The Approach to Effective Freight Procurement

The Approach to Effective Freight Procurement

by LSCMS Shippers’ Council

Container shipping procurement faces a multitude of challenges shaped by global events, industry shifts, environmental mandates, and technological advancements. To thrive in this ever-evolving landscape, shippers must embrace a flexible and responsive approach.

This entails staying well-informed about industry trends, harnessing technology for improved decision-making and transparency, nurturing strong partnerships with service providers, and continuously evaluating and refining procurement strategies to address the evolving complexities of container shipping.

At the heart of it all, an effective procurement strategy remains paramount. It serves as the compass guiding shippers toward efficient, economical, and dependable cargo transport. By crafting a well-defined strategy, businesses can mitigate transportation costs, mitigate supply chain disruptions, and uphold customer satisfaction. In an era of constant change, the importance of a robust procurement strategy cannot be overstated.

A comprehensive Freight Procurement Strategy typically involves three phases Pre-Procurement, Procurement, Post-Procurement.

Pre-Procurement

Before commencing on a Procurement Exercise, it’s important to collaborate with internal stakeholders, including procurement teams, logistics departments, and related teams, to ensure alignment on objectives, requirements, and budgets.

As the domain expert, it is critical for the Freight Procurement team to share their assessment of the Freight Market and their analysis on shipping rates, capacity trends, service reliability, sustainability regulations, industry developments and other factors to allow related members to have a better understanding of market conditions and also past performance. This will help facilitate effective communication and collaboration within the organization.

After reaching consensus and internal alignment, the procurement team would need to conduct a comprehensive assessment of their transportation needs to arrive at the Scope of Transportation Services required.

This involves not only identifying the volume and frequency of shipments but also delving into specific requirements, such as:

The advent of Digital Freight Procurement Tools, means users can now compile the above data in a fraction of the time spent previously.

With the above information on hand, the procurement team can proceed with Scope Definition to clearly define the transportation services required. The more concise the specifications, the better service providers can understand your unique requirements and thus you will achieve a better outcome.

Armed with a good understanding of the scope of transportation services required, the Procurement Team can proceed to conduct Market Research to identify potential service providers who are able to meet the transportation services required. This could often be in the form of a Request for Proposal (RFP) before embarking on a full blown Request for Quotation (RFQ)

When looking for suitable service providers, Consider factors such as:

There are plenty of service providers from Maritime Consultancies to Market Intelligence Platforms that provides different types of benchmarking service to aid in the evaluation and assessment of service providers.

After evaluating prospective service providers, the Procurement Team would be able to identify service provider who meet their requirements to participate in the RFQ

By thoroughly addressing the above during the Pre-Procurement Stage, shippers can establish a strong foundation for their Freight Procurement process. This proactive approach not only streamlines the sourcing process but also increases the likelihood of finding the right transportation service providers who can meet specific needs and expectations.

Freight Procurement

The actual Freight Procurement Stage is the heart of the transportation service sourcing process for shippers. This phase involves a series of well-defined steps to identify, select, and contract transportation service providers.

The core of the Freight Procurement Stage is the creation of a comprehensive Request for Proposal (RFP) or Request for Quotation (RFQ) document. This document outlines the shipper’s shipping requirements, expectations, evaluation criteria, timeline and contract terms.

The RFP or RFQ serves as a formal invitation to potential service providers, detailing the shipper’s requirements and soliciting competitive bids. Service Providers are to revert to the RFP/RFQ based on the timeline indicated on the document.

After receiving Proposal / Quotation from Service Providers, the Procurement Team should evaluate the submission based on criteria set out in advance and commence final negotiation and evaluation.

  1. Cost Structure – What does the response include and is this complete and competitive when compared with other submissions.
    (E.g., Ocean Freight Only / Ocean Freight + THC, Ocean Freight + THC + Bunker Charges, etc.,)
  2. Local Charges – Agreement and Tenure. This is where we need to look at the minutiae and fine print.
    (E.g., THC, Doc Fee, Cleaning Fee, etc.,)
  3. Tenure of charges – Is the pricing fixed for the entire tenure? (If not, what is mutually agreed review timing and basis?)
  4. Detention / Demurrage Charges
    (What is agreed terms and agreed costs if exceed agreed condition?)

