You are now listening to the supply chain secrets podcast with Brian Moses and Don Davis. Well, hi everyone. I'm Brian, most SVP of retail strategy at NYSHEX and former VP of supply chain at Walmart. And I'm Don Davis. I'm the senior vice president of carrier strategy here at NYSHEX, former executive Hapag-Lloyd and CMA. And we're back again today to discuss supply chain secrets. Our topic today is two way committed contracts.
Now, last week, Don, I started our podcast with some headlines to start the discussion. And I think I'm going to do the same thing this week, because there was no shortage of headlines. This past week was the TPM or transpacific maritime conference. For those of you that don't know that's one of the key industry events that bring shippers and carriers together to talk about current events, market dynamics, and new innovations. That are in the marketplace.
So Don, one of the key innovations that's being discussed and it's our topic today is committed contracts. So both the keynote shipper addresses that typically lead off the conference. On the first day, they ask an importer and an exporter. From the shipper side to talk about what they're considering in terms of the upcoming year and their contracting process.
And both shippers said that they're either using or considering checks or those types of committed products, which was interesting to hear. But I think what was more interesting was is that then you had the carrier executives talking about their strategies for contracting and what do you know, actually the two matched after the year of 2020.
I'm not sure that shippers and carriers agree on many things, but actually the Maersk executive said that they expect a hundred percent of their business to be based on two way commitments in the future. So there must be something to it. What do you what do you think about it? Yeah, I think it's so interesting to see the way the industry's evolved.
I think it just brings about a number of, of questions I have in my mind because you know, I think that this is something that has been, been talked about. And if you look at other. Industries other markets, you can see that there are some level of contract commitments and it's, kind of even strange to think about doing something without a commitment. And so let's talk about like the airline industry, right? That if you buy an airline ticket, it's pretty much upfront.
It's something you do on a committed basis. And I think it was the very first workshop I went to for NYSHEX which is way back in 2016. It's one of the things we talked about was, the airline industry and how American airlines was the first to have this sort of like committed solution. And, if you think about it, It makes sense why they did that. Right.
They're very similar in a lot of ways, they, have an asset, they have planes, they have to make sure they're in certain places, they want to make sure they're full. And I think container shipping is actually more complex than, aircraft, because it would be a little bit like if you decouple the seats from the airplane and you said, okay, we have a plane here. But all Brian, sorry, the plane's here, but we don't have a physical seat for you because those come separately.
I mean, it's, that's what you have to think about with the, with container shipping and containers, that those there's two components to it, which make it even more complicated which is why I think now that rate levels have started to improve. There's a lot of thought around like, Hey, it's a lot easier for me to commit because I'm not scraping by with these low margins. Yeah. I mean, I think it's an interesting example. And first of all, just let's kind of out of the gate.
I mean, in our own words what committed contracts mean to us? Like for me, I think it's exactly what it claims to be. Right. I mean, the shipper is willing to commit regular volumes, and in exchange the carrier gonna give guaranteed space or equipment or, or whatever, the, the terms of that agreement are. But either way, both sides have some skin in the game, essentially speaking. Right. So, one side is going to do what they say the other side is going to do what they say.
And then if not, there's, there's probably some kind of penalty or default. I mean, in your airline example, a lot of times you buy a ticket and if you choose to move to a different, flight, you know, there could be a charge associated with something like that. Right? Yeah. And, and when you think about airlines, you're not even. Buying, unless you're pretty certain that something's going to happen, right?
If you have a family of four, you're not going to just make that, make that purchase without having some certainty around what you're doing. Because I think we've all experienced some level of headaches, trying to make changes with airlines and fees and things associated with that. But again, it's, they're trying to manage their, capacity and, and similarly, carriers have a similar burden and. When I think about what two way commitments mean?
I think it means that both parties are creating an agreement where there's clear terms and that they're both expecting something from the other party, which is defined upfront. And then if they don't deliver that, there's going to be some punitive component to it. And I think it's important for people to understand that. These type of contracts are designed to bring success. It's not designed to be punitive.
No, one's trying to make money off the penalties, but it's trying to one define the terms and to create some parameters around what a penalty means. And when those penalties are going to be enforced. Yeah. I mean to me while I think about a commitment being customizable between a shipper and a carrier, because I think there's all kinds of things that you could create commitments around the key. As you said, our expectations are clear, the terms are. Crystal clear to both parties.
