Contract Terms

Contract Terms

The Danish financial newspaper Borsen reported this month that Maersk Line and logistics operator Kuehne + Nagel signed an agreement with the sort of scale bound to make waves around the world when it lands in the shipping market.

According to the newspaper — neither company would comment on the report — the contract would cover transportation of some 600,000 20-foot equivalent container units, raising the Swiss forwarder’s allotment with Maersk some 40 percent over 2010, and carry a price tag of up to $800 million.

But the scale of the contract between the two global behemoths is really only part the story.

For the shipping and trading world, it serves as a ready opening to a contracting season that will show how the painful lessons of the 2008-09 global trade downturn may translate into new ways of doing business this year and beyond. That pain, of course, came not only from the sheer drop in actual shipping activity but also in the jockeying between suppliers and vendors and what many believe was a very loose reading of contract terms, to put it mildly, in efforts to navigate through volatile markets.

The results of the ocean, trucking and intermodal commercial contract discussions in the coming weeks will say a lot about whether a “new normal” in business means new relationships and tighter terms for managing the flow of goods through supply chains.

There already are suggestions that is happening in supply chains.

In a discussion of his report, “Facing the Forces of Change: Decisive Actions for an Uncertain Economy,” Guy Blissett, IBM’s director of wholesale distribution research, told Industrial Distribution magazine that relationships within the supply chain are changing as “companies are looking much harder at the financials and much harder at the customers they supply and sell to.”

“As customers and suppliers go through the same exercise,” he said, “there’s actually some shifting going on in terms of who does what in the value chain.”

That is happening in transportation, where providers separate customers between what one CEO told us are strategic partners and transactional customers.

That may be true for the buyers of capacity, as well. If so, we may see contracting in the container shipping world going beyond the comparatively simple pricing and broad container allotments that have marked peak-season contracts of years past.

But that raises major questions for shippers. When logistics and transportation costs may amount to less than 10 percent of the overall costs of finished goods — a broad and very generous estimate — what’s the right strategic commitment to make to a single provider? How much forecasting can you share? And of that, how much of that forecasting would you really commit to? What is the value of a carrier’s commitment for space and equipment, not only in price but also in terms of volume commitment? What, in other words, is the value of greater certainty in the supply chain?

Without that certainty, any supply chain is subject to the vagaries of the spot market. Is that too great a risk in 2011?

So far, it seems Kuehne + Nagel and Maersk Line have come up with one answer for their companies.

Paul Page is executive director of The Journal of Commerce. He can be contacted at 202-355-1170, or at ppage@joc.com. Follow Paul Page on Twitter, www.twitter.com/paulpage.