WHITE PAPER OCEAN SOURCING: 5 TIPS TO PREPARE FOR OCEAN FREIGHT NEGOTIATIONS AND CONTRACTING

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1 OCEAN SOURCING: 5 TIPS TO PREPARE FOR OCEAN FREIGHT NEGOTIATIONS AND

2 : : 2 THERE ARE MANY CHALLENGES FACING OCEAN FREIGHT SHIPPERS, SUCH AS RISING LINER RATES, TIGHT CAPACITY ON CONTAINERS, PORT CONGESTION, AND UNCERTAINTY IN CARRIER OPERATIONS. USE THESE 5 TIPS TO HELP PREPARE YOUR STRATEGY BEFORE NAVIGATING THE CHOPPY WATERS OF OCEAN FREIGHT NEGOTIATIONS. A chart showing the cost fluctuation of container shipping over the last few years would resemble a neck-jarring roller-coaster ride. It seems as though the beginning of each contracting season commences with shipping lines announcing new rate increases, along with discussions around capacity issues and shifting volume forecasts on major trade lanes. One of the keys to any successful negotiation is good preparation. When all other things are equal, the party who is better prepared will typically walk away with the better outcome. A few preparations you should do are the following: Research the market situation and understand your power vis-à-vis your suppliers, are you a big player or a small player, are you an attractive customer or one who suppliers tolerate but might not prefer. This will help you set proper expectations for your negotiations. Develop your objectives for the negotiation; make sure you engage your key stakeholders and make determinations regarding your must haves versus like to haves as outcomes of the process. Take the opportunity to sit at the other side of the table; think about the objectives, interests and motivators of at least the key players in your mind. This will help you plan for communications before and during your negotiation process There are numerous resources available to international shippers to assist in developing contracts with container shipping lines, from how to structure your RFP to specific language to include in the final contract. A successful sourcing strategy begins with planning and preparation well before the first bid is requested. SciQuest offers these five tips to help you prepare your own ocean sourcing and negotiation strategy. 1. Evaluate Equipment Type Options 2. Explore Alternative Ports 3. Break Down Cost Components 4. Consider Service Levels 5. Utilize Carrier Scorecards

3 : : 3 TIP 01: EVALUATE EQUIPMENT TYPE OPTIONS Does your business require containers of a certain size? Perhaps you standardized on 20 containers simply because that s what has always been used. But there may be benefits to your business if you have the flexibility to move from 20 to 40 containers, or vice versa. Can your delivery point accept different container sizes? Having options on equipment type enables your business to take advantage of what the carrier lines have to offer. Depending on your shipment and delivery location, moving from a 40 container to two 20 containers would provide more cost effective drayage options, or reduce transshipments and load deconsolidation. Turning off the refrigeration unit on a 40 reefer container may provide you with nearly 40 of container space at a reduced rate for carriers that have a lot of one-way refrigerated shipments that need a return trip. And 40 containers can increase the likelihood your cargo will find a space on a ship during the peak season, as carriers are more likely to accept an expedited 40 container over two 20 containers. TIP 02: EXPLORE ALTERNATIVE PORTS Alternate loading ports on the same coast can provide effective pricing and logistics advantages. Carriers with excess un-contracted capacity at low-volume origin ports will price competitively to load their ships, to the point that even with longer inland moves to get your cargo to the port, you may find significant savings. Similarly, shipping to alternate ports can provide other price and service options for those with the flexibility to accept different destination points. Additionally, issues like port congestion, security procedures (e.g.: every container undergoes X-Ray inspection in Puerto Rico), and even labor strife can add significant time and cost to your shipping operations. Shipping to alternate ports may increase your costs for transshipping, consolidation, or inland moves, but less congestion and faster service may provide a business benefit that outweighs the cost increases. The point is to determine on which lanes, and for what cargo, you are willing to change origin and destination ports and communicate this to the carriers. Provide them a means by which they can submit pricing and proposals on different combinations of lanes and inland moves, and work with internal stakeholders to evaluate the pros and cons of the options presented. TIP 03: BREAK DOWN COST COMPONENTS Understanding your options for inland moves, as well as drayage, can provide you with a leg up for carrier negotiations. Evaluate your existing drayage contracts, if you have them, to compare against proposals from carriers and freight forwarders. Work with your current truckload carriers and 3PLs to gather options for shipment to/from ocean ports, as these existing relationships may prove to be more cost effective options than what the liner carrier or freight forwarder can provide. Look at all assessorials including bunker charge schedules. In a soft market, where capacity is something the carrier is looking to fill, all of these can be placed on the negotiation table.

