Contract Logistics - In Need of a Shakeup?

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In the world of transport logistics, contracts are king; new wins and old retentions in the fresh and frozen industry are the meat and potatoes (couldn’t resist) that keep companies ledger’s in the black. Though perhaps “contract” is a slightly misleading term; these sought after agreements are often based on estimated figures, subject to change, confusingly complicated, and with heavily one sided payment terms. Why?

 

If we examine the contract between a shipper and transport firm, its lifecycle looks something like this:

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So far so simple. But let’s look at each stage a little closer, and see where the complexities develop.

 

Logistical Particulars Estimated

Therein lies the rub; with so many variables to consider in fresh and frozen, exact numbers are hard to predict. You may know you’re transporting strawberries but you might not know when they’ll be ready. It’s hard to predict exactly how many strawberries you’ll be needing too; consumer demands and tastes are hard to predict accurately and fluctuate year on year. So … we know we need strawberries and we know where we want them from, the rest is best guess at this stage.
 

Request for tender

A select network of suppliers then receive the estimates and quote for the work. These suppliers will either be transport firms directly, or freight forwarders who circulate them on to their own larger network. Transport firms have the task of examining the lane proposed and deciding on what to quote. They have to factor in how much of the volume they can satisfy, depending on how many trucks are in their network; the height, weight and temperature requirements of the goods; and the route being covered. Large contracts don’t cover return journeys and travelling home empty rapidly eats into margins, so naturally, transport firms preferred contracts will be those that they can match to a contract covering the reverse leg; the holy grail.

Once a quote is put forward - various stages of negotiation are ran through - shippers wanting the lowest price they can pay, transporters wanting the highest price they can charge. Once a middle ground is found we move on to stage 3…

 

Tender accepted

Quote is accepted - contract made; but let’s not be too hasty. What have we entered into a contract for? An unknown amount of strawberries, to be picked up from a set location, on an estimated date, continuing at an estimated collection number per week, and delivered in an estimated time period.

Logistical particulars quantified

So we close in on the start date and a few things can get quantified; namely the start date, and a more defined estimate of the number of loads expected. These get communicated and stage 5 commences...

 

Physical work begins

Now we’re sitting pretty, locked into a years worth of work, with a healthy income to satisfy the P&L statement.

But let’s think about some of the basic variables of any contract involved, once we do things might not seem so certain:

  • Price

Can the price be reviewed and under what circumstances? What if the price of fuel jumps up and the haulier finds themselves locked into a year long contract making a loss on every load?

  • Volume

What if the producer’s crops are devastated and the volume of strawberries falls by 50%? Does a 4 load a week contract now become 2? How does the transport firm account for the loss in utilisation?

  • Payment

UK supermarkets are the big boys of the industry - with the most sought after volume, but their payment terms often leave transport firms cash flow wanting. Standard payment terms of 90 days would leave any firm feeling vulnerable, even one whose goods weren’t so subject to seasonal fluctuations and unforeseen weather events.



So what are the actual obligations of the contract - are you better off making a “contract of utilisation”? Is there a better way to approach the particulars? Payment terms certainly seem like an area in need of a rethink; a left-over from the credit crunch of the naughties that caused some of the bigger global companies to start using their clout to call the shots. Ten years on, isn’t it time for a more ethical stance on payments? And could this even benefit the shipper? SME’s have to find some way of minimising the impact of these terms, and the solution for many is invoice financing; perhaps if they didn’t have to, then their prices would come down. Or perhaps the answer lies in the spot market: If shippers start viewing it as a valuable tool, one that can actually increase utilisation and allow for logistical flexibility, instead of a last resort used to satisfy unexpected volume, then they might be staring into a future with less emissions, less cost and better service levels. God forbid.


While there may be no clear answer here, it seems that at least some thought should be given to the topic. By doing so, might we create a better way for logistics firms to operate within these so called “contracts” - one that’s fairer and more efficient for all?