Race to the bottom on rates … is counterproductive

(shippers, in their drive to force down prices, arre increasing market volatility – something they claim they want to avoid)

as published on the VOICE OF THE INDEPENDENT – MAY 2013

WHILE much of the industry focus has been on lossmaking carriers, forwarders report that they too are feeling the pinch as the tendering process gets evermore fierce and price driven, with shippers often failing to honour contracts if the market price falls further.
“Shippers want consistency of price, and the tender process helps that,” said one senior forwarder. “I can understand why manufacturers go out to tender, because tenders help give the illusion of a fixed price. But you can have a customer ask you to commit to the end of the year, and then pull out because he’s found someone cheaper.”
The multinational forwarders have placed much importance on their price advantages and believe that it is their key advantage over the independent sector in securing contracts from medium and larger shippers.
However, service and quality have been proved to be as important to a wide range of shippers and battling on price alone can force a race to the bottom, without improving the shipper’s supply chain.
The trend towards more tenders has been fuelled in part through better transparency, as well as a move towards placing the tendering with procurement, rather than logistics departments. “The economic environment has become more uncertain, plus there is more visibility on rates in the market than there used to be,” CEVA’s interim Chief Operating Officer and Global Head of Ocean Freight, Dominik Tichelkamp, said. “You can get a daily update on rates – you can see if you are in line with the market or not. So you have customers pushing for new tenders, customers who want to reopen contracts – it’s happening more often. If it’s just shipping a container – it’s a commodity. A lot of companies can do that. So, to optimise your price as a shipper, you get a lot more people to tender.”
As a result, the ‘tendering season’ has changed and forwarders now are faced with multiple, year-round bidding processes. “There used to be a regular rhythm of freight tendering, and now people are tendering at random points during the year,” said one senior supply chain executive.
“The negotiating positions have gone out of the window and the shippers are using that to their advantage. When shippers ask for services to be retendered, that creates volatility in the market.”
“That’s certainly a pattern we are facing,” admitted the chairman of one mid-sized forwarder.
“There’s a cycle. When things are a bit tight, companies cut costs. Transport is the first thing to come under scrutiny. People find it hard to deal with the variables in transport, so they feel ripped off. They take the process away from the logistics managers and give it to purchasing, who put it to tender and get lower prices. Our customers admit that they will sometimes forgo the finer points of service to keep the costs down, while forwarders say it’s better to carry some business than none at all. We’re losing business to ludicrously low rates from the major forwarders.”
Online tenders in particular lose focus on service, leaving forwarders struggling to compete on any aspect apart from price.
One leading expert said: “I think e-tendering is profoundly stupid because all the notion of the value of a contract is ignored – you might as well put someone in front of a slot machine. It works for some of the commodity areas, but if you are talking about the provision of a service then it is another matter entirely.”
And as increasing numbers of forwarders ‘buy business’, the balance of power along the supply chain is shifting firmly to the advantage of the shipper.
Multinational forwarders interviewed agreed that winning bids came in at below cost.
The pressure to offer the lowest price is inevitably passed on to the carriers, already struggling with overcapacity and increasing the market volatility that shippers claim not to like.
“If I get the business and squeeze the carrier, that’s my job and that’s what the client expects,” said one forwarder. “We’re under huge pressure from corporate customers.”

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