Yet interviews with shippers suggest that ocean carrier contracting based on specialized knowledge of transportation and relationships with carriers is slowly winning out over a generalized procurement-driven mindset in which price is the overriding consideration.
“Major companies are realizing that their logistics teams bring in-depth transportation knowledge and long-term ocean carrier relationships, across a multitude of cultures, to the negotiating table. Those relationships can have an almost magical effect on the final freight dollar amount and resultant service level,” said Chas Deller, who retired in September as head of global ocean freight procurement for UTi Worldwide and is now a partner in 10XOCEANSOLUTIONS Inc. which advises shippers in contract negotiations.
The stakes in finding the right mix of price and service are not small. Deller estimated that Asia-U.S. contracts with beneficial cargo owners or BCOs in total are valued at between $11-13 billion annually for the carriers. The estimate is based on a roughly 70-30 split between West Coast and East Coast arrivals of all Asia-origin containers in 2014, according to PIERS, and base per-FEU rates of between $1,700-2,150 to the West Coast, $3,200-3,600 for West Coast IPI to the Midwest, $2,900-$3,500 to the East Coast and $4,000-4,600 for East Coast IPI to the Midwest. The calculation assumes 60 percent of the 13.8 million TEUs in total Asia-to-U.S. trade last year, or 8.2 million TEUs, move under direct BCO- carrier contracts. Individually BCOs can spend tens of millions of dollars per year on Asia-origin ocean transportation per year.
For many large shippers balancing a procurement and logistics approach is still a juggling act. Companies are constantly weighing the need for competitive freight rates relative to their industry peers, or even goals to achieve lower rates to cut costs, with the more nuanced and multi-dimensional needs to build and maintain relationships with carriers, coordinate product lead times with internal business units and with finance teams to minimize inventory carrying costs to the extent that is a goal.
A purely procurement-based approach – still used by only few large BCOs -- holds that the lowest-priced carriers get the business absent almost any other consideration such as transit time or service quality. The resulting bids from carriers in price-driven tenders would include frequent use of transshipment ports where end-to-end transit times are longer, with resulting longer product lead times and higher inventory carrying costs.
But companies have evolved enough - thanks in part to weathering tough times during the recession - to know that a pure procurement approach is no way to buy transportation. Whether they like it or not, companies sourcing in Asia are dependent on container lines to run their business and a relationship with elements of a partnership are preferable to ones based purely on price- despite the intense price competition among carriers. Also, despite how commoditized container shipping is today, vessel schedule reliability and transit times can be key considerations as logistics buyers work internally with business units, finance and the C-suite. In other words, the more logistics functions are integrated into sourcing, marketing, finance and other business functions – as they increasingly are – the less logistics will be seen purely from a cost standpoint.
Partly that is because relationships are valued on both sides, and they can yield results at key times. “No ocean carrier wants to lose a long term BCO relationship that they have spent years cultivating and vice versa. Big BCO's have big egos and have access to executive level decision makers at ocean carriers - critically needed when times are tough on space,” Deller said.
This dynamic means that in most large companies today it’s the logistics function that manages the procurement of international transportation, not a central procurement function that by definition will have less knowledge of transportation. According to one estimate by a logistics director, today 90 percent of large companies manage transportation procurement through their logistics departments.
According to one large BCO, “in most large companies that I know of, including my last and my current, the transportation procurement responsibility is within the logistics organization. Some companies have the logistics function under procurement but most do not.”
According to another BCO: “Generally speaking companies at the forefront of thinking have taken down the barriers between procurement and logistics. Laggards are the organizations that continue to have the functions siloed. Many procurement organizations realize the unique skills and requirements needed to procure freight and have abdicated the procurement responsibility to the logistics people as long as corporate procurement standards and practices are adhered to.”
In general procurement seems to be moving in the direction of working more closely with business units, such as logistics. In a recent survey of procurement executives, 83 percent said creating partnerships with other business units should be a priority, but it’s still not viewed by business units as a full partner.
