Electrolux’s Bjorn Vang Jensen is looking for a new way of negotiating contracts with ocean carriers. “As we look at our ever-growing global volumes,” he asked, “how do we rethink the way to cater for that volume without having to go through the same grueling street-market-type ocean tenders every year?”
As vice president of global logistics for the Stockholm, Sweden-based appliance maker, Jensen wants to find a way to allocate a sizable part of the company’s growing volume with a few reliable carriers on a long-term basis, so he won’t have to quibble about rates every year.
The company’s criteria for carrier reliability isn’t restricted to schedule reliability, but also includes how quickly a carrier can confirm space availability for a booking, how good its key account management setup and responsiveness is, and simple operational parameters, such as whether it provides clean containers in good repair.
“That’s a much more important indicator of reliability,” Jensen said. “A day or two late is not going to break our supply chain, because we are not a just-in-time manufacturer, and as we all know, schedule reliability is woeful across the industry.”
Electrolux, the world’s second-largest manufacturer of domestic appliances, operates more than 50 of its own factories worldwide that are grouped under three product divisions. Its Major Appliances division produces domestic kitchen and laundry equipment and air conditioners. Its Small Appliances division makes vacuum cleaners, blenders, coffee makers and other small appliances. The Professional division, makes commercial appliances, such as heavy-duty washing machines and dryers, which are used in a variety of professional settings, including ships, and large, often custom-made, cooking solutions.
Electrolux’s factories are located on every continent. It also uses original equipment manufacturers, mostly in Asia, that produce products designed to its specifications. It has four of its own plants in Asia, one in China, one in Thailand, and two in Australia. It has five plants in North America, and is building a sixth, in Memphis.
Many plants in high-cost countries rely on at least some components supplied by manufacturers in low-cost locations in Asia, eastern Europe and Mexico. “The growth of this company is to a large extent built on stuff that is sourced far away from where it is sold, and that is unlikely to change any time soon,” Jensen said.
That makes for a complex global supply chain, and one that is growing more unpredictable every year. “That is our biggest challenge,” Jensen said. Electrolux expects to ship 160,000 20-foot equivalent container units this year, a volume that has been growing at a 20 percent compound annual rate for the last six years. It expects volume to pass the 200,000-TEU mark next year, “and we will not stop,” Jensen said. At some point, however, unless you adapt your transport sourcing strategy, volume becomes a liability rather than an asset — “it’s a headache to make sure you optimize your freight costs around an ever-increasing volume, while maintaining reliability and space commitments,” he said.
Electrolux has a good deal of leverage with its carriers, not just because of its swelling volumes, but also because it provides all of its carriers this year with eight-week rolling forecasts of its volume needs. This gives carriers, which chronically complain about the lack of visibility into their customers’ space needs, a very clear picture of its space requirements, and aids in the fulfillment of contractual minimum space commitments.
It also enables Electrolux to lock in very favorable contract rates, often at significant discounts to spot rates.
But Jensen, who manages all of Electrolux’s ocean shipments with staff spread across Singapore, Copenhagen, Stockholm and Shanghai, said he wants to get away, at least partially, from the annual tug-of-war with carriers over contract rates. “We have five people who do little else for four or five months out of every year than squeeze ocean carriers on rates,” he said. “How unproductive is that?”
Jensen wants to explore the feasibility of long-term contracts with fewer carriers that can carry a significant part of the volume, and “move the focus away from day-to-day transactional cost-cutting and toward optimization. “That way we can use our talented logisticians in other areas of the business where they can optimize the supply chain and make more money for the company than negotiating another $30 off the freight rate.”
Whether the contracts are pegged to rate indices or not doesn’t matter. “We’ve challenged selected carriers to come back to us over the next few months with some out-of-the-box thinking that they feel can work for them and for Electrolux,” Jensen said. “Whether we get there or not is premature to speculate on, but we are certainly prepared to listen to well-thought-out solutions that challenge the current way of cooperation between (beneficial cargo owners) and carriers — and we may have a few ideas of our own.”