CONTAINER RATE RFPs AND NEGOTIATIONS FROM A SUPPLY CHAIN PERSPECTIVE

Here are thoughts on container rates for all the people who are involved with international supply chains

 in various roles and trade lanes. There are rates, and there is what rates are about in both rising rates and falling rate times.

Is This You? Many manufacturers, retailers, and wholesalers--as importers and/or exporters--are involved with international logistics. There are likely multiple people inside a firm who interact with it.  As CFOs. CEOs. Supply chain management. Purchasing.

Sometimes this mix of people with different responsibilities are directly or indirectly at cross purposes. This showed with retailers that overstocked inventory. This capital spend hit P&Ls with transportation costs and balance sheets with inventory.

At some point, if volumes are large enough, comes the matter of negotiating rates—contract and/or spot market rates. So what you need is an approach to how and what you buy from container lines. Contracts and/or spot rates—and the split.

Purpose. The intent is to align your supply chain with your rate approach. Give specificity to your Request for Proposal (RFP) and negotiations. This means identify, focus, and prioritize what you are doing. And, as a result, you will decommoditize rates which are often defined as commodity pricing with no differentiation in what you are buying. Also, you want to define what you are buying.

Buyer vs seller. There is a view that it is about buyer vs seller. But there is also a view that is buyer vs buyer and seller vs seller. What am I bid for my container volume? What will you pay for my transport service?

Remember, not all buyers are the same. And not all sellers are the same. You have a supply of volume. What are the best deals you can get for it? Carriers have a supply of service. What are the best deals they can get for it?

All parties with similar ends. What am I bid, what is the demand, for my freight? What am I bid for my container carrying supply? Bidders vs bidders for that transport supply. Sellers vs sellers for that transport demand.

Keep this in mind as you frame your RFP and negotiations approach.

A rate is a rate. Or is it?  There have been numerous stories and posts about various rate indices and how they are moving and changing. What is missed is the question of what they mean.

Is this about the container or about what is in the container?

Containers are really about the inventory they convey—that is sold by distributors and by retailers in stores and e-commerce,  and used by manufacturers. So rates are really about what is in the containers--finished goods, raw materials, components, assemblies,

and work-in-progress items that the container holds. That is not a subtle distinction. That inventory and its movement are central to your business.

Container shipping and its prices are a derivative of supply chains. Supply chains drive the shipping activity. Not the other way around.

Methodology. Since it is about what is in the container, identify, focus, and prioritize what will be shipping and what you are negotiating with container lines or with freight forwarders.

One excellent approach is to define/classify your inventory as A, B, and C.

These designations cross product categories. Think of it as:

P  “A” items are those with high volume and high sales margin. Some may say it should high revenue. But sales margin reflects profit potential. For manufacturers, this would be the manufactured item, which in turn, blows out as the bill of materials and the parts, assemblies, and components.

ü  “B” items have less volume and margin. They may also be compatible with “A” items.

ü  “C” are slow movers. They may be considered sales and supply chain “dogs” for the handling and cost they involve versus their volume and profit contribution.

If you have seasonality or other peak movements, then break down those inventories too. Keep what is important in front of the container lines and you. Stay focused

 

INVENTORY / PRODUCT	SALES MARGIN	VOLUME BY SUPPLIER	VOLUME BY ORIGIN	VOLUME BY DESTINATION
A
B
C

 

The table above is illustrative of products in a container and their varying importance. This includes

knowing the origin-destination port combinations and suppliers. Think of  

this as micro-mapping your immediate/direct upstream supply chain. Make sure you are current and recognize recent and planned changes—product, supplier, and origin port.

 

In a company, it would be bigger with thousands, even thousands of thousands for some, of products, parts, or whatever you are about. Data analytics would be great here.

 

This drill-down gives focus to not only products but also to suppliers and origin ports. Remember, no part of the organization has more data than the end-to-end supply chain. The methodology provides priorities for your bids and negotiations. Also, include any planned changes—with existing or new inventory or suppliers and port combinations. Carriers should understand what you plan to do to bid properly.

 

Not recognizing what is being shipped is to commoditize the products. There is no difference. Think about that. You treat yourself as having commodity products while buying a commodity service. Break that mindset. The results will show in your pricing and your operations performance.

 

Service. This is what you are buying to move those products. Transportation. Freight rates are the price you pay for the service.