And to me, it's the detailed framework like that, that allows performance to be easily measured. And then to your point, right? I mean, it's set up for mutual success. There's obviously accountability on both sides, but when you have that framework, it's easy to monitor and it's easy to diagnose where exceptions do occur and you can fix them. Yeah. And I think getting away from these, the contracts as they are structured today, which.
To me, it makes sense to address this point because to have an MQC divided by 52, and that equals your available capacity is, is difficult for both parties, right? Because no one really knows what that means. And I even think from an MQC commitment standpoint, I mean, what do you do if you know, you have volume fluctuations, do you go for the highest number or do you go for somewhere in the middle and average, but then what do you do when you have these. Surges and things like that.
So I think it is challenging for shippers, but it's also challenging for the carriers because they can't make their container ships bigger from one week to the next it can't move containers from one country to another immediately. So. It's it's certainly challenging for both sides. And that's why I think it just makes a ton of sense to be up front with what you can do and then whatever else you're unsure of let that flow. Right.
Cause then the carriers can address that with their capability to handle those things, which were unknown three months ago, when you made the contract. Well, and I think as the marketplace just gets more and more dynamic, I think this is why both shippers and carriers are looking at these types of solutions to help solve big problems. Right? I mean, obviously to your point, you explain the complexity as a carrier.
But the idea of knowing that there is a, a guarantee or a high probability that they're working with shippers who are gonna do exactly what they say they're going to do is as you said, much easier to plan and predict around, and the same thing for the shipper dealing with. Our carrier is going to accept my bookings. Are they going to give me a piece of equipment? Are they going to roll my cargo? There's so much uncertainty that's built into that.
And again, if that can be guaranteed at a high level of profitability, again, it makes things so much easier to manage. And then to your point, there's a part of your supply chain that you say I don't have to worry about. There's plenty of other things as a. As a, as a logistics manager that you have to worry about. And if the ocean component is one less of those things, then you've got more time to focus on other, other really important problems. Right.
Right. I mean, I think it allows you to focus on other things, but also it, I would think from a shipper side, your, your focus is then on this smaller piece of the business, which you weren't sure of. Three months ago. Right. And, and to address that point versus your whole supply chain, which could be infected by something without a commitment I imagine is challenging. And again, getting back to that whole MQC divided by 52 things. Might've looked different a year ago.
I mean, think about it that if we look to ourselves and think about a year ago, things look a lot different. So. There, there were certainly challenges, a lot of unknowns there, and that's why it makes sense to take some of those things that, you know, are certain. And then everyone can feel better about that type of agreement, because it was clear.
I was certain at this time and as things change, I can change too, but that's where that other piece of floating cargo or spot cargo or what have you you can manage it in a different way, but again, you're not trying to re think your whole book of business because you're, you're stuck trying to get on a ship. Yeah, I think that's one of the great things about how customizable these are.
And I don't think I heard any shippers or carrier saying my intention is to commit 100% of all of my lanes throughout the whole year. That's really hard to predict with any level of certainty, but to your point. Most shippers have a part of their supply chain that is replenishable or consistent that they can count on weekend and week out, across across the year. And I think that's the focus point for, for a lot of shippers. To your point, there are other ways that you can apply these.
These types of solutions, whether it be for seasonality or overflow or flex capacity, which we can talk about a little more, but I think it's the creativity and how customizable it is to your business. That really makes it appealing. Yeah, I absolutely agree. And I think, again, it creates tremendous value from the carrier side, because I think.
Just thinking about it in those terms where like, if they were playing, they would have two separate components and how challenging that is to, to manage that the more certainty you can bring to a carrier, the bigger value creator it is for them. And that's why I think as, as you pointed out, Maersk has come out and said in five years they want a hundred percent of their contracts to be two way commitments. It makes sense. Right?
Because of the challenges that you see today in the industry, I don't think it's. Anything sinister, or there was a plan or people fell down, it's trying to manage a pandemic, things change quite a bit. There's a surge in volume and you couldn't plan. But again, if you have these 30, 40% fall downs and you don't know what's real until after the ship sales, how do you manage your assets like that? It's just very difficult.
So if, if a carrier can say like, wow, I can see with certainty already, what's going to happen because I have these two way commitments for, let's say. 80% of my business. Then you can plan much better because you can see my containers here. I need them there, et cetera. Yeah, well you know, one of the practical approaches that I heard talked about was using committed contracts is as a diversification alternative for shippers.
So if you look at your carrier base, as kind of a portfolio, you're, you're probably still gonna have some traditional agreements. And after the last year or two, you know, there's probably some risks that's built into those. they are broad, they are general. and there's a lot to be interpreted between the shipper and carrier as to what expectations are. but I think there's going to be some degree where, where you have that.
