When it’s contract negotiation time, Patrick Moffett, vice president, international logistics with wireless phone producer Audiovox Corp. (www.audiovox.com), has three things in mind: service, capability and economics. Which carriers serve the points needed, what is their capability to perform between those points, and what are their rates?
“If I throw out the first two factors and just concentrate on rates, I lose,” asserts Moffett. Preparation for negotiation begins with good recordkeeping. For example, Moffett tracks transit times from door to door and that performance record sets the tone for future negotiations.
“In Norfolk last year, our carrier lacked chassis to finish the container movement,” he remembers. “If we have to wait seven days for chassis to move 50 containers, we lose sales and the sales group beats up on me. So next negotiation session, carriers must show how they will improve equipment availability or they are out.”
Jim DeVeau, senior vice president, logistics, with discount footwear retailer Footstar Inc. (www.footstar.com), agrees preparation is key to negotiation success. “Our cross-functional team does its homework,” he notes.
The team spends time with the two or three finalists in the RFP (request for proposal) process. “We not only call references, we also kick the tires. We go into the field to see the service level provided to other retailers. We see their actual infrastructure. We get a good feel for their culture and go over their operating procedures, their documentation, their on-site Customs capability, etc. We investigate in-depth their pricing and service capability. We ask detailed questions, such as what type of EDI [electronic data interchange] transmissions they use,” explains DeVeau.
Footstar requires a full range of service and more from third-party logistics providers (3PLs). “We look for a range of international services, EDI capability, value-added service and cargo management. Do they own the infrastructure or do they use other third parties overseas? If they don’t own the infrastructure in China, they are not a good player for us,” states DeVeau.
Post 9/11, Moffett suggests security also is a timely issue. “Who is C-TPAT-approved now or who will be soon?” And he examines the detail in freight claims. “Who was highest and where are important details to track?” he asks.
If, like Audiovox, you have Third World traffic to and from areas such as Korea, Malaysia, or Venezuela, look for a strong carrier that handles those points as well as higher volume lanes. Because Audiovox’s traffic is light from those points, Moffett balances the rate across busier lanes.
“If I only have 50 to 60 containers from Miami to Venezuela, it is expensive to rate those containers locally. If I can include Third World freight in a master contract that also includes our Asia-to-the-U.S. freight, I save up to $300 per container,” he notes.
Understanding and clarifying such details is critical to a successful relationship. Maureen Strahan, vice president, global supply operations with high-tech electronics manufacturer Hewlett-Packard Co. (www.hp.com), urges negotiators to document very explicit statements of work. “Get it in writing instead of depending on what you think you hear,” she suggests.
Moffett has had enough of confusing details in transportation contracts. In the future, contracts he negotiates will be more understandable.
“The old ones have been ambiguous with many surcharges. This year, I’m requiring every carrier to add a spreadsheet that makes those detailed charges easier to calculate. In each column, they must line up points served with the plethora of surcharges that apply —for peak season, security, chassis, mini land bridge, the Alameda corridor or the Panama Canal,” Moffett says.
“In all contract negotiations, make it a formal process,” urges DeVeau. Start with a RFI (request for information) from potential service providers. Keep it simple, yet leave room for creativity.
Footstar’s RFI includes an open section where it encourages out-of-the-box thinking. “We look for best practices and creative thinking,” DeVeau notes.
It also takes flexibility to keep up with a rapidly changing landscape. Moffett has seen a change in tactics in the last two to three years, especially the role of the chief financial officer (CFO).
“Back in the 1980s, if a carrier didn’t perform, we got rid of it the next day,” he says. “We can’t do that now. We commit to the carrier for a year, and cannot exit the contract without legal action. That makes it a serious piece of business, so the CFO stays much closer during negotiations. I make it understandable for him/her and the management group. I make them feel part of the team.”
The other significant development affecting Moffett’s negotiation strategy is large retailers such as Target and Best Buy who are taking on more of their supply chains. “Our factory delivers to their consolidator, then I’m out of the deal. We can give them a lower price if we don’t have to worry about duty, ocean freight, or the ubiquitous surcharges,” he adds.
Retailer Footstar stays flexible on trade terms during negotiations. “We’re truly working with our suppliers and are willing to take on supply chain responsibility,” notes DeVeau. “While retail still tends to have an 800-pound gorilla mindset, we prefer to negotiate trade terms that give us the best visibility and move product to our stores.”
While flexibility is undoubtedly a desirable trait in a negotiating team, cross-functionality is a necessity. At Footstar, the cross-functional contract negotiation team typically includes inventory people, EDI expertise and the accounts payable group to help negotiate payment terms.
In addition to himself, Moffett’s negotiating team consists of his staff and the traffic department. However, they also solicit input from purchasing and sales people to learn what new products are coming out and to estimate routing and volume.
Strahan also stresses the importance of forming a