Crocs: Redundancy in ocean freight contracts takes priority over cost

Date: Friday, February 26, 2021
Source: Supply Chain Dive

  • Crocs is working to prioritize redundancy in its next round of ocean service contracts, Mary McNelly, the company's director of global logistics, said in a panel discussion at TPM 2021 on Thursday.
  • McNelly said Crocs cut one of its lower-volume partners early in the pandemic, because it did not think demand would be high enough to fulfill the minimum quantity commitment in the contract. But the turbulent year ended with Crocs experiencing high levels of consumer demand. McNelly noted that the brand was "actually not far above" its original MQC for the year, but much of it was shifted to the back half of the year.
  • "In ... previous years, I would say you need to balance redundancy with not eroding cost or volume optimization. This year, I think you need to protect your business and focus on redundancy and protection," McNelly said. "And for me, that's always looked like having multiple [non-vessel operating] partners and multiple direct partners to be able to support the business."

The ocean market in the back half of 2020 — and still today — has been difficult for shippers that have described the market as a "nightmare" and blamed it for significant supply chain delays.

But McNelly noted that when a shipper's volume begins to exceed its MQC, it's hard to fault the carrier for not being able to take the extra volume, especially at the end of 2020, when multiple industries faced record demand and freight needs. The capacity squeeze creates a shipper need for more redundancy in carrier options, she said.

When Crocs' volume began exceeding its volume commitments, it had to "work to add new partners to the mix and continue to be creative on how to find that volume in the market," McNelly said. She mentioned two-way commitment contracts, spot tools like the one provided by Maersk, and the New York Shipping Exchange, or NYSHEX.

"Gordon, five years ago, [was] running around TPM saying, 'Hey, this is a thing,'" McNelly said, referring to NYSHEX CEO Gordon Downes. "Well, in the last eight months, it's a thing, right? So, NYSHEX is going to be something I think that's going to be incredibly important to watch and think about how you play that in your network."

CMA CGM CEO Rodolphe Saadé said in a separate discussion at TPM21 on Thursday that he recognizes customers have a hard time with the current market.

"What I'm saying today to our customers is that I understand their frustration," Saadé said. "But at the same time, we are going through exceptional times. Volumes from Asia, and especially China, to various destinations, is extremely high."

When asked about contract conversations with customers, Saadé said the carrier wants to provide flexibility to shippers by making itself open to multi-year contracts, but also to companies who would prefer to take advantage of the market and do a spot negotiation.

"We will adapt to the needs of our customers," he said. "But, again, we cannot work for free."

As shippers and carriers discussed contracts, the reliability of container shipping services has plummeted.

"Global schedule reliability dropped to 34.9% in January 2021, which means that for the sixth consecutive month, global schedule reliability has been the lowest across all months since Sea-Intelligence introduced the benchmark in 2011," Sea-Intelligence CEO Alan Murphy said in a Friday press release.

The last year has confirmed in McNelly's mind that ocean shipping is a commodity, not a service.

"It's a commodity," she said of ocean shipping. "And I'm paying to scramble to get loaded. I'm not paying for service, I'm not paying for anything other than to get loaded, because transit times are out the window."

 

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