When it comes to ocean freight transport, shippers have benefited from almost a decade long “down-cycle” as far as rates are concerned. Over that period of time, shippers were able to secure capacity from a variety of competing carriers at a lower cost. However, bankruptcies, consolidations, and the reorganization of carrier alliances has drastically reduced competitive options, leading to an increase in rates over the long term due to a tightening of supply vs. demand growth. As ocean bidding season rapidly approaches, we’d like to highlight a few items for your organization to consider during your upcoming ocean procurement event.
The length of your carrier contracts
With anticipated rate increases on the horizon, pursuing long-term contracts provides the organization with the most protection against long-term inflation. The decision to maneuver from single-year contracts to multi-year ones, or vice versa, can be challenging since predictive modeling for long-term rate forecasting is difficult. Furthermore, it’s important to remember periodic adjustments still need to occur with long-term contracts as markets change. Concepts such as how your organization manages rate buffers, cap-collars, load acceptance percentages, and schedule changes should factor into your post-contract management strategy, so you need to have a concrete plan and use an industry-accepted methodology for any adjustments required after the awards period prior to beginning the bid.
Port bundling strategy
Qualifying what defines a reliable port will change depending upon who you ask within the organization. Operations staff will claim the most reliable port is located closest to the manufacturing plant, but procurement and finance personnel must assess more than just geographical consideration and evaluate other contributing factors such as port throughput rates, vessel scheduling, and carrier pricing for alternative ports as they impact the total cost. At first glance, the “closest” port may seem to make the most sense, but if port access is more costly for the carrier, that cost will trickle down to shippers as well as increase the probability of rolled shipments. Furthermore, defining a specific port reduces the number of carriers to evaluate since not all carriers service the same port. Implementing port bundling in your RFP can help increase carrier options, improve carrier relationships through flexibility, avoid rate inflation, reduce the risk of rejected shipments, and accurately calculate the “total delivered price.”
Bid process challenges
Aside from the costs, geography, and contract terms making up your bid strategy, a detailed lane analysis must also be conducted, which typically requires more time than an organization’s labor capacity. The human resource requirement needed to successfully complete an ocean procurement event goes beyond what most shippers have available, which often leads to missed opportunities for better rates or contract adjustments. Furthermore, if ocean spend comprises a smaller portion of your transportation budget, it can be easy to overlook some of the strategic methods available to your organization to employ during and after the bid is complete. Relying upon outside expertise may be the best option if your organization lacks the necessary personnel in this area.
Organizations seeking to gain an accurate measurement of their anticipated ocean spend should strongly consider the concepts listed above prior to your bidding event. Establishing a proactive approach to your procurement strategy will certainly prove more beneficial during the negotiation process and will help determine the best outcome possible for your supply chain. If your company is unsure of where to begin, don’t hesitate to contact experienced professionals for their expert advice regarding best practices and industry-trusted methodology.
John Westwood is a Senior Manager for Chainalytics’ Transportation competency and has 17+ years experience in transportation sourcing and logistics management. At Chainalytics, John specializes in assisting global organizations in the development and implementation of transportation procurement strategies and international transportation spend management.
Chuck McDaniel is an international supply chain planning and logistics professional with 25+ years of experience, including such roles as Team Leader in Supply Chain Development, Leadership Training, Logistics Planning, Forecasting, Audit,Operations Management, Payables, and commercial solutions including supply chain crisis intervention.