I think the other thing is that there's carriers that are offering their own committed products that, that I think shippers are evaluating and deciding. Do I want to do something direct with the carrier and what do those terms entail and what advantages or disadvantages as a shipper do I have with that? Or third? Obviously I could go with a neutral third party that helps facilitate.
These types of discussions that helps educate both sides on where the best opportunities to commit cargo would be for the highest degree of success. And that, that might be a route as well, but it could be that shippers look at a blend of all three. but either way, the great thing is, I think shippers will have options and it's finding that right balance, you know, what's your risk tolerance and how much diversification do you need based on your size and scale will ultimately be the question.
Yeah. And so let me ask you a question and, and I know there's all new and it's an evolving situation, but what do you think the reasons are that our shipper wouldn't commit? Because I think that from a carrier perspective, you know, they they've had to deal with a lot of, Customers not honoring contracts, you know, that the MQC has been unenforceable. They're like a toothless tiger that they don't send out these liquidated damages, invoices to customers.
So I don't think the MQC has worked as being punitive and that's created all these issues with people not showing up. So, from a carrier perspective, you might say like, ah, it's just because nobody wants to commit, but I don't. Necessarily believe that's true, but I could understand why carrier would say that, but what is your view on why a shipper wouldn't commit. Yeah, I think it's a great question.
And I think the same types of, concerns that a carrier may have about the things that are uncontrollable or the things that are hard to manage are the same thing that, a shipper has. So now, as a shipper, I've got to commit specific volumes, whether it's on a weekly or monthly or quarterly basis. And if not, I've got actually some skin in the game. There, there could be a default or a penalty that, comes to me.
And there are a whole host of things that happen between when a purchase order gets raised to raw materials, being procured to a factory producing on time to being able to load it into a container to get on, a vessel. so. Obviously there's a lot that can happen in those, those processes. And as a shipper, you've gotta be really confident. you've got to involve a lot of your internal state key stakeholders to say.
Hey, look, we've gotta be better at coordinating and planning than we ever have been before, but here are the ultimate benefits. I mean, we're going to see predictability and reliability from our carrier partners. Like, we've never seen before. And so I think that's the hesitancy where as a shipper and I'm going to be really honest, the last 10 years or so, we haven't had to be really specific with things because to your point.
it was easy to sign a really high MQC and if we fell short or we missed our forecast, there, weren't a whole lot of liquidated damages coming our way. And so now it's a different story where capacity isn't readily available as shippers, we've got to become much more specific and manage our supply chains and supply chain partners closer than we ever have. And I think there's just some concern and on the shipper side of how do I do that and how do I do that effectively?
Yeah. And I think the MQC and my experience has been one where, and working with a number of shippers that they were not always sure what to do, right. That they think, I mean, I can remember customers saying, here's your award. You did your tender. It's 56,000 TEUs, but my MQC is going to be 30,000 to use. Anything like, Hmm. Well, how does that really make sense? And it's like, Oh, I want this flexibility and so on.
But it, I think it goes back to that point of is the, MQC really an indication of what people expect to do. I awarded you X, but my MQC is for Y. So, which is it going to be? When is it going to be? And I think we just have to get away from that behavior. I think it makes sense to tender your volume and, and put your lanes and your, expected volume there.
But when it comes to commitments, It makes sense for both parties to really drill down and take the time to say, this is what I think, I'm sure I'm going to ship and I can commit to this because it makes the supply chain better. And, and certainly from a carrier's ability to deliver a better service, it allows them to do that better. If they can know things upfront. Versus that example I gave of 30,000 MQC 56,000 to use as an award.
Yeah. And the key of, of, of managing your supply chain and your internal stakeholders, most closer as you get to see those exceptions, you get to figure out where those opportunities are to fix things and go forward. Because again, you want to be sure that you're getting the predictability, that you're avoiding any kind of default. And I think that's a benefit of that whole continuous improvement. Approach to your business, but, but it also just speaks to, to redundancy.
I think you're exactly right. You find those places where there's a high level of confidence and success in fulfilling your end of the committed. Deal. And then it's about building redundancy, right? That says in some of the places where again, I know I might have a little bit more uncertainty, but I think this is my, maybe what happened? How do I use again, committed agreements or, or other vehicles to still provide me with a level of support? Should I need it?
And that could be in those seasonal times or overflow. One of the things that, that Don is, fairly popular now. And I'd love to hear what your perspective from a carrier side is this idea of committing to something that you feel really good about fulfilling, but then pre negotiating something that would be flexible on the upside to say, there's a portion of this. I'm not so sure of, but I'd still like to have the opportunity to come ask you for additional support, if, and when that happens.
