Supply Chain Council of European Union | Scceu.org
Transportation

How to prevent cargo rolling when contracts lack teeth

A shipper books cargo on an ocean liner, but it doesn’t make it on the sailing. The carrier rolled it, as it was overbooked, the case for about 30% of cargo, according to Maersk.

Even with a contract, cargo rolling is an issue that plagues the industry. There are solutions, however they involve time consuming contract negotiations, accurate forecasting, and penalties or higher costs to guarantee shipment.

Based on supply and demand, cargo rolling and no-show cargo go hand-in-hand. Just like airlines, carriers usually don’t get paid for empty space, so they book more cargo than they can carry, rolling what’s less valuable to them.

Fixed contracts and the spot market go hand-in-hand as well. Fixed contracts are designed to provide stable shipping rates and reserved cargo space for the shippers. In return, carriers get a forecasted volume and steady income. But long-term contracts aren’t protecting shippers as anticipated.

“It’s enforceable, but to the degree of the contract,” Gary Ferrulli, chief executive officer of Global Logistics & Transport Consulting told Supply Chain Dive. Rolling depends on the spot market rate levels as well as relationships.


“… you’re going to roll Walmart’s cargo? Probably not.”

Gary Ferrulli

Chief executive officer of Global Logistics & Transport Consulting


If a ship is overbooked and customers include Walmart and a retailer in bankruptcy, “you’re going to roll Walmart’s cargo? Probably not,” said Ferrulli. When he was a vice president for North America, Sea-Land Service, he made decisions each week on which cargo to roll. Usually the decision was based on the customer and relationship value. “In today’s world, it’s a little more complex because of contracts,” he said, but relationship value still matters.

Without guarantees or detailed contracts with teeth, shippers may continue experiencing difficulty getting the cargo space they want, or they’ll pay the spot market price because they failed to negotiate an air-tight contract for the needed space.

Detailed fixed contracts are one way to favorably tilt shipping stability. The other is paying higher rates for guarantees. Newer instant quotes and automated booking programs may start providing helpful guarantees as well, for spot markets.

Change your contracts

When shippers sign a carrier contract, they’re usually generic, said Ferrulli. “They’ll say ‘we’re going to ship with you about 1,000 TEU in this market,'” he said. In the beginning of the year, there’s not much of a capacity issue. But as the year continues, reaching peak shipping times, the shipper may exceed their TEU quote, as they only committed a percentage of their anticipated freight. The carrier then says “we fulfilled our requirement, you fulfilled yours,” and the shipper needs to book on the spot market, he said.

In another scenario, the shipper may contract for 1,000 TEUs, shipping 400 early in the year. Later on they may want to ship another 400 at once, but the carrier claims the 1,000 TEUs must be divided into equal weekly increments, about 20 TEUs per week. Without a more defined contract, the carrier may charge spot rates or roll any of the shipper’s cargo over 20 TEU.

Shippers and carriers are at fault for the rolling problem​. Shippers often don’t sign contracts reflecting their actual cargo needs since they’re hedging their bets, said Ferrulli. Anything above that stated number gives the carrier more leverage outside the contract.

For shippers who know they’ll have seasonal differences in shipping amounts, Ferrulli recommends writing contracts stipulating how many TEUs will be shipped each week and in each lane. Not all carriers accept detailed contract terms like this, and Ferrulli primarily uses four carriers who agreed to it after protracted negotiation. The shippers, though, have to accept that any TEUs outside of that specific contract are subject to spot market rates.

In the past, carriers were often forgiving if a shipper didn’t use their allocated TEU, and carriers extended the unallocated freight to the next year’s contract or wrote a new one. They might also have extended the discounted rates to additional cargo over the contracted amount. “There was selective discipline relative to enforcement of contracts,” he said. “Today it’s become much more disciplined and stringent on meeting the conditions, going both ways.”

Money-back guarantees

The cargo rolling issue started attracting technology solutionsa few years ago.

Startup 300cubits developed a cryptocurrency and online booking system to ensure carriers and shippers fulfilled their contracts. While successful in decreasing cargo rolling and no shows, the startup suspended booking deposit operations on Oct. 1, partly after realizing there are bigger booking pain points than rolling, which is what its system was designed to solve.

Instead, “shippers complain that they often could not get their bookings confirmed during peak season despite their booking volume are still within contract commitment,” said 300cubits founder Johnson Leung in an announcement.

In 2015, start-up NYSHEX, started offering contracts for individual shipments, with penalties if the shipper or carrier canceled. The carrier rolling rate for its NYSHEX Forward service is 2.6%.

In mid-2019, the company began offering NYSHEX Forward Select for multiple port pairs and a monthly volume commitment. Since kicking off that service, with 15,000 TEUs contracted, it announced it has not had any defaults. Booking ahead with guarantees is risky, as NYSHEX penalties are 35-40% of the contracted rate, and sometimes delayed cargo is outside of the defaulting company’s control.


Penalties are one way to incentivize commitments, another is offering a money-back guarantee. But that will cost you.


Penalties are one way to incentivize commitments, another is offering a money-back guarantee. But that will cost you. “You’ll pay more than the contract rate,” said Ferrulli. “Or the 3PL guys will get you a guaranteed space three months from now, but you’ll pay up front. You pay for it one way or another.”

A third model is called “take or pay,” he said. With that less common model, the carrier guarantees a certain number of loads per week and gets paid for that number regardless of whether the shipper delivers that many loads.

Ferrulli estimates that 1-2% of shippers overall have contracts with guarantees, and estimates that 5-7% of larger shippers use some type of guaranteed space.

Newer spot market products are offering guarantees.

Maersk recently introduced Maersk Spot, where customers are charged a fee for no-shows and the carrier compensates them for rolled cargo.

Freight forwarder Kuehne + Nagel is offering money-back guarantees through its online quoting and booking platform, for delays due to rolled cargo. But not all online booking and instant quote systems, offer it. “You get a price and it may not come with anything else such as guaranteed shipments,” Nerijus Poskus, vice president and global head of ocean freight at Flexport told Supply Chain Dive.

Some carriers are creating premium ocean freight services, where shippers pay more, the cargo is guaranteed to leave and arrive on time and is discharged first, Poskus said. “If they fail to deliver, they give the money back.” This is good for high-value goods, where shippers are willing to pay more to reduce the risk. “If it’s a Christmas tree with a low value, it doesn’t matter if the shipment is delayed,” he said, as the shipper may just want a cheaper price.

Online quoting and booking can help with the rolling problem, but it doesn’t fix the problem if they’re just giving prices and no guarantee. “If you’re allowed to cancel and it doesn’t cost anything, shipping lines can’t plan well,” Poskus said. Where online booking can help solve the problem is if a shipper cancels a week or two before sailing, and the carrier sees the cancellation and can replace that with a new booking. “That’s a better way to solve (rolling) than online quoting,” he said.

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