If you feel like you have been locked into a contract with unsatisfactory rates, all while watching the spot market rates drop by over a third during this past year, in many instances significantly below your contract rates, don’t despair, as there are many factors that will make 2018 very different from 2017 in terms of rate negotiations. And although the major east-west carrier alliances are now all in place and have plans to realign certain services, the baseline offerings will remain relatively unchanged.
However, there are new services on the horizon to be aware of. South Korea's SM Line has indicated it will commence two new Asia-North America loops during the first half of 2018, one calling the Pacific Northwest and the other the U.S. East Coast. These will be in addition to the upgrades of vessels on the Asia to Europe trade, meaning the cascading of vessels onto the transpacific will once again inject additional capacity into the trade.
To ensure that you have a well-planned approach to achieve the best results from your annual bids and contain costs as much as possible, you will need to start with the basics like projected volumes. And the more granular data you can provide to your carriers, the better.
Carriers love to know ahead of time what cargo they can expect through the year. They all know about the peak season rush. It’s the spread of cargo during the year that is a more attractive prospect. As such, if you can provide an overview of your shipment profile, it is of great assistance to the carriers, who will in turn look more favorably on your freight than that of those who cannot provide this data. Your transportation management system (TMS) or freight auditor should be able to provide you with the granular data required for this - e.g. size/type of equipment, origin/destination, and volume by month.
Locking as much freight into your contracts as possible is one of the best ways to avoid big changes in the rates applied through the year. Contracting up to 85 percent of your total volume with fixed surcharges as well as no peak season charges being applicable can certainly go a long way to ensure you get the maximum bang for your buck.
Carrier Vs. NVOCC? Whether to contract directly with a container carrier (or carriers) or a non-vessel operating common carrier (NVOCC) depends on your overall requirements.
A large domestic spend in the parcel arena, for example, may not provide synergy in terms of ocean transportation and these should be kept well apart. In general, ocean transportation is an area in which going directly to the source is by far the best option. To be sure, you may well need the services of a third-party logistics provider (3PL) to manage your bookings at origin and provide you with visibility through the supply chain, but this does not mean that they should be the ones negotiating your freight rates. There are many companies in the market with great tools that can assist in placing bids, many of which will certainly save far more than the cost of engagement.
The direct shipper-carrier relationship is a far stronger one, as they can agree to terms which an NVOCC is unable to. Recently, there has been a shortening of rate validity offered to the NVOCC market place, and they are having to pass these cost increases in turn on to their customer base. A direct carrier relationship can certainly overcome these issues. In short, employ the experts in their respective fields.
Increasing Vessel Size. Although there is little prospect to see more major consolidation in the marketplace given the already limited carrier base, there are a couple of firms that could potentially look to be amalgamated into a larger carrier. However, this seems unlikely in the short term.
As mentioned above, sooner or later there will be a fundamental change in the size of vessels operating on the transpacific trade lane. Carriers such as Mediterranean Shipping Co. (MSC) and CMA CGM are now placing orders to enlarge the existing vessel capacity of a fleet of 14,000-TEU vessels, adding sections to increase their carrying capacity to over 17,000 TEUs - a very quick way to increase capacity with limited vessel down time and without ordering newbuilds. With HMM also looking to double it’s fleet size by 2022, as well as discussing orders for 22,000-TEU ships with local Korean yards, this trend toward larger vessels appears not only to be continuing, but possibly accelerating.
Larger vessels will without a doubt cause carriers to increasingly favor calling at those U.S. and Canadian ports that can handle these ships, not only at the berth, but in terms of the proper inland infrastructure required to efficiently move products off the docks and to market.
In negotiating your rates for 2018, choose your carriers wisely, as they can be your best ally to both mitigate cost and ensure your cargo is moved on time every time. While we may not all be in the kind of bargaining position as a mega-shipper like Walmart, we can all get the best for our companies with the right approach as we prepare for the annual contract bidding season on the transpacific.
Henry Gorski is the ocean category manager for global consulting and software solutions firm enVista. He has spent the last 30 years working in international supply chain management for companies including Evergreen Marine Corp., Orient Overseas Container Line (OOCL Logistics) and Mediterranean Shipping Co. (MSC).