Pricing a shipment for ocean carrier is part science and part art more of the later than the former. Low price will create operational catastrophe in addition to the financial mishap. Too high prices will drive the customers to competitors door step. Shipper’s are highly price sensitive and constantly renegotiate to save the extra dime. Given these complexities it is for sure many elements need to come together for pricing Ocean Carrier rates. Below is an overview of the pricing process, the actors; the role played and rate components.
Actors: Sales, Pricing Manager, Customer.
The sales here refers to both the customer service representative who handle the incoming calls of rate inquiry and the outbound sales lead who meet with large clients especially in the contract bidding process.
Pricing Managers are individuals tasked with ensuring carrier’s profitability. They are organized by trade (Region to Region: Europe to Asia or Europe to US) or by export irrespective of destination (all exports out of Europe). Pricing manager handle day to day commercial aspects like request for special rates, discounts, responding to long term bids, ensuring the carrier rates reflect the market condition.
Customers are direct shippers and freight forwarders (CEVA, Panelpina, Danzas). Freight forwarder as logistics agents represents multiple shippers and has access to different shipper’s contractual rates and at the same time have their own direct contracts with the carrier too.
An example helps us to understand the freight forwarder intricacies better, consider Walmart sourcing different items from multiple geo diversified vendors and have employed CEVA to provide supply chain services like customs clearance, warehousing. At the same time Walmart enters into a contract with the ocean carrier XYZ to provide the long haul from Asia to US and Europe. CEVA provides consolidation service for small shippers and have direct contract with the ocean carrier in its individual capacity.
So now when CEVA makes a booking for Walmart they are entitled to Walmart’s rates.
Similar to Walmart, other organization (Home Depot, Toys-r-us) employ CEVA’s service and CEVA gets the rates based on whose shipment is booked.
Rate Type
Tariffs are guideline rates, surcharges and rules published by carrier to their different agencies. US Import and Export tariff is mandated to be publicly available by FMC. These are usually high rates and shipments that meet tariff rates are readily accepted by the carrier.
The other common rate type is contractual rates and usually emanates with a formal Request for Quote/Price (RFQ/RFP) by large corporations or a simple phone call asking for a quote.
For our overview purpose let’s review the simple quote request and how it translates into a contracted rate.
Quote Process
Quote is a customer specific rate negotiation process leading to a contract. Quote process usually starts with a simple phone call from customer asking for a rate to move shipment from point A to B to local carrier Agent. Agent collects other information like the rate time period, expected minimum volume, commodity and the container type (for our simple example we are not dwelling into all the information collected). Agent provides a quote based on carrier guideline rates.
Agents are empowered to provide discounts within certain threshold if rate terms are not agreeable to customer. Rate request below the pre approved threshold needs pricing manager approval and this might delay the response.
Pricing managers may provide a counter proposal or reject the lower rate request based on market condition. The pricing manager’s decision is conveyed back to Customer by Agent along with the offer expiry date. Many rounds of negotiation are a norm, with the Agent acting as a conduit before a rate agreeable to both customer and the pricing manager is reached. Depending on the region either a physically signed contract is drawn up, in others the quote confirmation email/fax is good enough. To obtain the negotiated rates at booking time the customer refers to the quote number.
The initial tariff/guideline rates are negotiated down based on the volume, customer caliber and market condition in almost every instance. Quote is a time stipulated rate agreement by the carrier in exchange for a minimum volume commitment by shipper.
Rate Component
Now that we have familiarized ourselves with the actors and process let us dig a little deeper into what is rate made up of. Rate consists of two portions the freight and surcharge. Freight is the rate charged by the carrier and an income while surcharges are cost passed on to the customer at amounts, agreed upon by the maritime consortium or cost for special services provided by the carrier. Few examples of surcharge are BAF (Bunker Adjustment Fee) this is the fuel cost, terminal handling cost (THC) at origin and destination port terminals. Customer might require additional services for ex: Agro exporters might require fumigated container or apparel exporters require containers fitted with lines & rings for hanging garments. These supplementary services are provided at additional surcharge.
