Sitting on the sidelines at The Journal of Commerce’s Trans-Pacific Maritime Conference, two shippers said their solution to the troubling questions over services and rates sounded simple but was infinitely complex to achieve.
They’d love to negotiate longer-term contracts with ocean carriers, the U.S.-based transportation managers said, speaking on condition of anonymity, but they had not figured out how to protect their companies from sharp fluctuations in the market.
The search for certainty, or at least something close to predictability, loomed over last week’s 11th annual TPM Conference, for container shipping and other transportation carriers looking for predictable cargo flows and for shippers seeking space and equipment — and rates, of course — they can count on.
Shipper-carrier tensions have receded since the global economic downturn, when sharp fluctuations in trade volume triggered a wild ride in rates, deep equipment shortages and even calls for government intervention.
But the latest annual event looking at the direction of trade in the United States’ largest trade lane showed those stresses giving way to a closer, maybe even measured, look at how to build something better out of the experience — or at least to build something to avoid a rerun.
For several shippers heading into contract negotiations for this year’s peak shipping season, that may include far more detail than they’ve ever included in service contracts, which Siva Narayanan, global logistics process manager for chemical shipper Rhodia, called nothing but “a rate sheet.”
Scott Larson of retailer Bon-Ton Stores said he is looking to write in detailed container volume specifications not just for the season but also on a week-to-week basis, with provisions for adjustments based on ongoing market developments.
Those adjustments, what triggers them and who pays the costs are where debates are shaping up for carriers and shippers. Speaking at a panel on shipper-carrier relations, logistics executives said their companies are trying to take a long view, either through more formal long-term agreements with carriers or with broader supply chain strategies.
“Overly price-focused shippers miss the point by failing to consider other supply chain costs beyond the ocean rate,” said Eric Brandt, manager of global ocean transportation at Kraft Foods. “We need to change.”
Brandt said areas such as basic inventory management and load optimization can bring “tenfold improvements, rather than 10 percent, and those will come year after year.”
Brandt said container ship operators, however, must give customers certainty by standing by commitments. “Carrier tactics must produce predictable outcomes,” Brandt said.
Kraft is looking for contracts “not for 12 months or 24 months but for 32 to 60 months,” Brandt said. But, he said, he still sees the market dominated by “an opportunistic approach where shippers don’t want to pay above the market and carriers don’t want to get paid below the market.”
Duncan McGrath, manager of container freight in the Americas at Cargill, said the grain industry giant wants to use its experience in commodities, where goods are traded on futures markets, to mitigate risk in ocean container markets. The company is examining trading in the Container Freight Derivatives market that was launched last year, which McGrath said could work “in some circumstances for some goods.”
“The key for both parties, in Cargill’s view, is volume certainty,” he said.
Rhodia’s hope is to take those slim contracts and make them true service contracts, including commitments and accountability. “If it doesn’t show up at the port, I will pay you,” he said. “If you roll my cargo, you will pay me. We must have that mindset.”
To C.C. Tung, chairman of Orient Overseas (International), the Hong Kong-based parent of container ship line OOCL, the best solution to the services question is a strong exchange of information. “Improved communication among shippers and carriers is necessary to achieve better matching of capacity to demand, reducing volatility in rates and avoiding disruption to supply chains — addressing a key fear of both shippers and regulators,” he said in the keynote address to the TPM event.
“To avoid such disruptions in the supply chain, and take into consideration these wider industry challenges, contract negotiation should focus more on service issues rather than just solely on rates,” he said. “Shippers are looking for stable, reliable service, with extensive networks and reliable transit times, as well as stable rates. They should consider entering into longer-term contracts with carriers, which means sitting down with each other in an open and free environment to discuss our mutual needs and how to meet them.”
So far, so good for shippers, but Tung also believes a strong information exchange between carriers is necessary, something shippers hardly applaud.
Carriers and shippers alike would like to see more volume moving on those vessels at whatever rates the market will bear, and there is little promise of dramatic changes in supply chains slashed to historically low inventories during the downturn.
“You’re going to see inventories stay low for the foreseeable future,” said Cliff DeFee, a professor in Auburn University’s Aviation & Supply Chain Management Department.
Contact Paul Page at email@example.com.