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Rates Over-Rated

Category: Imports

Carriers say shippers should value service, consider commitment

by Bill Armbruster, blog anchor

Shippers should consider a lot more than just rates when they are choosing their ocean carriers, say carrier executives in reacting to the results of our December survey on what matters most to shippers when they shop for a carrier.

“The focus of the customer should be on service and reliability,” says Frank J. Baragona, president of CMA CGM (America).

Baragona and the other executives I interviewed for their responses to the survey all agreed that rates were an important consideration, but that they should be just one factor in shippers’ decision-making processes.

Mike Radak of Hanjin Shipping Co. says the most important consideration for shippers in deciding their ocean-carrier strategy should be to consider the commitment that both parties can bring to each other’s mutual benefit. “That commitment includes service, space and, yes, rates as well,” says Radak, Hanjin’s senior vice president for sales/marketing and operations.

Going forward, he adds, it would be in the best interest of all parties to concentrate on a new means of collaboration, including, but not limited to:

  • Carrier commercial practices, including those involving booking cancellations and rolling cargo;
  • Shipper commercial practices, including forecasting improvement and minimum quantity estimates; and
  • Export capacity forecasting.

Radak says both sides should also look at other ways to improve the shipper-carrier relationship, including collaboration on major supply chain changes.

Unfortunately, he notes, “when rates become the primary driver in the shipper-carrier relationship, service and space allocations fall by the wayside.”

Howard Finkel, executive vice president of Cosco Container Lines Americas, expresses similar sentiments: “It’s not a surprise that rates are number one, but to me that’s a little shortsighted.”

Finkel says shippers can help themselves by providing carriers with as much information as possible about their anticipated cargo volumes when they have contracts committing them for certain minimum volumes. For example, he says, shippers should tell carriers which cargoes move year-round, and which move seasonally. That will help carriers decide which size vessels to use and where equipment needs to be.

Burned by a low-cost option

Lamont Petersen, Hyundai Merchant Marine’s vice president for the Transpacific westbound trade, points out that price is always a key consideration in any negotiated transaction, whether you are buying a new automobile or transportation services.

On the other hand, she says in reference to the results of our survey, “I’m not surprised to see that almost 60% of your respondents placed significant importance on service reliability, space and equipment availability and customer service. Most of us have probably been burned a time or two by going with a low-cost option which influenced future purchasing decisions. If this were not true, Yugo automobiles would still be around,” she says, referring to the cheap model that was an overnight sensation when it was introduced in 1985 but quickly faded when people discovered that it was an awful car.

Rich Hiller, executive vice president and chief operating officer for trade management with MOL (America) Inc., says service reliability, strong on-time performance, customer service, competitive transit times, and competitive pricing are all important requirements for shippers when they select an ocean carrier.

“We believe that most shippers are willing to pay a higher price if they can get a reliable return on their investment,” he says.

A spokesman for NOL said that while shippers are certainly cost-conscious, they also place a great deal of importance on service reliability: “There isn’t leeway for shipment delays. That’s why they do business with carriers they can depend on to be on time.”

But for some shippers, it’s a simpler choice, one carrier executive acknowledges. “Right now there are so many providers in the market: there are providers who offer the lowest rates, and there are providers who offer high reliability. You partner with whichever carrier most meets your needs,” remarks the executive, who asked not to be identified.

Measure of reliability

Baragona of CMA CGM says that when shippers choose a carrier service, they should consider their preferred day-of-week departure to the target destination with the best transit time. Then shippers should determine the carrier’s reliability by calculating the percentage of time that its vessels meet the scheduled arrival date.

The CMA CGM chief says another major consideration is the ability of a carrier’s back office operation to provide timely and cost-effective solutions to any disruption in their supply chains that would affect the cargo’s delivery to the customer. “None of this would be possible without a professional relationship between both organizations,” he adds.

I think that all of these executives make good points by stressing the importance of service. Of course, when space is very tight, desperate shippers may go with any carrier that will give them a booking. But in the longer term, smart shippers will look beyond the rate. As Hyundai’s Petersen puts it, “Value is not defined just by price.”

About Bill Armbruster

Bill Armbruster, the anchor for the Datamyne Blog has covered shipping and trade for 30 years as a reporter and editor with The Journal of Commerce and Shipping Digest. “I’ll be blogging on headline news and current issues in oceangoing commerce, trying to shed some light on the backstories and, wherever I can, supply some sound advice for shippers.” Write Bill care of blog@datamyne.com.

Date posted: January 31, 2011

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