Work with legal and procurement teams to draft the contract documents. Ensure that the contract covers all agreed-upon terms, obligations, responsibilities, and dispute resolution mechanisms. It should also include provisions for performance monitoring and compliance.

Contracting / Award

  1. Pricing Terms and Agreement
  2. Service Level Agreement (SLAs)
    (E.g., Shipping Frequency, Service Routing, Delivery Time, Compensation Clause, etc.,)
  3. Performance Monitoring (KPI)
    (Establishing key performance indicators (KPIs) to measure and assess performance.,
    Regular review and report on service providers’ performance against these benchmarks.,
    Address any performance issues or deviations promptly to maintain service quality.)
  4. Dispute Resolution Mechanism

Notify the chosen transportation service provider(s) and provide them with the contract documents for review and signature. Ensure that all parties involved in the contract understand and agree to the terms and conditions. Obtain the necessary signatures to finalize the contract.

By elaborating on the Freight Procurement Stage, shippers can establish a well-structured and organized approach to sourcing transportation services. This not only helps in selecting the right providers but also in building strong, long-term relationships that contribute to a more efficient and reliable supply chain.

Post-Procurement

The Post-Procurement Stage in freight procurement is a critical phase that occurs after transportation service providers have been selected and contracts have been awarded. This stage focuses on managing and optimising the ongoing relationships with service providers and ensuring that the transportation services meet the shipper’s expectations and requirements.

After a contract has been awarded, it is imperative for the service provider to contact shippers and consignees to set up an Implementation Plan and Standard Operating Procedures (SOP) and implement Initial Stage Control mechanisms.

As with any new process, parties involved need to clearly define the purpose and procedures to ensure a smooth transition. An implementation plan should start with the exchange of contact information and subsequently progress to establishing the booking process, operations process, and documentation process all the way to the billing process. Failure to establish Credit Terms or not confirming routing details could lead to unnecessary delays.

Establishing a robust performance monitoring system with key performance indicators (KPIs) and metrics is crucial. Regular performance reviews and reporting on the performance of transportation service providers against predefined benchmarks help in identifying areas of improvement and ensure that service levels are consistently met.

Beyond performance monitoring and review, actively managing relationships with service providers with regular feedback sessions to identify areas for improvement, collaborating to optimize processes and enhancing service quality is needed to ensure long-term performance.

While the adage “No News is Good News” is widely heard in logistics circles, we can certainly improve with regular communication to enhance mutual understanding.

A culture of continuous improvement is one that helps foster trust and partnership. Shippers should utilise various opportunities during their regular communication to actively seek ways to enhance both day-to-day operations as well as the freight procurement process.

Service providers can distinguish themselves from the competition by actively engaging their customers in Identifying cost-saving opportunities and ways to enhance efficiency. Providing updates on emerging industry trends and technology advancements can also strengthen relationships.

By focusing on these key components in the Post-Procurement Stage, shippers can effectively manage their relationships with transportation service providers, maintain high service quality, optimise costs, and adapt to the ever-changing dynamics of the freight and logistics industry. This stage is essential for building long-term, mutually beneficial partnerships and ensuring the success of the overall supply chain.

About the LCSMS Shippers’ Council

Logistics Excellence Through Collaboration

The LSCMS Shippers Council is a very active group of major Shippers. The group members share their logistics expertise, and industry common challenges and discuss opportunities and solutions. This engagement advances knowledge and expertise for logistics practitioners across the spectrum of supply chain topics.

The group meets on a regular cadence, both virtually and in person, to raise and discuss topics of interest with attention to current and pressing relevant subjects. This group is not just a “talk shop session” but one where the focus is on achieving outcomes.

If you are a Shipper and interested in hearing more on this topic or would like to join the Council, please feel free to contact us at elee@lscms.org.

This article and the views contained therein was prepared or accomplished by the LSCMS Shippers Council.
The opinions expressed in this article are strictly those of the LSCMS Shippers’ Council and not attributable to a specific individual or enterprise.

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