 

Unfortunately, it is not a given. It is no longer looking at transit times and how they align with your needs. Now, it may be your biggest sticking point, even contentious, in negotiations. The product differentiation for rates also ties to what carrier and service you buy.

 

Fast, reliable transport is important for the ‘A’ products. It plays a role in the speed from purchase order placement to being paid by customers for what you sell. Compressing that cycle has financial benefits with its payment and inventory turns.

The problem is that container lines are not selling and are not providing a dependable service. Blank sailings. Slow steaming. Canceled services/loops. Each of these impacts the flow of inventory across the A, B, C designations. Especially the A items.

 

Because of the unreliable service, retailers, manufacturers, and distributors must carry more inventory as a buffer. This means spending more capital to mitigate carrier actions. Think of doing a financial analysis of buying extra inventory and what the freight rate offset should be to balance against the purchasing outlay.

 

Or, think of what carriers may want for your service. The cautionary note is that you are not the only one on a ship. Will you be protected against canceled sailings and other tactics? Do not hedge here. Get it in the open. Put it in your RFP.

 

Define what you think the service should be. Start with the booking your supplier or you do and go through the steps to the delivery destination based on your activity. Now define it. That enables having agreed metrics.

 

Analyze the service performance of carriers you will send RFPs to and what you require. Then translate that into metrics and penalties for service failures. Remember these are called “service” contracts, not time volume agreements.

 

The ands—surcharges and disruption. You are prepared with the two key issues—rates and service. But be aware of and be prepared for other charges—bunker adjustment factor (BAF) and other surcharges. Fuel, aka BAF, should be based on a formula that a carrier and you agree on. Recognize that other surcharges may occur—from those that may arise the with Panama Canal and its drought to those for geopolitics that are occurring in various places in the world. The amount of the surcharge may not be known. But recognize that unknowns may occur and how they will be handled. Again, they should be based on a calculation that parties agree to.

A side note. The BAF topic will get interesting in the next few years as alternative fuels for ships come into use as part of IMO 2030 and decarbonization.

The recent past has shown the unexpected can happen. What happens when they do? Play the risk and do nothing or plan now with container lines?  Is it something you want to and can deal with in contracts? Then put it into your bid.

Now What and Negotiations. Your bids should go to container lines that can meet your prerequisites. Your products, your suppliers, your origins. Focus on carriers based on your A, B, and C? Use different carriers for A vs C items?

No matter how you issue your RFP, there are negotiations with your carriers. Remember, it is not about the container. It is about what is in the container. Those A, B, and C products/parts.  Besides freight price and surcharges, this is also about the service needed for each inventory segment. Stay the course in discussions on your package of needs.

This will not go into negotiation techniques. Presumably, you have a way that works for you in various cordial and not cordial environments.

There is internal analysis and thinking. How well do responses meet your defined expectations and requirements as to rates, surcharges, and service? Do you differentiate by product category?

“A” product 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. This can be a tricky matter with carriers canceling sailings to manage ship capacity and, in turn, rates. Then there is slow sailing which does that too.

 

Both create issues with managing inventory and fast turns from purchase orders to customer payments. The latter is important for profitability and to mitigate either stockouts or being inventory rich. This leads to the idea of splitting your contract and market activity by category.

  

Benchmark the spot market vs what is offered to you. How do you see your market economy and the global economy? Against that, how important is service? That question comes into play in the spot market. There is a lack of service specificity playing 

the market. That lack of contractual commitment can influence how much volume to put under contract. Will you do it based on your products, container lines, or a traditional price way?

Service and related contract commitments should have metrics that are measured for compliance. That keeps contract obligations ongoing and in front of both parties.

There is a wild card here in assessing what you put under contract. It is the potential for trade and logistics disruption. Potential major disruptors involve geopolitics and climate change.

Do you want to hedge your contract volume for terms in the contract that protect you in the event of chaos? You want something firm that you can depend on. Recognize that carriers may want something from you in exchange. There is much to think about, negotiate, and act on.

Result. This approach is meant as a guide to what you are buying with container lines and why—to align your supply chain—its inventory and requirements—with what you buy, why, and with whom. No matter whether bids and negotiations or market pricing, this is about delivering your supply chain parts and products consistent with your needs. It provides context for prioritizing and evaluating negotiation rates both contract and spot in terms of moving inventory.

 

Remember, a rate is not a rate. It differs by product importance and offers increased value to the company.