Suggested Criteria for Service Contract Negotiation

1. MLB (mini-landbridge -- West Coast discharge / rail to E. Coast) vs. AW (All water) service differential. For one service contract, there is a 22.5% premium for MLB service compared to AW service costs.

2. The base "unit" for negotiating the volume commitment should be TEUs (20' equivalent units). A 40' (regardless if reefer or Hi-Cube) would count as 2 x TEUs. If applicable, a 45' container would also count as 2 x TEUs. A 40' container's price could be the "starting point" around which the other prices are based.

3. Free time is normally 2 days on reefers and 5 days on DV (dry vans). The comparative service contract that ANERA offers textile importers allows 15 days free time for DVs. Since they do not need reefers (actually offer a 10% discounted price if textiles are moved in refrigerated boxes-- treated as if they were DVs), there is no free time designation for that type of container.

4. Uniformity of rates between ports. In theory, there should not be a rate differential between Baltimore and New York. North Atlantic ports (Norfolk to Boston) are typically treated under the same tariff rate.

5. For shipments that may be purchased on a CIF or CFR basis, in which the oceanfreight is prepaid by the supplier, can containers be moved under the SC (service contract) to qualify for the volume pledged?

6. What is the "liquidated damage" for a "shortage" in the number of containers shipped vs. that committed? On a TAA (Trans-Atlantic Agreement) SC, the "liquidated damage" was as little as $250/TEU. Obviously, with a low "liquidated damage", it may be worth the "risk" to commit a higher volume if the unit price can offset possible "shortages".

7. Is it possible to offer an "incentive discount" if initially "x" TEUs are committed, while "x + 100 + 200 + 300, etc." are actually shipped? At which point could a price reduction "kick in"?

8. Reasonably, the more TEUs that can initially be pledged, the lower the unit cost. At what point will price breaks take place? Get a price at 300 TEUs, 400 TEUs, 500 TEUs, etc. Do not "play your hand" by giving away the total that you anticipate. Instead, let each "bidder" give you their "best rate" for 20' DV, 40' DV, 40' HQ (High Cube Dry Van), and 40' reefer (presumably, as it is rare to encounter, you have no 20' reefers). This "best rate" should be based on the "what if" scenarios of increased TEUs pledged.

9. Recently, there is a lot of pressure on ANERA (Conference) to reduce their costs to compete with the NVOCC (Non-vessel operating common carrier) and independent carriers that serve the Far East. In fact, for the textile import shipper's association, in December, many of the ANERA member lines reduced their 40' standard DV rate by $400.

For the 1996 negotiation, the textiles importers association is seeking at least a $600 concession from the rates of last year ($200 further reduction over those unilaterally offered by member lines in December). To give you a "base" idea, a sampling of rates for the textile association effective 5/1/95 were...

AW Service MLB Service

$2420 20' $2965

$3225 40' $3750

$3630 40' HQ $4445

These rates were basically "ALL IN" (all inclusive of various ancillary charges such as CAF - Currency Adjustment Factor, FAF - Fuel Adjustment Factor. also known as "bunker surcharge", DDC - Destination Delivery Charge. really a terminal handling charge). From some Far East origins, there may be "arbitrary" fees (loading from ports that commonly do not offer direct service to the U.S.), and in certain "lanes" one or more of the above ancillary charges may apply. This is clearly stipulated in the SC.

10. Review what commodities shipped would qualify for the SC. In theory, you should be able to obtain one price for all 20', 40', 40' HQ, or Reefers, regardless of the commodity shipped. However, since you have experienced differing prices based on commodity, have this clearly clarified.

11. The suggestion is made to seek a comparison among the following...

ANERA member (for instance, Maersk)

Hanjin

Evergreen

NVOCC

If you give each the identical criteria to "bid" on your business, you can then ably compare "apples to apples".

12. Request service assurances as to the following ... transit times sailing frequencies, equipment availability, and offices that would be dealt with for the carrier in the U.S. and overseas.

13. Request if it is possible to offer an "incentive to renegotiate" the contract if it appears during the course of the year that your volume may dramatically increase, or that you may contemplate giving more containers to one carrier, while maintaining the "minimum" commitment to the other carrier. Alternatively, request if it may be possible to negotiate the SC for a period less than one year and then negotiate the balance of the year subsequently.

14. How are instructions to your suppliers made to ensure that the SC is used and credit is given toward the volume commitment?

15. What ways does the carrier have to give you a summary to "audit" the amount of money paid on a unit basis -- to ensure you are not being overcharged? Concurrently, as we discussed, you may want to keep some sort of "spread sheet" review to ensure the correct pricing is being assessed.

16. Are there origin charges in the shipper's currency that would be incurred by the shipper? Normally, on an FOB terms of sale; any wharfage, THC (terminal handling charge), port tax, etc. at origin port / point of receipt of the container are for the account of the seller (shipper). Indirectly, you will be paying the FOB costs, which would be accounted for in the seller's pricing.

17. As we discussed, many services assess ancillary charges that may fluctuate with changes in "bunker oil prices", currency exchange rates, DDCs, THCs, port surcharges, etc. Normally, the adjustment is made on a quarterly basis, if it applies. Suggest you get a clarification of any ancillary charges that may apply for certain "lanes" (from certain ports / points of loading) and when adjustments may be made, if they apply.

Also, as this may be a "two edged sword", ask the carrier to give the advantages and disadvantages of getting a "base rate + ancillaries" compared to an "all in" rate. The "all in" rate should have to account for the ancillaries in their "all in" price.

18. If your existing carriers happen to ask you "what kind of reduction" would you expect for this coming year, the range of reduction that ANERA is proposing for textile goods is in the 15-20% range. Perhaps, that may be a starting point, assuming your volume commitment to the existing carriers may remain the same over the coming year. Of course, we may not be comparing apples to apples, since there is a different industry involved and the magnitude of the volume being negotiated is over 18,000 TEUs compared to your volume.

19. When deciding how many carriers to use, you may want to consider...

- The advantage of one carrier keeping the other "honest" as opposed to "putting all your eggs in one basket".

- The disadvantage of negotiating with two or more carriers versus negotiating with one carrier from a volume (and subsequent price) perspective.

- Service advantages of having more than one carrier.

- Deciding what "percentage" of business to give one carrier vs. the other carrier(s).