Demand forecasts crimp container allocation reliability: Maersk

Demand forecasts crimp container allocation reliability: Maersk

August 20, 2021 / 11:50 AM Maersk this year introduced a new contract product that avoids a dependence on large-volume shippers accurately forecasting their weekly and monthly allocations in lieu of a more flexible option that functions like the container line’s mutually enforceable spot product unveiled two years ago.

Uptake of the product, which Maersk said has reached 10 percent of its total contract volume, reflects the difficulties importers face in pinpointing what they need in a given week. It is designed to give those shippers a way to secure the capacity they need for a higher price than they would have paid under a traditional minimum quantity commitment-based (MQC) contract, but less than on the red-hot spot market.

The new product, which Maersk has been using for a few months, challenges the long-held belief in the ocean freight industry that accurate demand forecasting from shippers leads to better network planning and better capacity utilization for container lines.

The product is an evolution from the Maersk Spot dynamic pricing tool the carrier introduced in June 2019, targeted at bringing mutually enforceable terms into the long-term contract realm.

“We and shippers were going blue in the face trying to get forecasts right,” said Johan Sigsgaard, global head of ocean products at Maersk. “It’s something customers were having to update two times a week, and it’s manual, but it didn’t impact downfall (on container no-shows).”

Typical annual or long-term ocean freight contracts either give shippers a rigid allotment of space each week, based on dividing the total volume committed to the line by 52 weeks, or they allow for variations week to week based on the shipper conveying forecast allocations a number of weeks prior to a sailing. Those forecasts can be inaccurate and the timeline before they are finalized can vary from three months before a sailing departure to a few days.

Accommodating overflow volume

The Maersk product is based on adding prebuilt tolerances to the estimated allocation a shipper needs each week, with the tolerance decided between Maersk and the customer. For example, if a shipper and Maersk agree to a 20 percent tolerance, and the shipper believes it will need 100 FEU each week, instead of agreeing to limit the customer to an allocation of exactly 100 FEU, Maersk will allow the shipper to add up to 20 FEU of overflow volume each week as long as the bookings for that overflow are made two weeks prior to vessel departure.

“The main pain for us lies in the last two weeks of no-shows,” Sigsgaard said. “If we can wipe that away, it will take away the vast majority of the problem. The rest we can solve with Spot and with our forecast. If a booking is made two weeks out, but the container doesn’t show, that’s when the two-way commitment penalty kicks in. If the bookings don’t come in two weeks before, those slots get released to the spot market with no penalty to the shipper.”

In essence, shipper behavior, and Maersk’s confidence in its own ability to forecast capacity availability based on its understanding of customer behavior, replaces the need to commit to MQCs and for shippers to continuously update changing demand forecasts.

“We’re using machine learning to figure out how the spot market is developing,” he said. “Our data science team knows how to build our forecast based on the signals, looking at historical patterns, the timing of bookings, and aggregate booking behavior.”

The new product can be viewed as a tool for Maersk customers to get flexibility and guaranteed capacity in lieu of a more rigid forecast/MQC model.

In an MQC, a cargo owner commits to shipping a specified volume of freight with a shipping line, and the carrier commits to providing the space to move that volume. But in practice, MQCs are often not met by one party or the other, depending on the underlying supply/demand situation in the market.

“The MQC or volume conversation is good to set the framework, but as a commercial or legal thing to beat each other up with, we’re giving up on that,” Sigsgaard said.

Expansion will come when market calms

That does not mean Maersk’s entire inventory of capacity is available via the new flexible contracting model. Sigsgaard said Maersk initially allotted 10 percent of its total contractual volume to the new product this year, and it sold out before the program even started.

“It’s a bit of an extreme year to launch this product,” he said. “We’ve had more demand than we can sell. We could have sold significantly more of this product than we did this year.”

The self-imposed cap was implemented because the contract comes with a delivery guarantee that is tricky to manage in an environment fraught with port congestion, equipment shortages, and other COVID-19-induced disruptions.

“Just getting 10 percent with a proper service delivery is difficult this year,” he said. “When we can be more confident on the delivery side, we’ll look to expand this significantly next year.”

Sigsgaard said the interest in the product is driven by “clear and dependable access to space, combined with the delivery promise. Right now, the space is more important than the delivery promise. We think when the market stabilizes, there will be just as much significance in the delivery promise. Our belief is this is not just short-term behavior that will revert.”

As for the shippers that have gravitated to the product, he said it has mostly been large-volume shippers that have a base load of volume that varies marginally on a given week, with their more dynamic week-to-week needs met by the spot market. 

“We’re solving an old problem in a new way,” Sigsgaard said. “The customer can get the flexibility they need. And we get visibility into true demand because it’s the same two-way commitment as Spot.”

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