Supply chain problems, no. 3: How to win at contracting season
Co-authored by Brittany Brown & Suhas Sreedhar
Welcome to Supply Chain Problems, the series where we look at some of the messiest issues in supply chain today.
Issue #3 – How to win at contracting season
‘Tis the season, and for supply chain workers, it’s certainly not the most wonderful time of the year. No, we’re not talking about the holidays. We’re talking about what comes after—the notorious period that everyone in supply chain dreads—contracting season.
For those unfamiliar, contracting season is the time of year when every company that ships goods negotiates contracts with its logistics and transportation providers. To say these negotiations are intense is actually kind of an understatement, and the terms that wind up in these transportation contracts aren’t just dizzyingly complex, they’re the exasperated result of hundreds of hours of stress, scrutiny, analysis, over-analysis, argument, and bargaining. In short, contracting season is brutal. And everyone knows it.
But like many rituals, this supply chain tradition goes on, year after year, in this arduous manner because, well, that’s how it’s always been done. But does it have to be this way? Nearly two whole decades into the 21st century, can’t we do better? Can’t we evolve?
We think so. Therefore, here’s your personal guide to winning at contracting season. You can thank us later.
You can’t really win a game if you don’t know its rules. In our case, the endgame is a giant transportation contract. So, if you want to master contracting season, then first, you need to understand the contract itself.
But even before that, let’s get to know the players:
The Shipper, a.k.a. the Beneficial Cargo Owner (BCO). Likely a retailer or manufacturer, a shipper has many containers of goods/products/materials coming from all over the world. As most shippers don’t specialize in the physical transport of these goods, they outsource this function to an LSP.
The Logistics Service Provider (LSP). The LSP owns or leases the space and assets needed to transport a wide variety of goods/products/materials over many modes, as efficiently as possible. LSPs are either third-party logistics providers (3PLs) or transportation carriers (like ocean shipping lines). One example of an LSP asset is the space on ocean vessels, which is sold in units of containers to shippers.
Now, onto the contract itself. The contract is first requested by the shipper and acts as not only a legal document, but also as a guide for how transportation should be planned; it’s a financial basis for shipments and a general snapshot of the supply chain. Let’s look inside of one. A contract contains:
- A boilerplate, which is the legal terms and agreements that apply to the entire contract.
- At least one trade lane appendix, which is comprised of commodity sections and accessorial tables. The commodity section has many lanes. Lanes are individual combinations (specific to the commodity) of origin/destination pairings, equipment type, and rate. Accessorial tables are lists of the surcharges and fees applicable to the entire trade lane appendix. Examples include DOC (Documentation), BAF (Bunker), THC (Terminal Handling Charge), and ISF (Importer Security Filing).
Consider this: As complicated and detailed as these contracts are, with potentially hundreds of lanes, the average shipper is likely to have 5-15 different ocean carrier contracts. And ocean carriers, or any given LSP, can have hundreds of shippers as customers.
Tip #1: Battle complexity by normalizing data. Yes, that multiplication factor means the sheer volume and complexity of these contracts is horribly daunting. But one basic way to tame the complexity is to normalize your data.
A major annoyance of contracting season is that there is so much information in scattered formats and locations, coming from different parties. Converting all that data into a unified format so that it can be analyzed is the essence of normalization, and it’s pretty much essential for getting a handle on things. Ensuring the data is 'speaking the same language,' regardless of carrier, and cleaned of errors can help you make sense of all the choices available to you.
Speaking of choices, let’s move onto the main game—the season.
Contracting season is a journey with many stages. Here are the major ones:
- Define & scope stage: In this stage, shippers compile information about their supply chain blueprint; they consider origins, destinations, commodities, volumes, and vendors. They use both historical information as well as projected estimates.
- Tip #2: Avoid analysis paralysis. Contracting season and spreadsheets have been in a long-standing love affair. Spreadsheets aren’t exactly user-friendly. They present an overwhelming amount of information that’s hard to act on. While spreadsheets, unfortunately, won’t ever go away, you can reduce your dependency on them through technology that automates carrier contracting processes and presents only the most relevant information you need to make decisions. These technologies have the added benefit of reducing human error through better algorithms for scenario-planning.
- Strategy stage: With a better-defined landscape, it’s time to start thinking about how to best set up your supply chain in the form of transportation contracts. The right strategy will consider sensitivity to cost, the importance of service, and the need for flexibility and alternative options.
- Tip #3: Balance service level vs cost early on. For most businesses, the business priority is not strictly cost or service, it's something in the middle. Define that mid-range clearly and early in contracting season, and negotiate accordingly.
- Bid stage: With a strategy determined, shippers now request contracts, specifying three components: a boilerplate, a set of timelines, and expectations regarding the contract request, and a database of rates for each shipping lane. Once contracts are requested, multiple stages of negotiations will ensue before the shipper awards its business to an LSP or LSPs.
- Tip #4: Have a backup plan. Even with a defined cost-to-service ratio, you can manage the volatility of the supply chain better if you incorporate a certain level of flexibility into your decisions. Select backup carriers, alternative routes, ports, and container sizes—and do this seriously, with as much careful attention as you put into your primary choices. Having alternative options minimizes risk while still taking advantage your size to obtain the most competitive rates.
- Manage phase: This happens after the contract is signed and set. It’s the post-season, and it can be tricky. Unfortunately, many shippers don't have strategic focus on this stage and miss opportunities to continue to optimize and tweak their contracts. Stay on top of your operations, your benchmarking, and performance data so that you can adjust accordingly.
Contracting season is a most dangerous game. It’s open season on shippers and LSPs, who all engage in a battle royale for profitability. Large volumes, global complexity, and high stakes make contracting season a dreadful time of the year. But it doesn’t have to be this way.
Two decades into the 21st century, we have machines that can help us. We have data, analytics, and predictive AI, and networked cloud communication.
Being bombarded with too much information from all sides? There are platforms that normalize your interactions with shippers and LSPs and carriers, so that all the data is in one place and actually useful.
Want to optimize service levels vs cost? You don’t have to bust out a spreadsheet and manually perform regression analyses. There are intelligent applications that will optimize for you, in real-time, taking into account more variables than you can imagine on your own.
Worried about contingencies and scenarios? Intelligent what-if analyses are part and parcel with most intelligent applications these days.
Technology is your friend. And perhaps, in the brutal world of contracting season, it can help all of us turn from adversaries into allies. Because that’s the real, deep, dark, secret truth of contracting season: it doesn’t have to be a zero-sum game. Everyone can win.