Supply Chain

Negotiating a Service Contract

By Richard Knee

If Shipping Line X tells you it wants your cargo on a specific trade route, you have instant leverage.

That and other tips on negotiating service contracts came at a recent gathering of agricultural-product shippers, including Steven L. Horton, a Miami Shores, Fla.-based business consultant who held high-level pricing posts with APL between 1987 and 1996. Horton’s other negotiation tips include the following:

Understand the carrier’s needs
In suggesting a multi-step strategy for negotiating service contracts with vessel operators, Horton says understanding carriers’ needs is essential.
“Ask the carrier, ‘Why do you want my cargo? Where do you want my cargo — in what trade lane?’ If the carrier comes back with a specific trade lane, that’s immediate leverage for you,” he says.

Pre-talk preparations & administration
Negotiating a service pact is only part of an effective strategy
for working with carriers; equally important are pre-talk
preparations and administering and managing the contract while it is in force, he says.
Before sitting down with a carrier representative, “Get your house in order,” he says. “What are you doing with your own company — what do you ship, and in how many trade lanes?”
The shipper needs to research and understand the market in which the carrier operates and to determine the number of carriers it will need, he says. “In this day and age, you have to have more than one carrier,” Horton says.
The person dealing with the carriers needs to learn what product(s) and what volume his/her own company ships in each trade lane the company uses, because the carriers need that information, he says.

Bid request protocol
With the preparatory work complete, the next step is sending out bid requests. They should go “to every carrier covering your trade lanes, and to NVOs if you’d like,” Horton says. (NVO, or NVOCC, is short for non-vessel-operating common carrier, which acts as a freight consolidator.)
He repeated, “Be honest about your volumes. This can’t be more important than it is right now,” he says. With oil-price increases forcing shipping rates up and with capacity tight on some major trade routes, shippers need to “build integrity” to maintain good relationships with carriers, he says.

Give carriers time to respond
Also important is giving carriers ample time to respond to bid requests, Horton adds.
In scheduling the contract talks, the shipper and carrier need to determine how much time they will take and “back-time” from when they want the life of the service pact to begin, he says. For the shipper’s representative, this means getting input from the company’s logistics team, from the “internal customers” that arrange the export sales or import purchases and from counterparts in sister companies that might be moving goods under the same contract, he says, adding, “The legal adviser must be in on the process from the get-go.”
Enough time should be allotted also to enable the carrier’s pricing unit in each trade lane to approve any variances from the vessel operator’s boilerplate contract, he says.

Surcharges
When it comes to surcharges, “Lock in as many as possible,” Horton says. Regarding fees for unstable cost elements such as fuel, the shipper should seek a stipulation for quarterly negotiations, he says.
The shipper should also insist that any language regarding new surcharges provide that such fees “be by mutual agreement or you can get out of the contract,” he says.
Exporters and importers should also avoid a single expiration date for multiple contracts unless they have enough people to negotiate all of the pacts simultaneously, he says.

Keep your word
Horton and other speakers had a word of warning, though — don’t promise what you can’t deliver. If you book space and fail to fill it, you lose credibility. n