In a recent webinar with my colleague Philip Damas, Director and Head of Supply Chain Advisors at Drewry, we examined the challenges facing BCOs as they prepare to conduct ocean freight bids in 2021. Volatility, tight capacity, and the prevailing pricing power of carriers – these are the obstacles that aren’t easily overcome with basic procurement practices.
An uphill contracting battle
In 2020, most shippers awarded contracts to three-to-five carriers, less than the four-to-seven carriers many contracted within 2019. They also most likely awarded a lower percentage of cargo to direct contracts, somewhere between 65% and 80%, and more volume went to the spot market with lower minimum quantity commitments (MQC).
Early BCO bid trends for 2021 show shippers moving towards a shortened bid cycle to ensure capacity while exploring new procurement options from direct carrier, NVOCC, and shipper associations. Some shippers are also centralizing their procurement efforts and tightening operations to reduce indirect costs above and beyond the rates they’re paying. The result is continuing to award to a smaller, more limited dedicated carrier base with higher MQC commitments to ensure better budget alignment and enhance forecast stability. Carriers, buoyed by the high spot market, are being more selective, pushing back on shippers, increasingly factoring in if BCOs will use ancillary services to determine at what MQC level they will contract.
Best ocean procurement practices for the new year
Preparation is the Best Prevention
Which bid optimization tools are right for you? If you’re still running your bid in Excel, it’s time to look for an SaaS procurement tool. Such tools allow you to have a clear dialogue on how well your network and the carriers are aligned. Carriers can also review your network to create customized lane packages or incentives for the freight that most interests them. Without an online procurement tool, you can’t execute a robust bid that considers cost and service tradeoffs to generate different “what-if” awarding scenarios with the necessary speed and fidelity. If you are only using Excel-based tools, you’re leaving money on the table. These tools are even being adopted successfully by small (i.e., 500 FEU) shippers.
Take a flexible approach to your bids and evaluate the benefits of securing multiple service and routing types. Whether assessing costs across different ports, alternative services, or the cost of shipper-controlled versus carrier-controlled doors, explore tier rates that will help you get extra capacity below spot market rates when needed. Let the tools help you determine the optimal mix of price and service.
Structure the bid and build your RFP while keeping your full cost at the forefront. There are many factors outside of line haul and bunker. Free time is a significant component, and carrier submission rates differ by lane. The idea is to build these variables into your cost model to determine the true cost for each carrier. We continue to see shippers standardizing factors like free time across carriers by hard-coding values in the RFP. This approach is similar to how you would present a bunker fuel table to enforce one set of rules for all carriers to bid on.
Integrated Metrics Create Alignment
More shippers are integrating third party data on carrier performance into their RFPs to help drive decisions and awards. Using data from vendors such as Drewry, you can incorporate actual average transit time, schedule reliability, vessel type, and use these and other factors to help drive decisions and awards, especially when new carriers are involved. This allows you to move your bid process away from anecdotal evidence to data-driven awarding.
Effectively Securing Capacity
In 2020, cargo acceptance rates were on the low-side. Many shippers saw rates in the mid-60% range. “What about MQCs?” you may ask. “Are we actually getting the space we contracted?” Well, there are ways to improve your acceptance rate. You could work on becoming a preferred shipper, which will help ensure you are given space. Better yet, you can progress towards achieving “perfect shipper” status by implementing best practices such as providing better communication – e.g., a 12-week forecast – and maintaining stable weekly run rates going into peak season.
The challenges facing BCOs this year are not going away anytime soon. With ongoing capacity issues, ocean procurement will likely remain a challenge. Consider services like the eSourcing Ocean Freight Solution+™ offered by Drewry and Chainalytics that combine procurement best practices with market insights, providing you with a transparent view of the market and help ensure you arrive at the optimal mix of service and cost.
John Westwood is a Sr. Manager in Chainalytics’ Transportation consulting practice. John brings over two decades of transportation operations and procurement experience to strategic sourcing projects and implementing various domestic and global transportation modes, including ocean, air, truckload, and small parcel.
