What’s new in ocean cargo contracting?

Editor’s Note: In an ongoing effort to keep readers informed on the current state of ocean cargo shipping and contracting, we conducted a brief interview with one of the founders of Catapult International, a leading edge international shipping software and consulting firm.

Matt Motsick – one of the company’s two founding directors – provides an overview of key issues in today’s marketplace.

Logistics Management: The Bunker Adjustment Factor (BAF) is a surcharge adopted by ocean freight carriers to account for fuel cost fluctuations. Still, BAF accounts for as much as 50 percent of the shipping cost in certain trade lanes. Can you explain this?

Matt Motsick: Bunker prices vary dramatically depending on which port the vessels get their fuel. One trade may bear more of the brunt of the BAF costs depending on vessel utilizations and weights. For example, if Transpacific exports are weak and Transpacific imports are robust, you still need the same amount of fuel to propel the vessel. So in this example, the imports might bear more of the fuel cost due to low export utilizations. Additionally, depending on the average weight of the cargo, many vessels “weigh out” before they reach 100 percent of container capacity. This can also drive up the BAF cost for the cargo on board because the carrier is unable to assess the BAF on 100 percent of the vessel’s twenty-foot equivalent units (TEUs) but rather has to cover the fuel cost with the reduced amount of containers on board.

LM: Shippers tell us that 30- to 40-percent of ocean carriers are 4 to 5 days late than their scheduled/advertised time. If true, why is this happening?

Motsick: The short answer would be port congestion on high traffic or under-developed ports, weather delays, increased slow steaming, and labor strikes. But it’s more complicated than that.

In any mode of transportation, a delay can potentially impact departure statistics until the trip’s cycle completes.  For example, a late airline flight in the morning will result in multiple late departures throughout the day, until the cycle refreshes the following morning.

Ocean transportation is unique, in that a vessel’s departure cycle has no end, and thus no opportunity to refresh.  A single negative event causing a delay will continue to negatively affect that vessel’s schedule for a potentially long period of time.  In reality, a carrier’s on-time statistics are skewed by how quickly that carrier re-sets their schedule to accomodate the delay.

LM: So, how does the shipper prepare for these disruptions?

Motsick: For the most part, all are unforeseen events and cannot be planned for, with the exception of slow steaming which is a result of increased fuel costs.

LM: Has anything changed in the way shippers interact with carriers these days? Do large volume retailers, for example, enjoy a certain advantage?

Motsick: Large shippers generally maintain long-term relationships with multiple carriers as a way to ensure high service levels. The carriers also benefits from such relationships, as these volumes represent a significant portion of their capacity, and sales cost overhead is spread over this larger volume.

LM: So, are you suggesting that large volume shippers becoming less reliant on freight intermediaries?

Motsick: Medium and large shippers prefer to negotiate the price and minimum quantity commitment (MQC) directly with the ocean carriers and then let the freight forwarder take care of the bookings and customs clearance. This allows the shipper to gain the name recognition with the carrier – which typically equates to a higher level of service.

Small to medium sized shippers prefer to use NVOCCs (non-vessel operating common carriers) as they may have better rapport, such as quicker response time to quotes and bookings, than the carrier.

Some use the hybrid model, having both NVOCC’s and Carriers in their pocket.  This gives the shipper greater flexibility with transport pricing/service options.

LM: What is the typical engagement model for mega shippers?

Motsick: That depends on the shipper’s corporate culture. Some large shippers have separate procurement departments, which are very familiar with the bid processes.  For other shippers, the negotiating party may come from senior or mid-level management of their transportation department.  Depending on how many port pairs, it could be as formal as an Ocean bid RFP or as simple as simple as an exchange of emails followed with a service contract.  

LM: How do shippers short list the ocean freight carriers? Is it through the reverse-bidding process or is there any other mechanism?

Motsick: It boils down to who provides service to the required port pairs and then it becomes a price/transit time/ customer service issue.

The bid process is the primary factor in the selection of ocean carriers.  Other factors that impact the selection decision include service levels (direct experience or reputation); perceived space availability; global reach of the carrier (if needed), and unique service offerings.

LM: Do these shippers enter in multi-year contracts or do they enter annual contracts (or are there any short-term contracts as well)?

Motsick: Both. They can usually get a price advantage for a multi-year contract, but if the market drops it is harder to get rate reductions when locked into a multi year contract. But similarly, if the shipper opts for a one-year contract, they run the risk of increased rates when the contract is up and if market conditions are strong.  Even in these agreements, the carriers opt to include “mutually agreed upon General Rate Increases (GRIs)” in the contracts’ terms.

LM: How do these companies renew their contracts after their engagement agreement expires? Do these companies again adopt the short-listing process and select the shippers based on pre-decided parameters, or do these shippers negotiate with their incumbent service provider only?

Motsick: It completely depends on how satisfied the shipper has been with the carrier.   If very satisfied, a simple renegotiation or an extension of the existing contact with incumbent carrier (s) will often suffice.  If the shipper is not satisfied, then it is back to sending out a new ocean bid ( RFP) and starting the process over again.