Yeah. I mean, personally, I love that idea because, and it's not just the surge the notion of a surge, because I think that's not a new idea, but I think about tying that additional volume that may be coming a carrier's way to a booking window and saying, okay, If you're going to surge, that's fine. But you have to, you can search up to 20%. Let's say as an example, but you're going to tell me 14 days in advance and, that way of the time it creates discipline on both sides. Right?
Because now I know, okay, I'm going to allow you to do that. But after 14 days, I'm going to close that window because now I'm going to pursue spot cargo, but it creates discipline on the shipper side too, to say like, Hey, we have to make sure we know this upfront. So that, because we have this ability that I think that's one of the biggest challenges, because I can tell you in my life, I've experienced a lot of phone calls saying like, Hey, the ship sailing tomorrow.
I want to add another four containers. I have them loaded. They're ready to go in the terminal. Can you like part the red sea and make these containers get on the ship? And it's very difficult to do that. And sometimes you can, and sometimes you can't, but. It's difficult for both parties to operate in that fashion. And that's where I think having that flexibility and also creating some rules and understandings of when you can use that flexibility. And if you use it before this time, it's there.
And if you don't use it by that time, it's gone, that makes a ton of sense. And it's super attractive from a carrier side. Yeah, I think it's this idea. When, when they're Slack in the system, you can have inefficiencies and you don't have to be perfect. I think for the last 10 plus years with the overcapacity, it's created Slack and allowed for commercial decisions to be made and flexibility to be had, which.
I think we've, we've talked about before structurally is probably just not going to exist for the foreseeable future. So this idea of, of, of, of shippers and particular retailers really leaning out their inventory and going into these just in time models to ensure right, that they're limiting and minimizing the, the total amount of inventory they have to have in their system and still meeting. Customer's needs when and where they want to shop.
I think it's just one of those where the shippers can't expect or rely on that Slack capacity to overcome the challenges that are out there. So this is where these very clear expectations on both sides. I think allow still for some of that approach where I'm going to be very specific and I'm going to manage things closer than I have, but you know, the days of have plenty of capacity and a lot of flexibility commercially to, to make decisions and overcome some of those challenges. I just.
They, they just don't seem to be there like they have in the past. Yeah. I think one of the biggest changes in the past few years has been the carrier's ability to control their capacity much better in this whole idea of blank. Sailings has really changed the way capacity management has occurred for the carrier. So, and it's a pretty simple thought process, right? If my ships aren't full, I'm not going to sale, I'm just going to basically blank sale.
So that way I'm using my assets better, which again, Makes sense from a carrier standpoint, if the rates are low, I know that doesn't make shippers happy, but I think now we're, an environment where the rates are profitable and They feel compensatory for the carriers that they can commit and then they can plan their networks better, this results in a better result for the customer as well. So I think.
On the one hand, you have the benefit of having a commitment and you have the certainty around if you can flex or not, or how those things work. But now you're also enabling the carrier to provide you a better service because of one you're committing the rate levels that are compensatory and two, they can do better job of asset planning. This, this all helps take the industry forward and improve things. And that's why I think, I think Maersk is right. I mean, I think.
Once you begin in this, this committed contract arena, it starts to make a lot of sense. So I think. It would make sense for both parties from a shipper and carrier standpoint to really think about how they can carry it forward. Yeah. It's funny. You go back to your hairline analogy that you brought up at the very beginning. I, I feel like I've been on the other end of, of airline blank, sailings, where I've been at a connection point.
I know that the plane has probably 150 seats and I look around and there's about 10 of us standing there and all of a sudden. They flight gets canceled. So I don't know if the carriers have gotten that from the airlines or not, but I feel like I've been on the other end of that one, myself. Yeah. I, I think we've all experienced that and gone through that pain and nothing worse than being, I mean, I guess that's what it's like to get rolled. Right.
I mean, you're, you're sitting there on a plane and then it's canceled and you're like, Oh, great. I'll just go back in the the lounge or something. It's not, not fun. Yeah. Th the last point, I guess I'd bring up from a shipper perspective. When I think about committed deals and how it helps me is, I go through, you know, kind of this painstaking process every year for my annual agreements, where I am thinking about developing a forecast, doing a tender.
Having multiple rounds and kind of optimizing the heck out of the results and trying to come up with the best perfect, solution between the capacity that's being offered to me, the price is being offered at, and then it matching my, my unique lane network. And I come up with this perfect model that says, here's exactly how much I'm going to give to each carrier. Here's what it's going to cost me. I go present it to my supply chain executive.
