One choice international shippers face is whether to sign long-term contracts with ocean carriers or use freight forwarders and pay spot market rates. In the current environment, spot market rates are often lower, but shippers may face a service penalty when capacity tightens. Just as airlines overbook, so do ocean carriers. However, while airlines reward those who give up their spot, ocean carriers don’t. In an overbooking situation, ocean carriers are likely to reward shippers that have long term contracts with better service.
Shippers that decide to move a portion of their freight using long-term agreements will quickly learn that ocean contracts are complex. There are dozens of ocean carriers that cover different lanes, plus a multitude of different surcharges, including charges based on commodity type, and minimum quantity commitments.
Matt Motsick, the CEO at Catapult International, and Alicia Canelos, Director of Managed Services for Ocean Rates, talked to me about the complexity surrounding surcharges. Catapult has IT solutions and special expertise in ocean freight audit.
Matt and Alicia told me that ocean contracts are notoriously complex, with each carrier contract being very different in format and content. On the content side, each carrier has different surcharges and applies them in different ways. There are 367 different surcharges worldwide according to Catapult, and a large percentage of them are port charges. There are many different types of port charges, and every port charges a different amount for their services. For example, some ports have theft and recovery charges. Also, the vocabulary surrounding surcharges is not standard — what shippers are used to calling “fuel surcharges” for over-the-road transportation, ocean carriers call a “bunker contribution charge” or a “bunker adjustment factor.” Further, the surcharges are listed in different places in the contract. If you’re a cynic, you might say a carrier’s goal is to confuse customers.
There is a modicum of good news. The Federal Maritime Commission requires ocean carriers serving the US to publish all tariffs and surcharges. In theory, these are publicly available online. However, to find the web page, discover the surcharges, and apply them to the contract is a time-consuming task at best.
Shippers frequently seek to negotiate long-term contracts with fixed surcharges so they don’t have to constantly adjust rates in their transportation management system (TMS). Often the goal is to include as much as possible in the fixed rates, sometimes including fuel surcharges. But buyer beware! For a carrier to sign this, they have to charge a premium to cover their risk. The more surcharges included, and the more those different surcharges are apt to change in price, the higher the risk premium will be.
There is also complexity around commodity pricing. I talked to Ivan Latanision, Senior Vice President of Product Management at INTTRA about this aspect of ocean contacting. INTTRA offers a multi-carrier e-commerce platform that facilitates the communication between ocean carriers, freight forwarders, and shippers. Ivan told me there are historical reasons for commodity pricing. Before ocean containers were introduced, port workers had to break down bulk loads. Th difficulty in performing this task varied by commodity type, so it was reasonable for longshoremen to be paid differently based on what was unloaded. But while the task of breaking bulk has largely disappeared, these commodity-specific royalties remain.
According to Kim Le, the Director of CargoSmart North America, the commodity naming conventions are not standard. One carrier might call a commodity in question a “car,” a different carrier might call it an “automobile,” and a third carrier might call it a “vehicle.” This can make apple-to-apple comparisons difficult.
But Kim also says the lack of standardized naming can work to a shipper’s advantage. It might be that a commodity could be fairly labeled in one of two ways. Naming conventions are not always black and white. This is particularly true in certain commodity classes like furniture. In this case, the shipper can choose the commodity with a lower fee associated with it. Carriers, because of their excess capacity, are more willing to be flexible. Shippers who have visibility to the rates of associated similar commodities in their contracts have greater flexibility to book cargo against the lowest rates available.
Kim’s company, CargoSmart, offers an e-commerce platform focused on ocean transportation. CargoSmart provides solutions for shippers and logistics service providers to manage their ocean carrier contracts online. The solutions automate the complex process of preparing for negotiations, making optimized bookings against contracted rates and routes, and reviewing carrier performance throughout the year.
Finally, there is the issue of minimum quantity commitments. If a shipper commits to move a certain quantity of goods on a lane with a particular carrier, they need to track that and meet their obligations. If they don’t, they face penalties. If a shipper has committed to different volumes for different carriers on a lane, the tracking of these “allocations” becomes more difficult. A good transportation management system automates this allocation tracking process.
Ocean contract management is complex. But by using a robust TMS, domain experts, and other ocean-specific solutions, shippers can make more optimal decisions.