Peak Contracting Season

’Tis the season. No, not that season, the container shipping service contract season! By now, carriers either have made an offer to their customers or held a heart-to-heart conversation on what to expect when they do.

Some carriers even were bold enough to ask if there were terms and conditions shippers would like them to consider for the upcoming contract. They’ve asked for customers’ forecasts — what their sales or planning people are saying about volumes between May 2011 and April 2012. Are there any new origins, destinations, commodities or changes in seasonality? Any new equipment requirements? Some might have questions on customers’ plans for chassis.

This all gives carriers a better opportunity to plan and meet shipper needs more than 90 percent of the time, which we’ve all been told is a really good level of service.

In return, I’m sure shippers received detailed information regarding changes in schedules, transit times, port rotations, and sailing and arrival days that will occur between May and April. This information gives shippers a better chance to plan in advance and feel comfortable in telling their plant, warehouse or other customers that service will be good — really good — more than 90 percent of the time.

And shippers, don’t forget to tell your truckers that, too! This is the time of year when all carriers want your business. They want your signature on the contract, and, make no mistake, those carrier sales reps will do everything they can to deliver what you want.

Your task is tough, fraught with the pressure of your bosses’ specific objectives, cascaded down from your CEO’s specific objectives and ground into the budget, calling for transportation costs to fall 25 percent in the coming contract period.

So the stage is set. There are only 11 weeks left to finalize contracts and set off into the 2011-2012 business year. In general, conditions this year are more stable in terms of vessel capacity and equipment availability. Indeed, on a global basis, carriers face overcapacity this year. How will they manage it?

Based on the harsh lessons of 2010, when equipment shortages, tight vessel capacity and soaring rates were the story, shippers are bound to insist on specific terms and conditions for space and equipment, making clear what MQC — minimum quantity commitment — means and establishing mutual consequences for noncompliance with space and equipment requirements and volume commitments.

Most of my shipper clients have been on board for specific terms and conditions for three to five years and are pretty pleased with the results. One carrier a few years ago failed to meet its requirements for space and equipment availability during the peak season, and the solution was to not honor the volume commitment and not re-sign with that carrier for the next contract season.

Some of my shipper clients still won’t commit to volume guarantees at specific times of the year in exchange for carrier space and equipment commitments — this, even though their shipping patterns haven’t changed in more than a decade. And several potential clients haven’t hired me because they couldn’t understand why I couldn’t get carriers to guarantee space and equipment without a concomitant guarantee on volume.

After all the uproar and exchange of barbs during and after last March’s Journal of Commerce TPM Conference, it would seem logical the service contract talks that followed would have produced agreements with specific language on many of the most contentious issues.

Logic didn’t prevail. Although there was some movement for more specific language and mutual consequences for noncompliance, my educated guess is that far fewer than 30 percent of all 2010-2011 service contracts include those conditions.

Maybe the timing was bad and there wasn’t enough time to react. Maybe some contracts had already been signed before the uproar. Maybe some shipper negotiators couldn’t reach internal agreement or clearance on precisely what to seek. Maybe there was still a level of mistrust, as many shippers said it didn’t matter what was in the contract, because the carriers ignore the terms and do what they want anyway.

I suspect it was a combination of these and possibly other issues that caused so few shippers to secure very specific requirements. Will they be more willing to do so this year? Based on all the discussion and controversy since last March, one would think so.

But I’m not so sure. My conversations with several cargo interests suggest they understand what might be required but are reluctant to commit their company, to take on risk. As one logistics executive explained, “They know who we are and what we ship. We’ve used them for years, (and) they should cover our backs regardless of what’s in the contract. They always did before.”

And that may be a real belief that many have. Will it work for them in 2011 and beyond? Was 2010 an anomaly? We’ll know in about 10 months.

Gary Ferrulli is president of Global Logistics Consulting in Chandler, Ariz. Contact him at ferrullig@mindspring.com.
 

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