Shippers urged to rethink container allocation strategies

By January 21, 2021 No Comments
Shippers, container, allocation

Shippers need to focus on better capacity forecasting, sharing of benefits with carriers, and concentrating volume with fewer partners to navigate what will be a tricky container allocation environment in 2021.

Container allocations refer to the process of divvying up a shipper’s volume among various vessel operators and non-vessel operating common carriers (NVOs) on an annual and more short-term basis. Allocations are built on a mixture of annual contracts — based on projected volume associated with a negotiated rate, also known as minimum quantity commitments (MQCs), and shorter term, ad hoc needs — so they essentially act as ongoing projections for what volume a shipper will send to a specific carrier on a given week.

In a sense, allocation strategy allows a shipper to avoid having the space allocated to them weekly reduced to a non-scientific MQC-divided-by-52-weeks equation.

In an ideal environment, shippers would convey their ongoing volume based on rolling projections, and container lines and NVOs would be able to meet those varying allocations based on the advanced notice. However, the second half of 2020 threw many of those allocation projections out the window. One retailer, who did not want to be identified, told it has traditionally forecast its allocation needs to container lines 10 weeks out on a rolling basis.

“That didn’t work last year,” the retailer said. “They continue to stick to MQC-divided-by-52 set in early 2020, prior to the pandemic, and in some cases they want a peak season surcharge to even give us space according to MQC divided by 52. This year our forecasts are going to be better, since we have orders out there further than normal due to increased demand in our planning scenarios.”

Allocations go out the window

Last year shone a light on the fact that a shipper’s ability to forecast its capacity needs more accurately and further into the future is only one part of an allocation strategy.

“For decades, shippers and freight forwarders have been squeezing carriers and went shopping, exchanging their partners whenever offered rates did not match their expectations,” said Jonas Krumland, CEO of logistics software provider Logward, a spinoff of the German forwarder Leschaco. “The same players who’ve demonstrated to be short-term opportunists are now surprised at being kicked off carriers’ loading lists when, for once, the leverage shifted to the other side.”

Krumland said the widespread anecdotes of shippers struggling with blank sailings, tight capacity, premiums required to get loaded, and cargo rolls belie the reality that some cargo owners managed the turmoil of the last year better than others.

“What too few people talk about is that numerous companies managed the 2020 chaos very well, backed by solid partners,” Krumland said. “No matter which metrics you look at — total true lead times, rolling ratio, booking confirmation speed and reliability — those of our customers who invested in profound allocation management suffered roughly 70 percent fewer rollings than the opportunists.”

Shippers need to think about what Krumland framed as a “certain amount of open capacity in the market” that container lines can allocate to shippers in any way they see fit.

“Guess what? Carriers don’t randomly create their vessel load plans,” he said. “Instead of just rolling the dice, carriers rationally prioritize customers by profitability and strategic importance.”

“Look at your carrier relationships as long-term partnerships in which each partner wants to help and support the other.”

Forecast by port pairs and strings

An example of mutual allocation management, according to Krumland, should include a yearly allocation commitment of volumes broken down by port pairs and assigned to service strings. It should include transparency into sailing schedules and regular reviews of performance on both sides. That should include rolling and shared forecasts on a weekly basis, at least eight weeks out.

“There will be blank sailings and capacity shortages in 2021 as well,” he said. “So, you want to know exactly in which week you may face bottlenecks. Knowing which of your purchase orders are affected by a discovered bottleneck enables you to prioritize your shipments. Good allocation management will not ensure that 100 percent of your shipments proceed as planned. It ensures that you are in control to find the right compromises whenever it gets chaotic.”

The challenge, according to Chris Kirchner, CEO of logistics software provider Slync, is that data resides in systems within multiple parties — the shipper, the logistics services provider, and the carrier — and in both structured and unstructured formats.

“This makes it very difficult to get a[n] accurate picture of what is going on, and what needs to be done at various points in the allocation process,” Kirchner said. “The operational challenge is that allocation is a fluid situation taking place around the world on a continuous basis. It relies on carrier confirmations that can fluctuate, especially in today’s environment, and requires a lot of human attention in most operations.”

The traditional process has been to flow contract rate data from spreadsheets and emails into widely used booking systems that only represent a sliver of the process. Kirchner’s contention is that the mismatch, for both forwarders and shippers, creates a system that’s set up to fail.

Traffic light approach

Krumland advocated for a “traffic light” approach to measure shippers’ commitment on an annual basis and at the weekly forecast level to determine which port pairs, in which time frame, both partners are either over- or underperforming. “This shows shippers quickly where they may find open capacity according to their agreements,” he said.

Another suggestion from Krumland: Shippers that previously relied only on direct contracts with carriers but are considering adding an NVO as a safety valve should openly communicate such plans with their container line partners.

“If shippers feel the necessity to add NVOs, it should be openly communicated or even discussed with their awarded carriers,” he said. “The worst scenario would be to place volumes with an NVO or forwarder behind the carriers’ backs. It may happen that a forwarder finds capacity on vessels for which the operating carriers themselves turned shippers down.”

Krumland also urged shippers to consider spreading their volume commitments around to hedge their bets, consolidating volume with fewer carriers to increase leverage with each one.

“No large and diverse shipper can rely on only one partner, but spreading volumes should be limited,” he said, suggesting shippers have a maximum of five core carriers on a global basis, and to spread those volumes out by region, “so that carriers may still plan their service usage better.”

Read full article at JOCJOC

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