Until recently, most logistics professionals were focused primarily on reducing shipping costs and minimizing inventory. However, the COVID-19 pandemic and resulting effects on the global container shipping market have now made it crystal clear to logistics professionals that their businesses depend on their supply chains, and that their priority needs to be building far more resilient supply chains. This requires proactive supply chain risk management.
One of the many new tools shippers can use to effectively manage supply chain risk is the two-way committed freight contract, which allows both the shipper and carrier to effectively “hedge” against price fluctuations and service volatility.
In the third and fourth quarters of 2021, there was a major increase in carriers and shippers signing two-way committed freight contracts that span three years in duration and beyond. While some may still argue against such contracts given that spot rates could one day soften to below the contract rate, the calculus has fundamentally changed for many logistics professionals. Now, it seems that most shippers place a greater value on securing the ocean link within their supply chains than on the potential cost savings of chasing the spot market.
This new form of two-way committed contracts will soon become the norm. For example, Vincent Clerc, CEO of ocean and logistics at Maersk, said during The Journal of Commerce’s TPM21 conference in March that in five years, 100 percent of Maersk’s contracts would be two-way committed.
Of course, shippers and carriers will always have the ability to abstain from contracting and ride the spot market roller coaster if that’s what they want to do. But for those that realize the importance of supply chain resilience, the two-way committed contract has become an essential tool for managing their supply chain risk.