Innovative Strategies for negotiating the best ocean transportation service contracts.

With a significant shift in the supply demand cycle this year, both ocean carriers and cargo owners will be challenged to embrace this change, and work closely together to obtain service contracts that benefit all parties.

The Ocean Shipping Reform Act (OSRA), passed into law in 1999, gives shippers and ocean carriers much flexibility in ocean contracting. The types of contracts now available are confidential, multi trade lane, and multi-year. Contracts can have the innovative flexibility to give the shipper an ocean service contract that reflects not only price, but any number of service requirements that can be unique to that particular shipper. In today's ocean contracting environment, almost every aspect of the contract can be negotiated. With all this choice, innovation, and flexibility in the contracting process, it is imperative that the relationship between shipper and carrier move away from the adversarial relationship of pre- OSRA contracting, and more towards a collaborative one.

As a shipper, you can manage any preconceived tensions between yourself and the ocean carriers during the ocean contracting process. There are four basic steps that you should follow to obtain the best possible combination of rates and service parameters in an ocean transportation service contract. I like to call these, Getting Your House in Order, the RFP Process, Negotiation Time, and Follow Up.

1. Getting Your House In Order

* Research and understand the carrier market for each trade lane your cargo moves, along with sailing schedules and transit times.
* Determine the number of carriers needed for your ocean transportation program . Always have more than one.
* Do you want a multi year or single year contract?
* Determine your volume patterns. Are they in peaks and valleys or consistent year round?

2. The Request for Proposal (RFP) Process

* Ask for a copy of carrier service contract boilerplate document.
* Send the RFP out to every carrier that covers your trade lanes. With the constant changes in carrier alliances, you might be surprised as to the coverage and interest level from carriers you did not think covered your market.
* Be honest about your volumes and provide accurate forecasts to the carriers. If you have affiliate companies, you should add their volumes to the contract as well.
* Depending on the number of trade lanes you have, be sure to give the carriers ample time to respond to the RFP. For 20 pairs or less, ask for at least 8- 10 business days. For more than 20 port pairs, ask for 12-25 business days.

3. Negotiation Time

* Allow enough time for the negotiation process, especially if you have multiple trade lanes. Most global ocean carriers today have separate Trade Pricing Groups that will determine their price and contract terms for a particular trade lane (i.e. Asia to North America, Europe to Asia ).
* While you may have one central carrier contact during the negotiation process, understand that this contact has to get approval from the various Trade Pricing Groups within their organization. Changes to the carrier boilerplate require approval from each Trade Pricing Group involved, may take extra time to get through the carrier decision making process . Decide how much lead time you think you need from sending out the RFP to contract signature, and add at least 30 days.
* Understand carrier needs. Why does that carrier want to do business with you? Are there any specific trade lanes for which the carrier needs your cargo? If so, this will give you leverage in negotiating a more favorable overall contract for your company. Be willing to offer concessions in some areas.
* Let the carriers know that they are not the only ones participating in this process.
* If you need to get your legal team involved, allow additional time in the negotiation process.
* The lawyer's role in the contracting process is to help provide a framework, facilitate, and ensure that your company's legal requirements are met. Keep in mind that the core of the negotiation process still needs to be between the commercial business parties.
* Once again, get buy in from your logistics team and internal customers. Keep them in the loop during your negotiations with the carriers.
* Understand the terminal operations for carriers with whom you negotiate. Do they own their own terminals? If not, do they have priority berthing?
* Fix as many surcharges as possible.
* If you have shipments that will transit to an inland point, confirm the carriers ability to provide ample throughput, in addition to space on the vessel.
* Get a list from the carriers of their contacts for issue resolution, should a contract be finalized.
* Don't allow all of your contracts to expire on the same date .Arrange that contracts expire in the middle of the month, rather than at the end. Carrier Pricing groups are not as busy at that time, so your contract will receive a more timely response.

4. Follow Up

Keep frequent communication with carrier reps, and hold quarterly meetings with both carrier internal staff to discuss any contract issues. Allow time for all parties to bring up issues or concerns, and ask the carrier if routing or space issues are forthcoming. Meetings during the life of a contract will not only keep you abreast of issues, it will also make issue resolution easier when negotiating the next contract.

Shippers and carriers are just beginning to realize the benefits of OSRA, and now enjoy a wide variety of choices. Traditional skirmishes with carriers over rates and volumes are no longer necessary. With proper planning on the front end, shippers can develop goals, prioritize them, and negotiate them. Take control of the unpredictability of your contract, and allow more focus on service and cost issues. Take advantage of the changing environment!

About Horton Global Strategies

Steve Horton is the head of Horton Global Strategies, where he negotiates ocean service contracts for numerous importers and exporters worldwide. He can be reached at (305) 757-3380 or at steve@hortobalglobal.net.

To learn more about Horton Global Strategies, visit www.hortonglobal.net. If you would like to speak with Horton Global Strategies regarding your service contract challenges, contact us today.

© Horton Global Strategies 2006

Originally published in the Journal of Commerce March 2006