical shift, or something far more reaching, is yet to be determined.'
'Shippers won't hesitate to go back to service contracts, if the NVOs can't prove they can truly support the value-add services shippers are looking for,' Fisher said. 'However, if they do indeed differentiate their services from the steamship lines, this could be a real game changer in terms of how shippers go to market. Exceptional service at a competitive price could lock in a permanent shift in market share for the NVO community.'
Holding Firm.Liner carrier executives interviewed for this article feel certain that despite the global economic downturn, service contracts will prevail as the preferred method for most shippers to efficiently manage their containerized ocean freight.
'The transpacific inbound trade is predominantly a contract trade. Over 95 percent of the containers we move are under contract,' said Bob Sappio, senior vice president of APL's Pan-American trades. 'There's nothing I see that's going to change that in the near term. Importers do it to secure predictable levels of service and rates.'
In the transpacific, there's traditionally a slack period in volumes between when the peak season ends in October until January. During this time, some carriers will offer spot rates to shippers in order to attract additional cargoes for their ships. However, most large carriers will use this time to reduce capacity in the trade by dry-docking vessels for repair and annual maintenance, ramping back up in the spring.
Sappio said that with the current downward pressure on rates, some carriers have made the 'irresponsible decision' to allow spot market activity to drive rates instead of contracts. 'It's a recipe for disaster,' he said.
Alan Clifford, executive vice president for Mediterranean Shipping Co., said he hasn't seen any big changes in minimum volume commitments from shippers. However, shippers are 'taking pricing very seriously,' which is expected as they are under pressure by their own management to control costs, he said.
'Overall, we see that service contracts remain the preferred channel for rate agreements. This is true for all trades we offer,' said Jonathan Yock, president of Safmarine. 'There is no doubt that the spot market exists and is more prevalent today than ever before. However, it is extremely volatile and depending on your perspective this may not be the best business model to embrace.
'If managed properly a service contract can be an effective way to address this strategy and maintain competitive effective pricing where both the shipper and carrier can benefit. There is also visibility and control with whom you are entering into a business transaction,' he said.
Yock pointed out that contracts offer shippers other benefits as well. 'Quarterly reviews regarding performance, reporting, trade lane growth all can be quickly and proactively measured,' he said. 'It is true that the same ability exists within tariff pricing, but it becomes more difficult to separate or showcase the externalities that help separate us from our competitors.'
'Spot market rates provide a short-term benefit of a lower rate, but are volatile,' said Frankie Lau, director of marketing for OOCL (USA). 'Service contracts provide a long-term stability, allowing both carriers and customers to plan their revenue and cost budget, respectively. Long-term stability is not just critical for customers, but also important for carriers to run long-term investment planning.'