Contracts are meant to protect you from the potential harm caused by the volatility of rates… right? It’s often the consensus amongst shippers that signing into a contract with a freight forwarder is a great way to mitigate risk, but what do we do with the thousands of cases where customers sign into a contract rate only to find out they are being cheated out of a better deal? We know it can be stressful when spot rates drop below your contract rates.
Keep in mind – with a contract, someone may be drawing the short straw. And it’s not always your freight forwarder.
When Spot Rates Drop Below Your Contract Rates
If you have been or are currently being cheated out of good rates due to a bad contract, don’t feel bad. However, there is no reason that you should continue to miss out on potential earnings. Before you start searching for a solution, take comfort in these things even when spot rates drop below your contract rates:
Remember – price is only half the reason that contracts are meant to be beneficial. Even when spot rates drop below your contract rates, you continue to reap the benefits of consistency. Whenever you are on the spot market, you will often follow the lowest cost. This can land you on a variety of different SSLs with different shipping schedules. Your shipment schedules may have volatility over a one week time-frame. When you have a contract with a freight forwarder, you will have a great deal of shipment schedule consistency.
In addition to calendar volatility, following spot market rate deals means that you are abandoning consistency in shipping routes. When you are locked into a contract with a freight forwarder, you always have visibility and communication with those in charge of your shipping routes. If consistency in routes is important to you, being locked into a contract may not be all to bad of a deal.
What to Do When Spot Rates Drop Below Your Contract Rates
If you’re still don’t feel comforted, we understand. It never feels good to lock yourself into bad pricing structures. While it may be difficult or spendy to terminate a contract with a freight forwarder, there are some ways to can attempt to save money during your contract period. But you’ll have to reference your Minimum-Quantity-Commitments (MQC’s).
Make sure to review your contract to see if minimum-quantity-commitments are listed. These are often used by freight forwarders as a measure of security to ensure it is worth it to enter into a contract with another business. Your MQC’s will either be listed in TEU’s or FEU’s (twenty-foot equivalent units or forty-foot equivalent units). This number represents the minimum number of shipments you are committed to moving with your current freight forwarder. Moving less than this number of shipments with them can land you some hefty fines.
However, if your contract has an MQC listed, you are not necessarily locked into an all-encompassing contract. Companies will often list an MQC number on their contract lower than their expected shipment volume. If you expect to ship 100 containers next year, you should have only committed to an 80 MQC contract.
If this is the case in your current contract, you have the liberty to move all containers in excess of your MQC with any forwarder you desire. This would allow you to take advantage of the spot market rates for any additional shipments you have in excess of your contractual requirements. Go back and count how far along you are in your contract to see if you could reap these benefits.
Where to Go from Here
We understand how frustrating contracts can be. But we also understand how rewarding they may be – given the right circumstances. If you locked yourself into a contract, appreciate a couple things. You have more consistency in your schedule and shipping routes. Following spot market rates, even when they provide lower prices, adds risk to your shipping situation. However, if you are looking for any and all ways to minimize your contract costs, look into your minimum-quantity-commitment (MQC’s). If you have an MQC listed on your contract, you could save money by moving all shipments in excess of your MQC with spot market rates via other forwarders. Contracts are rarely all-encompassing of your shipping-related business decisions.
If you have been burned before by a bad contract, or are currently going through the pain of one, call us at Interlog USA and let us know. We would be happy to talk with you about your various options to see if there may be a better solution for you and your team.