What is minimum quantity commitment?
Minimum Quantity Commitment, or MQC, is the minimum amount of freight a shipper agrees to transport via a specific carrier during a fixed period of time.
With MQC, a carrier is “guaranteed” the minimum volume threshold of goods they’re expected to transport over that time, and thus, helps in better planning of resources and network optimization.
Minimum Quantity Requirement & Service Contract
When a shipper and a carrier (VOCC or NVOCC) sign a service agreement, a time period of service is specified in the contract along with the minimum quantity requirement.
With MQC, the shipper commits to provide the stated minimum freight volume (and by extension, freight revenue) over a specific duration to the carrier. Furthermore, the carrier commits to provide certain fixed services at a certain fixed freight rate for that span of time.
Typically, freight contracts are signed yearly. However, depending on the frequency of shipping and services required, they can also be signed quarterly, half-yearly, or even for two years straight.
Benefits of Minimum Quantity Requirement
Having a minimum quantity commitment has multifold advantages for all the parties involved.
- For manufacturers. It helps them plan the production capacity in advance, and deal with fluctuating demand-supply market conditions.
- For shippers. It helps them to tackle freight-related uncertainties, like unavailability of handling equipment, non-allocation of warehouse space, inflated freight rates, etc.
- For carriers. It helps tackle the unpredictability of the freight market, while providing them an estimate about their shipping scenario and optimizing resources suitably.
With a minimum quantity commitment, shippers inform the manufacturers about the required quantity of goods within a set time duration. They can plan their operations and inventories accordingly. The carriers also know the type of goods being shipped, equipment needed, and warehouse space required to handle the freight. Thus, they can pre-reserve the required resources for the shipper well in advance.
It also saves the shippers from last-minute sky-rocketing spot shipping rates. As, due to minimum quantity commitment, they get rate protection against the agreed quantity of freight.
Can Minimum Quantity Commitment Backfire?
Yes, MCQ can definitely backfire on the shipper if they fail to meet the minimum freight threshold. Failing to do so, a shipper is bound to compensate for the same, as per the terms specified in the contract.
For carriers, it can rebound in case the freight rates increase significantly. The carrier would be bound to provide the same freight rates as per the contract.
Thus, the carriers and shippers need to evaluate the market conditions and understand the supply chain dynamics before finalizing the contract for minimum quantity commitment. Some of the factors to assess include:
- Origin & destination port / Shipping route
- Service requirements
- Specified time period (peak season, off-season, etc.)
- Handling capabilities
- Fuel price inflation
- Supply chain fluctuation, among others.
Terms related to Minimum Quantity Commitment
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