Transportation: Negotiating Contracts Without Getting Soaked

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To stay competitive, companies must continue to optimize all modes of transportation. Here is a look at one particularly complex mode—ocean.

This year is shaping up to be one of the most difficult global shipping environments in some time. U.S. importers will need to draw on their management know-how, creativity, and technological tools to optimize ocean transportation.

"The global and U.S. logistics transportation infrastructure is stressed, and there are no signals that significant relief will come in 2005. In fact, indicators show it will get worse before it gets better," predicts Greg Aimi, research director, AMR Research, Boston. "The World Trade Organization expects container shipping to increase by another 60 percent in the next four years."

Bottlenecks in infrastructure and record import volumes are expected to exacerbate already troublesome port congestion. Ocean carriers—handling 95 percent of U.S. imports by volume — are operating at the highest capacities in years, with yields that are the best in a decade, according to John Urban, president, GT Nexus, a global logistics and supply chain software provider based in Alameda, Calif.

"While that's good news for carriers, it means significant challenges for shippers," Urban says. "They will have to deal with significant rate increases in the 2005 bid season and manage their ocean spend much more effectively to ensure they get the service levels and capacity commitments they paid for."

Ocean transportation contracts are typically negotiated during the early months of the year, ahead of the peak shipping season, Urban notes.

He outlines five steps that importers can take to optimize secure service agreements that deliver adequate capacity at reasonable cost:

1. Define your needs as specifically as possible. Structure your ocean transportation bid with clear and consistent information, standardized across your network of carriers. Use last year's business profile and performance statistics as the baseline to build this year's plan.

The more definitive you can be about your needs for capacity—by region, by lane, by transit time, by equipment, and by other service factors—the easier it will be for the carrier to respond in kind, and for you to evaluate their proposals equally.

2. Know your supply chain's charac­ter­istics. Understand where you can be flexible, and where you need absolute service. Products that are ordered regularly to replenish standing inventories, for example, can be managed with more flexible service, whereas time-sensitive or economically perishable products must have absolute service. Design your plan to address these varying service and capacity needs.

3. Understand the difference between price and cost. A typical ocean transportation move can have several different "legs" or service elements. The lowest price or transportation rate for an ocean move may not always give you the lowest overall cost, particularly if the low-price service is less reliable, driving up other costs such as inventory buffers, penalties, fees, and expedited shipments.

4. Automate and standardize as much as possible. Take advantage of online systems with good analytical tools that allow you to optimize plans, evaluate proposals faster, and quantify cost and service trade-offs. Some systems are available "on demand" and offer strategic insight that may lead to more cost-effective and service-specific agreements.

5. Continually monitor, measure, and adjust. The hard work done to secure effective service contracts can be lost if shippers do not have processes in place to manage those contracts and measure partner and carrier performance. Regularly measure plans against performance to ensure commitments to carriers are being met, and carriers are providing the promised capacity and service levels. A disconnect on either end can disrupt your supply chain and increase costs.

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