Tuesday, July 7, 2009

Shipping: Contracts vs. Spot Rates

Anyone involved in supply chain management, or just business in general, knows that the status quo of the past isn't so...status quo anymore. Globalization, political, and economic issues change the landscape of the logistics and supply chain industry every day. This includes how businesses are handling their transporation contracts and budgeting their freight costs.

In the past, year-long contracts were the status quo. These contracts would lock a specific company into an agreed volume of freight - securing a cost per container / per kilo, etc. They would also lock a provider into an agreed rate - well, for the most part (Those GRI clauses in fine print can get you every time). These contracts gave a sense of stability and an ability to budget and forecast transportation and shipping costs - they also gave a supply chain managers the warm fuzzies to know that they were getting the best price for their business and that future market increases would not drastically affect them.

But in today's contradictory business climate - are these contracts, which lock in a business to a specific rate, in such a roller coaster market the most efficient and economical way to go? Are we witnessing a shift in power to the shippers, 3PL’s, and forwarders thanks to their ability to spot quote and accept business sans volume agreements?

Shippers have always had two choices for procuring their freight and transportation: 3PL (third party logistics providers), NVOCC's, or by going directly to the ocean carriers themselves. Advantage: NVOCC’s & Freight Forwarders. Here's why:

- They provide the same if not a better level of customer service (less red tape and bureaucracy than the carriers).

- No volume commitments in many cases; the ability to play around in the market and test different options

- Ability to respond to frequent rate quote requests and quickly

Aside from some of the commonly recognized factors (i.e. fuel, politics, geographic constraints, etc.) it is extremely difficult and sometimes inaccurate to predict whether or when rate levels are headed up, down or are on a plateau in this market. Why get tied down in a contract when you may miss out in significant rate decreases? If rates go up and you are not in a contract, you can still win thanks to high market competition.

If any of us currently work directly with the carriers we know that there have been cut backs - mostly to customer service and the sales force. I have had my sales rep with one of the major lines changed twice in two months - it is next to impossible to get a rate quote so I found a local forwarder recommended through a business associate, and have been spot quoting through them. Honestly I wish I had done it sooner - their customer service is great and they are eager to win my confidence and business. Don’t get me wrong, not all forwarders are created equal. Some of the “big boys” failed to acknowledge my inquiries at all.

Many 3PL's, seeing the need and opportunity in the market, are adding services to their arsenal in the way of supply chain consulting and more tactical needs of shippers. As they continue to differentiate themselves from the carriers by offering several value added services to their customers that the carriers do not offer, cannot offer, or are too bogged down with their own operations to consider offering; perhaps we will see an end to most service contracts. Lord knows that a little diversification and healthy competition can only improve things all around in this industry.

- Written by Jill Morrison (Isahm Diab contributed to this article)

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