3 Reasons Ocean Contracts Fail and How to Overcome Them
The freight management world continues to experience disruption after disruption. From late 2021 through early 2022, world container rates soared beyond imagination. In response to any disruption, new logistics technology offers a solution. All companies want growth and success, but that growth must not sacrifice the facts behind all interactions, whether that’s transport contracts, 3PL contracted services, or beyond. That’s especially true as rates fluctuate. Consider this.
According to the Drewry World Container Index report on April 28, 2022, rates slipped to $7,768 per 40ft container, making the lowest rates in well over a year. While a positive change, there’s another risk on the horizon. Vessel operating common carriers (VOCCs) want to protect the record-setting margins of the last 12 months.
As a result, some carriers have already started to blank sailings to keep spot market rates stable. Still, the overall trend will be likely one of declines and potential inclines as new disruptions arise. Thus, today’s shippers, more often known as beneficial cargo owners (BCOs) in the global maritime space, need a way to ensure their cargo gets from origin to destination without delay, and when such delays occur, they need a clear strategy for maintaining positive contacts and ironclad transport contracts with all carriers.
However, achieving that goal is not a small feat, and the path to success begins with understanding where the shipper and carrier contract may break down and how that information can be useful in building more collaborative ocean freight services partnerships.
1. Misalignment of Ocean Freight Services Forecasting & Equipment Needs
Forecasting is not simply a nice-to-have in the global logistics landscape. It’s an absolute necessity. Poor forecasting amounts to problems managing carrier contract commitments and excess use of spot market demands. Keeping a diversified contract portfolio is a healthy strategy, meaning that even with contracted capacity, the shipper may still see an opportunity to move an item via spot contract.
As a result, even those with established annual transport contracts still need to mind the activity in the spot market, and the spot market in common sense is an indicator of the overall direction of the contract market.
With those facts in mind, a misalignment may arise between expected and tendered shipment volumes. If carriers don’t fill all available capacity on a vessel, they lose money. Similarly, shippers that underestimate demand run the risk of cargo that rolls and costs much more to ship. Regardless, the carrier and shipper both need a clear view of how much shipping volume is expected of each party.
2. Rate Variability Leads to Transactional Partnerships
Take a moment to think about that prior mention of spot rates. Spot rates work in a pinch, but they are generally more expensive and riskier. The carriers can make money on spot rates during a boar market, but during a bear market, their risk is amplified. As the buying shifts more to BCOs, carriers will inevitably want more contract freight. That locks in the rates and ensures a stable future.
This comes with a caveat. If the shipper chooses to forgo a transport contract in favor of shorter-term, spot rate moves, it creates a transactional partnership. In other words, both parties are only vested in that single action. This leaves little to no room for trust, building rapport or creating better, more lucrative opportunities in the future. Ultimately, such reality turns each party into a one-sided, he-said, she-said interaction. That’s not an effective business strategy.
3. Poor Customer Experience & Lacking Visibility
Shippers want a pool of freight contracts available on-demand, but that pool inevitably leads back to the spot versus contract discussion. When the contracts move closer to a transactional interaction, the customer experience declines. BCOs have little opportunity to account for possible changes, and carriers may not necessarily share all updates that affect the container.
For example, John Smith tenders a container of boots for shipment in mid-June 2022 with a major VOCC. The tender is up for grabs among both a contracted group and a spot group. The contracted group accepts the tender, but two days prior to sailing, the schedule is scrapped.
The container rolls, and the carrier notifies the BCO according to the specified contract terms.
That’s the crux of the whole interaction. Those terms might not exist. If not, the BCO doesn’t learn of the roll until it happens, and now, the BCO must try to find a spot carrier at a premium rate simply to maintain the back-to-school inventory. Worse still, the spot carrier may not have terms to notify the BCO of changes in the schedule or variations in ETA. As a result, downstream activities, like planning drays from the Port of Charleston to a DC in Oklahoma City, go out the window. In turn, costs begin to mount across the whole chain. The only solution is to optimize container allocation with more visibility and act on information according to defined, shared transport contract terms.
Use Committed Contracts to Allocate Valuable Freight for Reliability and Cost
Committed contracts in ocean freight shipping are built on a trust-first basis. These two-way commitments eliminate the uncertainty that comes into play when working across multiple freight parties. Remember that many shippers may work with freight forwarders or other 3PLs in the global landscape, and a common platform for setting terms, avoiding risk, and seeing the exceptions as they occur will go a long way toward meaningful cost reductions and better shipper-carrier collaboration.
That’s the value behind NYSHEX—a neutral contract and performance platform that provides instant visibility into all contracts and holds everyone accountable with clear, concise expectations. Request a demo of NYSHEX to learn how your organization can maintain independence and ownership of your global freight contracts, regardless of whether you’re a shipper, ocean carrier, or another party.
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