4 : : 4 TIP 04: CONSIDER SERVICE LEVELS Service levels can have a more significant impact on your business than shipping costs, and there are a number of service factors to think about before you engage carriers for pricing negotiations. Robust shipping forecasts will help you understand how often you need to ship and whether you can fill the equipment you ll be using. Knowing how much your customers can accept on delivery will help you determine your shipping schedules, container types, and lead times. There are many options available for increasing or decreasing the frequency of sailing days. Transit times vary based on lane, carrier, and slow-steaming options. On-time delivery commitments from carriers and freight forwarders, and the use of financial penalties for missed service levels, should be considered if you ve never implemented them before. Understanding your supply chain and your options can help you balance your shipping forecast with carrier capacity, sailings, and service levels. TIP 05: UTILIZE CARRIER SCORECARDS If you haven t already, build a carrier scorecard and incorporate its use across all carrier performance and evaluation activities. Track Key Performance Indicators (KPIs) such as percent of shipments that met and missed on-time delivery, vessel guarantees, dropped containers, invoice accuracy, etc. Review this information with key stakeholders before you begin your contracting activity so that everyone at the table has a clear view of each carrier s performance over the preceding year(s). This can go a long way towards proving that a favored carrier is providing exceptional value to the organization, or that perhaps they have some room for improvement. Having the scorecard at hand during negotiations can also help immensely. Pointing to KPIs when discussing shortfalls in historical service or commending a carrier that goes the extra mile drives a negotiation based on facts, not emotion. Another thing to consider is to think more strategically about your carrier management and scorecarding. This process should first involve stratifying your carriers in tiers of importance and risk. For example, are they strategic partners with whom you need to forge long-term partnerships, are they in the critical middle, and finally are they niche players? What risks may be inherent in your relationships, such as too much dependence on certain carriers, and financial risks of some carriers in terms of lack of financial stability. Use this in conjunction with your scorecarding process as you evaluate your suppliers during the sourcing/negotiation process and as you work with suppliers on an on-going basis during the contact period. Shippers that evaluate some of these options aren t guaranteed immunity from the shipping lines attempts to raise rates this season, nor will they necessarily get preferred status for their goods on high volume lanes. But armed with the data that comes from investigating your options in equipment, ports, cost breakdowns, service levels, and carrier performance, you will at least have the knowledge and the evidence you need to work with internal stakeholders and your carriers to find common ground at the negotiation table.

5 : : 5 ABOUT SCIQUEST FOR OCEAN SOURCING Advanced Sourcing Optimizer is an advanced esourcing solution that enables buyers to work with suppliers in a more collaborative, flexible sourcing process to present sourcing options that go beyond traditional online negotiations. With the creativity and flexibility provided by Expressive Bidding, a shipper s transportation carriers are encouraged to express the value they can bring to the table through varying levels of capacity commitments, service levels, and even lane alternatives. With SciQuest s patented bid analysis and optimization technologies, shippers can quickly and easily evaluate carrier proposals alongside business preferences and risk factors to find the right award strategy for their business. TO LEARN MORE ABOUT HOW SCIQUEST S CUSTOMERS HAVE IMPROVED THE NEGOTIATION PROCESS FOR BILLIONS OF DOLLARS OF OCEAN FREIGHT CONTRACTS, VISIT ABOUT SCIQUEST SciQuest (Nasdaq: SQI) is the leading public provider of spend management solutions delivering value beyond savings. Through the continued release of key innovative technology and a fanatical drive toward making our customers successful, we deliver exceptional value in user experience, productivity and operational efficiency. Our cloud-based, mobile-enabled, source-to-settle platform addresses all stages of procurement from the automation of core processes to enabling sophisticated, strategic and multifaceted sourcing solutions. We specialize in handling simple procurement needs to the most advanced supplier and supply chain requirements. SciQuest serves a wide range of industries and organizations including many of the Global Fortune 500. FOR MORE INFORMATION, visit TO JOIN THE CONVERSATION, please visit our blog at or follow us on : : sciquest.com