Before COVID, a combination of excess shipping capacity and steady demand held shipping rates at reasonable levels. Since 2020 however, factors like global congestion, widespread supply chain disruptions, and altered trade patterns have seen shipping rates shoot up almost ten times above the historical average.
With the markets yet to stabilize, Shippers can expect the high freight rate environment to persist well into 2022 and perhaps into early 2023 as well. In this article, we will look at how shippers can reduce their freight costs and minimize their transportation budgets.
Define transport requirements and evaluate shipment options
There are a lot of players in the shipping industry, all offering different rates. The difference in rates depends on the preferred origin and destination ports, goods transported, container size/type required, transit time requirements, and myriad other factors.
Shippers should first list all their requirements in terms of:
- Alternative routings: origin and destination ports and identify alternative nearby ports where rates might be lower.
- Urgency of delivery: If a shipment is not urgent, the shipper can often get a lower freight rate on a service where transit times are longer. Similarly, consider using air freight for the entire or parts of the journey to expedite shipments where time is of essence.
- Container types: If a particular type of container is in short supply, Carriers charge premiums for that container type or levy container imbalance surcharges. Shippers can explore alternative container types or sizes which could lower costs.
- Balance between speed and costs: Carriers are increasingly offering innovative products which involve using different transport modes (Sea, Rail, Land, Air) and alternative routings (USWC or USEC ports or sailing via the Suez Canal or Panama Canal). The shipper can use these products to reduce overall transportation costs. For example, for urgent shipments where Ocean delivery will be too late and Air too costly, Shipper can explore Rail mode (which is faster than ocean freight and cheaper than air). This is a popular option on the China-Europe trade lane.
Think in advance and build relationships with Carriers
Carriers generally try to strike a balance between contractual volumes and spot market cargo, that's why Negotiating lower rates in return for higher volume commitments shouldn't be underestimated. The rationale is to ensure utilization of approximately 50% of their overall capacity by signing contractual agreements with Shippers who commit a lucrative amount of cargo in a steady flow throughout the year. Carriers offer discounted freight rates and assured capacity in return for this security. Shippers can take advantage of this by splitting their annual volumes across a few reputed carriers, thus getting lower rates and reducing the risk of dependence on one carrier.
However, this means that Shippers have to plan well, estimate volumes, monthly flows, split between origin/destinations pairs, and equipment requirements.
Planning also involves understanding requirements in terms of value-added services that are purchased from carriers. Carriers and other vendors offer services such as insurance, trade finance, and customs clearance at different rates. Shippers need to decide which services they need and search for vendors offering the best terms after that.
Another aspect of planning is reducing spending on Detention and Demurrage, which is the amount charged by the port and carrier for the use of container equipment and storage space beyond the allocated free time. It is estimated that American shippers importing containers via Los Angeles and Long Beach can face charges over $2500, triple the global average. The timely movement of cargo can reduce the chargeable time, which results in significant savings.
Use sophisticated technological solutions
The shipping industry has seen a surge in technological solutions geared toward helping Shippers optimize their planning process and freight rate spending. These solutions are gaining in sophistication and becoming more popular.
These systems combine advanced AI and Big Data techniques to simplify the planning and transport management process, offering predictive trends and prescriptive solutions. Functionalities offered include route optimization, cutting transit times and bunker consumption, and reducing storage days and inventory levels.
Here at Portcast, we provide the technology that delivers a 30% reduction to indirect costs from container delays such as expedited freight, trucks, etc for our customers.
The current overheated freight rate market is in favour of carriers and seemingly leaves shippers with little room for negotiation. However, with robust planning and the use of appropriate technological solutions, Shippers can reduce freight costs.
As the market stabilizes, the iterative use of these good practices will see shippers reap even greater benefits.
If you are interested in how our platform may help your business, contact our sales executive to schedule a demo.