I look like a hero because it's, it's this great result. And then three months into, the, new contract. it's all for, for not because what I thought or what I expected or wanted to happen. Just didn't happen because of that lack of specificity in those contracts and expectations falling short.
So this idea, if, you're a shipper that spends a lot of time optimizing results and your final year result is really tied to this RFP process and this carrier allocation process, I think committed agreements can, again, help. You know, secure a much better or predetermined result for you because there's a part of that optimization. If it's committed, you can feel like there's a high degree of success That going to happen the way it should.
And so from a cost and a service perspective, you go ahead and say, I feel really good about that. And now I'm still left with something that's uncertain, but I'm going to focus and manage that to the best of my ability and minimize whatever exposure there would be. Versus trying to do that with a hundred percent of my business. So that that's the other way I look at it from a shipper and maybe how you could apply. Yeah. And I think that scenario you bring up could work both ways. Right?
I signed the contract it's three months later and things changed. So the, the change could be, wow, the rates dropped the spot rates. I don't know, $500 less than you. You feel like, Oh boy, you know, there's a cost savings there and there's this temptation there. And that's on the shipper side. And then on the other hand is the carrier situation, right?
That again, you sign a contract rates start to go up and then it's like, Oh, I'm having issues getting space because you know, there's this increasing gap there and that's just bad for both parties. And that's why I think my opinion is once we. As we we're moving forward with two-way committed contracts, that it just starts to make a lot more sense because you start to reduce that rate volatility.
And if it's only a small portion of the market, that's floating, that's, that's better where it could be, you know, almost a hundred percent of your business that's that's floating. Or again, there's been bad behavior on both sides. I think. So it's not pointing, saying carriers or shippers. I think you've seen it on both sides, but why. That temptation, when the gaps there is just creates a poor product for either party.
And that's why the commitment and having a committed contract in my view makes a lot of sense and is really the way of the future. Because again, that example I gave earlier of like award versus MQC, which is it well, which is, and, and it's just hard for, for either party to deal with that. Yeah, well, it's certainly one of the most important strategic questions that shippers are considering and asking themselves, right.
Of the contract vehicles that are available to me, which ones am I going to employ? And how am I going to incorporate them into my business? What makes the most sense? I think that the thing that I would just recommend as, as we finish out is. Take a diversified approach. Don't put all your eggs in one basket, obviously, but, but test and learn, you know, try something.
If, if it truly is going to be the wave of the future and ocean contracting as Maersk and other carriers have suggested that committed agreements are where we are going and where we'd like to go with our customers and shippers are saying. We're testing and learning and using it today. And it's working for us. I would just encourage shippers to, to, to figure out, you know, how you can try it. It's certainly not one of these things where you're probably going to, again, jump in.
With a hundred percent of your business, but figure out as Don said, what, what makes sense, where you have consistent regular business and take a chunk of that and put it into a committed agreement and see how it works for you. But but my, my encouragement would be is to, to test it and learn it. And then as things become more broad in the market in terms of acceptance and usage, you'll, you'll be in a position to take advantage of that. Yeah, I think that's great advice, Brian.
And I think one of the topics we've talked about is, you know, customer of choice. And I think having the ambition to move in this direction from a shipper side and presenting that to a carrier, demonstrates that, Hey, this is somebody who really wants to be a partnership. You know, I can tell you a lot of times in my life it felt like the word partnership was thrown around when things were happening in a terrible way. And, and that's not really the time. Right?
It's that, that upfront saying like, Hey, can we work together to do something different and do something better? So we don't feel bad at the end of this contract. Like, ah, neither one of us delivered for whatever reason. And, and I think that's where we help in that space. We're essentially facilitating that two way commitment that we're a neutral party. We see both sides.
And I think what's great to be a part of Nintex is to see that there are carriers and there are shippers that are like, Hey, I want to find a solution. Can you help us? And, and to be part of that experience, With the carrier saying, yeah, I want to try and help you and ship her saying like, Hey, listen, let's, let's, I'm going to share this information with you. Help me come up with a plan is really cool.
And why, I mean, me personally, I'm convinced that it makes sense to go this way and in this direction. Very good. I totally agree. Cool. Well, I think that wraps it up for this episode. And so I want to thank everybody for listening and we'll see you guys next week. Thanks for listening to the supply chain secrets podcast. Make sure to subscribe to the podcast on your favorite podcast network.