As beneficial cargo owners (BCOs) enter trans-Pacific service contract talks, they must determine whether to choose generally cheaper but less reliable trucking transport contracted via container lines or shell out for more expensive but more predictable haulage they contract themselves. The decision is complicated by some some container lines’ pulling back from door delivery exposure because of tighter capacity, while others are trying to handle the trucking leg for more customers.
It’s one of the most fundamental questions in international logistics: who handles the final-mile delivery of a container to a shipper’s warehouse? As drayage rates and chassis costs rise, and the supply chain becomes more complex, outsourcing door-to-door logistics to an ocean carrier can be attractive.
Cost versus control
For beneficial cargo owners (BCOs), it’s a delicate balance between keeping transportation costs in check versus a perception that ocean carriers provide less reliable inland transportation. Merchant haulage is viewed by some BCOs as more predictable, but rates are not nearly as attractive. The decision on which model is best depends on how a BCO values cost relative to reliability.
Drayage rates are higher than prior to the implementation of electronic logging devices (ELDs). Trips between Savannah and Orlando, Jacksonville and Atlanta, and Los Angeles and Phoenix used to be one-day hauls because drivers would alter turn times on paper hours-of-service (HOS) logs. But with an ELD, if a driver cannot complete a round trip within 14 hours of on-duty time, a layover fee will be charged. In addition, since drivers cannot be as productive per day since every minute is digitally recorded, raising rates was the only way to ensure driver paychecks remained constant. Since many of these drivers are owner-operators, they can choose when and where to work.
This creates an issue for the ocean carriers looking to provide low rates to win business. Without offering an incentive, BCOs would more likely use a non-vessel-operating common carrier (NVO). But if trucking costs are rising, ocean carriers face a daunting task to price a quote low enough to capture interest but also turn a profit.
The reason why a BCO would tender freight under carrier haulage hasn’t changed in years. Not only is it saving money, but it’s also a turnkey option with one invoice covering all expenses. Linehaul rates, equipment charges, terminal fees, and any penalties such as detention and demurrage are on one bill. In merchant haulage, a BCO might receive three or more invoices covering ocean, trucking, chassis, and terminal demurrage.
There is also a business incentive in carrier haulage in the form of cheap chassis. If a BCO pays $8 per day on a chassis, it’s possible to save more than $100,000 per year versus an at-cost chassis or $200,000 on a daily rental from a cooperative pool. Groups such as the North American Chassis Pool Cooperative note that the downside of taking such a low rate is the chassis supply is not as reliable as it could be.
Some of the concerns about quality and performance that come with merchant haulage are offset by the increased level of control it provides. The BCO chooses which chassis to use, relying on a trucker-owned unit or even leasing its own supply. The BCO also controls the trucker. Under carrier haulage, the BCO can nominate a trucker, but the ocean carrier doesn’t have to agree. It can farm out the job to a house carrier who does a poor job or is operating illegally, whereas in merchant haulage, the BCO vets its service provider.
Although carrier haulage makes things much simpler, it doesn’t mean BCOs should be completely hands-off.
Global logistics directors should know which terminal containers will be discharged in, visit the location, and network with terminal staff and ocean carrier representatives. If there are problems along the way, knowing who to call and establishing relationships with those players can be immensely helpful. Shippers should also make sure they are comfortable with the efficiency of the terminal.
A savvy BCO will also negotiate on the terms of the contract to protect their interests. When cargo is damaged, containers are stuck in a terminal, or some other problem interferes with the fluidity of the supply chain, the contract between BCO and ocean carrier will dictate who is responsible. If a BCO signs what is presented to them without an analysis, it might be accepting liability for situations out of their control.
Supply chain managers should also know the chassis alliances so they can coordinate dual transactions without causing their drayman to incur a chassis split. If they use four ocean carriers, for example, with two aligned to DirectChassis Link, Inc. and two to TRAC Intermodal, linking dual transactions accordingly would prevent a driver from switching chassis.
At its core, the issue comes down to costs versus control. Carrier haulage will be cheaper in a time when transportation managers are under pressure to keep costs in check, but BCOs will cede power and could sacrifice performance between port and warehouse. Merchant haulage provides more control to establish a high performance level, or even make last minute changes, but expect to pay extra money in the end.