This is for
those that are directly or indirectly involved with container shipping. CFOs.
CEOs. Supply chain management. Purchasing. Freight forwarders. Container lines.
Logistics. 3PLs.
We need some
perspective on rates that have taken discussions off track. For three years,
container rates have gotten a lot of attention in stories. First, there was how
high they were. Then how they are dropping. Spot rates. Contract rates. All the
complaints by shippers when they were high. Happy dances when they dropped. It has almost been a never-ending story.
But these
stories missed something, some context. Rates were presented like stock market
prices. Stories also did not cite the decades of shipper-favorable rates. But
there is more.
There is the
container. But what about what is in the container? What does it mean as to
pricing? Or does it matter? Is it—a rate is a rate?
Hint: Container
shipping is a derivative of supply chains.
First. Let
us back up on how we got here.
·
Before the global pandemic, container rates got
token attention beyond the timing of negotiating contracts.
·
There are two types of shippers—Beneficial Cargo
Owners (BCOs) and freight forwarders. Each has its agenda.
·
Negotiating power was with shippers.
·
The soft rate market made for low volumes
committed in contracts so shippers could play the spot market. Or contracts
recognized spot market prices.
·
Container lines had lost money for many years.
And remember, this is a capital-intensive industry.
·
Pre-Covid there was concern that some carriers
would go bankrupt or be acquired, reducing the shipping choices, and possibly
heading toward an oligopoly for container lines.
·
Covid started with a shutdown of much of origin
shipping, especially from China. That meant concern for what would happen to
carriers.
·
Then the pandemic hit destination countries and
created questions on what to do with containers loaded and shipped.
·
Then came a surge in product demand and, in
turn, shipping demand. We went from shutdown to a shipping frenzy.
·
Rates/prices surged to getting containers and
being able to get loaded on a vessel and shipped.
·
Then prices went crazy with the demand vs supply
for shipping. /
·
All this created a power shift from shippers to
carriers.
·
There was resentment with the change.
·
Then consumer market demand slowed. And with it,
demand for shipping.
·
Rates began to drop.
4 Points.
Before we get deeper into the topic of what container rates str about, here are
four points for perspective to consider.
1) Shippers
make service contracts with carriers. The question is whether they are true
contracts or loose agreements.
2) What
is the service in a service contract? How is it defined? Is it a complete service? How contractually
firm is it?
3) There
are two shippers—beneficial cargo owners (BCOs) and freight forwarders. Each
has a different need with rate and any contract negotiations.
4) After
years of shipper dominance in rate negotiations, the radical power shift with
the pandemic, and the drop in demand, a question is whether the relationship
between shippers and carriers is a collaboration or a mutual vendetta. The
answer can misdirect negotiations.
The Container. What is often missed by container lines and
freight forwarders is, for BCOs, that rates are not about containers. They are
about the products—the inventory-- that go in them. Stories in the past few
years about rates have missed this key point.
Containers are
really about the inventory they convey and is sold by distributor and by
retailers in stores and e-commerce and by manufacturers. And the challenge and
the fun. That brings us to where we are for the next round of service
contracts.
A, B, C
Inventory. There are 3 types of
inventory whether it is year-round or seasonal products. These designations
cross product categories.
P “A”
items are those with high volume and high sales margin. Some may say it should
be revenue. But sales margin reflects profit potential.
ü
“B” items have less volume and margin. They may
often be compatible with “A” items.
ü
“C” are slow movers. From a supply chain view,
they could be considered sales and supply chain “dogs” for the handling and
cost they involve versus their volume and profit contribution.
Negotiations. Remember, it
is not about the container. It is about what is in the container. Besides freight
price, this is also about the service needed for each inventory segment.
“A” discussions, with their
demand and sales/profit importance, are also about transit time and carrier
reliability. Then “B’s have less. And “C’s have a low priority here.
What BCOs need to do is
assess their planned activity. This includes drill down and focus as to supplier
and origin. No part of the organization has more data than the end-to-end
supply chain. That data and artificial intelligence provide the base for the
analysis, negotiation priorities, and rate evaluation. It can include
converting volumes into the number of containers.
As a result, BCOs have a
picture of what to emphasize in negotiations.
|
INVENTORY / PRODUCT |
SALES MARGIN |
VOLUME BY SUPPLIER |
VOLUME BY ORIGIN |
VOLUME BY DESTINATION |
|
A |
|
|
|
|
|
B |
|
|
|
|
|
C |
|
|
|
|
The table here is to
illustrate products in a container and their different importance. In a
company, it would be bigger.
It gives focus to
negotiations. When you put containers and inventory together, you can see and determine
service and pricing priorities. In turn, it enables the firm to develop service
specifics for the service contract.
Result. Not only guiding negotiation,
the approach also provides context for prioritizing and evaluating negotiation
rates both contract and spot. A rate is not a rate. It differs by product
importance and offers increased value to the company.
Not only BCOs, but container
lines, 3PLs, and forwarders with major customer accounts should consider doing
this. It creates insight and value for all parties.
Conclusion. Container rates
are not black and white—not a cheap or not event. There is also the service
that underlies the prices. They are about moving products in trade. That should
not be missed.
We are in a period of continuing
supply chain disruption. Geopolitics. Climate changes. And who knows what other
surprises lie ahead.
Supply chains are large, complex,
and nonlinear. Look beyond contract and spot rates which are a derivative of
what is happening. Think of how to position your supply chain to adapt and
create resilience. Look at the big picture.
