APL’S JACOBS CALLS FOR WIDER , LONG-TERM LOGISTICS CONTRACTS
Shippers and ocean carriers are “confused” when they focus on narrow yearly negotiations on freight rates instead of looking for opportunities to increase overall supply chain efficiencies, said Flemming Jacobs, chief executive of Neptune Orient Lines and of APL Liner.
“At the moment the majority of contracts are simply price agreements, not service contracts. Let’s challenge that,” Jacobs told an industry gathering in Los Angeles.
The head of Neptune Orient Lines – the parent company of APL Liner and APL Logistics, said that there is an opportunity for partnerships enabling shippers and carriers to work together “so that shippers’ future needs are discussed, planned for and met, and innovation and creative thought are developed into new ways of doing things, and to bring new solutions to old problems.”
“But if there is no partnership, no deep knowledge of shippers’ needs and wants, and where discussions are endlessly about price and about where the supply and demand balance is this month or last month or next month, then both shippers and carriers miss out,” Jacobs said.
For example, shippers increasingly demand – and carriers increasingly supply – the IT products that give them the visibility to help them manage their inventory better, he said.
“Broadly, I would say that the relationship should be long term, each should know the other’s business well, it should be mutually beneficial and it should be trusting so that solutions are arrived at that work from a business perspective rather than simply a transportation perspective,” Jacobs commented.
Ocean transportation amounts to around one tenth of the total cost of supply chain management, Jacobs said, adding that ocean transportation is a $80-billion industry as part of a $800-billion supply chain industry.
“Shippers have to be missing out if they’re peering at ocean transportation with a magnifying glass and failing to look at the overall costs of their supply chain,” he said. “Look at it this way – even if shippers take only 20 per cent of the waste out of the supply chain, essentially it means ocean transportation is free.”
Jacobs referred to a recent speech by World Shipping Council president Chris Koch, in which he highlighted the low relative impact of freight costs in international trade. Indirectly, Koch also pointed to the low return carriers receive for capital invested.
Jacobs also cited findings from a study by the Logistics Management Institute, which calculated that around 30 to 40 per cent of supply chain management costs were inefficient.
Two years on since the enactment of the Ocean Shipping Reform Act, Jacobs said that there are opportunities to change the old way of working in ocean shipping.
“I am going to give a wake-up call to those who still get their kicks from yearly, or even more frequent, fights over freight rates with their ocean carriers – those who just cannot wait for the 1st of May to come around and who derive the greatest satisfaction from succeeding in squeezing another $50 from the carriers even though in the process they miss tons of opportunities in the total supply chain,” he said. Referring to the traditional May 1 negotiation rush in transpacific service contracts, Jacobs called for multi-year, customized contracts between shippers and carriers.
“Negotiating individual contracts with multiple carriers allows shippers the ability to mix and match services and routes to their advantage, seeking efficiencies as they go,” he said. “And from the carriers’ point of view, we can negotiate with our shippers to meet their needs and our needs month by month, even week by week and in the trade corridors of our preference, and even by equipment type.” This means that APL can achieve fewer equipment imbalances and it can help the carrier “get away from the practice of gearing capacity for peaks that may or may not come, and instead prepare to provide for the steady flows,” he explained.
Jacobs reported that he has told many shippers that they are “shooting (themselves) in the foot” if their contracts include only a low minimum quantity commitment to APL to be able to shop around during the contract. “You cause our costs to be higher than necessary, and when you do so, you will ultimately have to pay,” he said.
“I admit, shippers are not alone in being confused,” Jacobs added. “Carriers too need to adjust their thinking and work with shippers to realize the potential of OSRA.”
Jacobs questioned the need for annual bids and tenders, and said that organizational structures within shippers’ companies may inhibit cross-functional efficiencies.