Shipper-friendly ocean service in the offing

The ocean shipping reform law and its associated implementation rules could transform relationships between carriers and shippers. It's up to shippers not to miss the boat.

By Tony Seideman -- Logistics Management, 5/1/1999

The maritime industry is playing by a new set of rules. Though more an evolution than a revolution, the Ocean Shipping Reform Act of 1998 and the rules for its implementation have the potential to alter everything from the industry's economics to the most basic services offered by

ocean carriers. No longer will dealings between shippers and carriers be exposed to the full glare of the regulatory spotlight: The single most important alteration in the rules, major players agree, is the revision that makes confidential contracts possible in an industry where they once were banned.

Traditionally, ocean lines have acted as common carriers. Rates were determined by complex tariffs filed with the Federal Maritime Commission. Frequently the tariffs concealed as much as they revealed. "Rates were a lot more difficult to find than it seemed," says Michael Barr, senior international logistics manager at Procter & Gamble. Shippers had to resort to creative language and intense negotiation to get anything close to what they wanted.

Trapped in a regulatory straightjacket themselves, carriers were effectively banned from offering significant innovations. "Ocean transportation became a commodity traded only on price. Because of the visibility of the deals, there was no incentive for carriers to be innovative or unduly responsive," says Clint Eisenhauer, vice president of marketing and communications at Sea Land Service Co.

All that has changed with the new rules, shippers say. "For the first time, shippers will be able to negotiate directly with carriers and maybe become a lot more innovative in what they put in their contracts," says Don Cameron, manager of trade policies at Bose Corp. There will be no going back after the new rules hit. "I estimate ... that 90 percent of freight will move under confidential contracts," Cameron adds.

Getting creative

Shippers believe that the new environment will work very much in the favor of companies that are willing to be creative and flexible. But players on all sides admit that making the shift probably won't be easy. "It's going to be more work in some areas for shippers," Eisenhauer says.

Regulations reward the conservative and penalize the creative, notes Thomas Craig, president of Exton, Pa.-based consultancy LTD Management. "It's going to make market followers very uneasy," he says. "Confidentiality favors market leaders. Those that react to the market are going to be in trouble."

For all concerned, the biggest change is going to be the transformation of the service contracts used in the industry to a real and potent tool. Pre-deregulation contracts simply said a carrier would provide space to move goods from one place to the next, shippers and carriers say. They offered no penalties for poor service or rewards for exceptional performance.

That will no longer be the case, Cameron says. "If you want to talk about service or put a service requirement in a contract, now is the time to do it," he says. For example, shippers with low-value goods will be able to ask for their wares to be used as "filler cargo" and thus get lower rates, he says. On the other hand, companies with high-value cargo can request their goods always be placed on the first, fastest-moving vessel.

Besides specifying and creating new services, shippers also will be able to set specific performance levels for their carriers, Barr says. Information is proving to be the glue that is holding the revamped industry together, he adds. Electronic communications systems that are already in place can allow shippers to track all aspects of their carriers' performance closely, Barr reports. "You can find out who is on time, who is not on time, whose transit times are as advertised," he says.

Making waves

The new rules have not met with universal acceptance. One facet of the new rules that already is producing friction involves the presentation of rate and tariff information. In the rules, the FMC said that carriers could satisfy the regulations simply by posting their information on the Internet. This isn't working, Barr says. Major shippers are quickly finding themselves in the same irritating position with the ocean industry that they were in with aircargo carriers a few years ago, with every carrier having its own information access system and standards.

"Right now every shipping line has an Internet system," Barr says. "What we'd prefer to have is a single system where my customer-service [department] can sit at a computer and call up our reference number and be able to trace and track that," he says.

However things work out, the new reality of the maritime industry is that alert shippers will be able to use ocean transport more effectively than ever before--and slumbering ones may find themselves in a very difficult position.