Could This Contract Stop Cargo Rollovers & No-Shows?
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Gavin van Marle reported in the Loadstar about a new contract arrangement between shippers and carriers designed to prevent both cargo shipment delays from carriers and cargo no-shows from shippers.
Experienced shippers know cargo rollovers are a problem in the international shipping industry. Carriers are notoriously unreliable. Blank sailings, overbooking, switching sailing schedules on shipments… There are shippers out there who consider international shipping delays, measured in days and weeks, to be the norm in the industry.
The Loadstar article quoted Bjorn Vang Jensen, vice president of global logistics at Electrolux as saying, “I ship 170,000 teu year and I still get rolled over all the time; I have problems with getting the containers.”
As a freight forwarder, we here at Universal Cargo work hard to make shippers’ cargo delivery as smooth and dependable as possible, knowing we face the challenge of unreliable carrier schedules.
What we didn’t know was just how costly carrier unreliability is for shippers per year.
The article by van Marle says, “shippers globally have to invest $14.7bn in additional inventory costs – storage fees, working capital costs etc – due to uncertainties over shipment delivery times, while another $3.8bn per year is sunk into blank sailings.”
That’s $18.5 billion dollars a year shippers lose due to carrier unreliability!
But it turns out shippers can be unreliable too.
Cargo no-shows from shippers are quite common. Shippers make a booking, find something cheaper, and then just go with that booking without so much as a cancellation. This practice from shippers is costly for carriers and, to read the Loadstar article, might be happening as often as a quarter of the time:
Hapag-Lloyd chief executive Rolf-Habben Jansen told The Loadstar that some 25% of bookings never appear at its ports of loading and, according to NJIT research, some 5m teu a year is classified as downfall, which it calculates costs carriers around $4.4bn a year.
From the numbers, carrier unreliability is more costly to shippers than shipper unreliability is to carriers, but both are problems. So how can these problems be fixed?
Enter the New York Shipping Exchange (NYSHEX) and their new contract arrangement between shippers and carriers. NYSHEX exists to deal with the breakdown in reliability between shippers and carriers.
The Loadstar article quotes NYSHEX chief executive Gordon Downes on how his company’s new service that uses enforceable “forward contracts” works:
“It works in three steps: first, the contract is specific to the departure port, sailing date, destination port, freight rate and number of containers; secondly, it is secure – shippers must pay a bond or pay a deposit to Citibank to secure the contract, and payment is released on fulfilment or a penalty paid on default, while the shipment is tracked to make sure the contract is performed; and thirdly, the contract is exitable, so that shippers with downfalls can leave the contract without losing their deposit by finding a replacement shipper to take over their contract.”
Shippers’ flexibility is certainly limited a bit by this sort of contract. I’m not sure I wholly like the idea of a shipper having to find a replacement shipper if they want out of a contract. However, a contract made should be kept unless made void by both parties or reasonably exited by one party under circumstances previously agreed to by both parties.
Contracts that hold both shippers and carriers responsible for their end of the agreement and cut down on unreliability in the industry certainly sound good.
What do you shippers out there think? Do you like the idea of a contract like this? What if this becomes the new norm in the international shipping industry?
Let us know your thoughts in the comments section below.
I’d love to debate the loss by BCO’s stated in this piece, having represented 12 shippers over the years who move between 11,000 feus and
30,000 feus a year globally.
We have put mutually measurable clauses into contracts since 2006 which define the minimum commitment from both sides on a lane
by lane basis, literally week by week (usually in 8 to 12 week segments) with serious enough penalties applying equally to both sides
if they fail to provide the volume or service. In that time frame we have had one major fall down by a carrier who in peak season could not
cover 75 feus a week in a specific lane and we had to find an alternative and did. There have been some skipped sailings but we get two
to four weeks notice and agree to options and solutions before it happens. Anyone who is surprised by their carrier it is because they don’t
have the right relationships – or they are using the wrong carriers. By the way the carrier who “failed” to live up to the lane commitment paid
the shipper $250. per container for the shortfall (and that is same penalty that shipper would have paid for shortfall on volumes) and at the
next years contract talks, we dropped that carrier.
The biggest issue is that BCO’s are virtually unwilling to commit to anything until you get to top level people in the company with a very detailed
rationale as to why it is necessary. They can come up with ten good reasons not to do it, but if there is an open and honest discussion and
trust in what you are doing, it is doable. As my one clients CEO said to me when we discussed the concept “Whenever we meet I will complain
about costs, but if the freight doesn’t get here on time to sell it, you are fired”. Simple and elegant phrasing and we worked exceptionally well together.
The last issue is that carriers have “educated” a generation of logistics management that rates, mqc’s, chassis, free time etc are all on the table at
all times, signing the contracts is just where you start negotiating a few days later, and that is just plain stupid – but most carrier management is just that,
read their financial reports.
Great to hear from you, Gary! We love your comments.
Your experience is certainly better than the experience described by shippers in articles like the Loadstar one shared. While the research cited on shippers’ losses comes from a trusted source, my second paragraph feels a little hyperbolic in hindsight as you point out this is not every experienced shippers’ experience.
I have to think BCOs have a better time of it than medium to small shippers. While the shipper who commonly experiences rollovers quoted in the article is big enough to be a BCO with 170,000 TEU, the research about money lost by shippers due to carrier unreliability doesn’t appear to be specific to the size of the shippers losing money. It just lumps them all together.
The problem definitely exists in general or there would be no need for a company like the New York Shipping Exchange to exist. But I guess the real viability of the company will be seen with time.
I do like your client’s quote. The arrival of the goods is the absolute most important thing. That’s why professionals like yourself and the team here at UC are successful. We make sure shippers get their imports and exports reliably delivered no matter what challenges the industry faces.
Any of you ever have your laptop “crash”? need to be rebooted? Updates coming in and need to restart? Then envision highways loaded with driver-less trucks using the same technology. I just want notice when and where they are so I can avoid those roads.