Buying ocean freight is about identifying which is the right service for your business and paying the right price for it or identifying the financial cost between one scenario and the other and making the final judgement call on which service to use.
Companies have different strategies for procuring ocean freight. Strategies can range from cost optimization or reduction, risk mitigation, network optimization, supplier consolidation, speed to market and being closer to market under either a short-term or a long-term plan. The right strategy depends strongly on the type of business organization you serve, the products being shipped, the key port pairs of your network and your annual transport volume.
Is your logistics service provider a good fit?
Some buy from carriers, others buy from freight forwarders. It is important to understand what your leverage is, the amount of internal resources you have and the kind of services and service level you expect when deciding who to buy from.
Shippers who buy from freight forwarders need to understand how their service providers manage their service providers. It is good to understand how your freight forwarders procure their rates, whether you are shipping on a FAK (Freight All Kind), which is subject to GRI and PSS, or a NAC (Named Account) that comes with space protection.
The recent M&A activity within the industry also means changes in services and liner strategy. Freight procurement professionals should regularly check to make sure that their carriers are still strong on the lanes on which they ship the majority of their cargo. It can be a good idea to look at other partnerships with your logistics service providers (LSPs): Maersk bought and integrated with Damco; CMA CGM Group, in accordance with the strategic goal of its Shipping the Future campaign, is to focus on maritime, inland and logistics development, and the recent acquisition of CEVA Logistics is a step closer to that. Ask your ocean liners today about their long-term strategies and how you fit into that picture, and possibly try out some of their door services.
For those who outsource their freight sourcing to 3PLs/4PLs, it is important to be able to have oversight over the procurement process to ensure transparency and auditability. It is also important to know whether the 4PL owns its own assets or whether it is subcontracting that capacity and operating at arm’s length. Procurement teams should get in the habit of setting KPIs with their logistics service providers and benchmarking rates. If you aren’t already having a quarterly business review (QBR) with your LSPs or providing them with a scorecard based on the service rendered, it is never too late to start.
Get in front of IMO 2020
The cost impact of IMO 2020 is already affecting some shippers. Assuming an increase of 15% per box for BAF/FSC, the cost repercussions could potentially total millions of additional dollars per year for some cargo owners.
Before requesting additional logistics budget from your finance department, consider backing up your requests with benchmark data. Ocean freight has always been a market-driven pricing model. Explaining the ins and outs of the ocean freight industry to a CFO or other non-ocean freight colleague can be a challenge without a frame of reference based on real industry statistics.
A business is only as competitive as its competitors, and benchmarking can illustrate this point very clearly. It allows shippers to showcase how well the business is doing regardless of whether it’s in the midst of an increasing or decreasing ocean freight rate market.
If you need help navigating the waters of IMO 2020, consider reaching out to a consulting service or other expert in the ocean freight industry who can advise you on current best practices in tendering for complex shipping environments like the global ocean freight market.
Since the Hanjin situation, carrier financial risk has been a nagging concern for many shippers. Many consumer electronics shippers with a JIT (Just in Time) distribution model were left with empty shelves, especially into North America. Keeping abreast of carriers’ financial health through their quarterly earnings report is a good ongoing practice.
Most shippers have a primary and secondary carrier awarding rule for their major lanes. It is important to know whether your primary and secondary carriers are not on the same alliance. Shipping alliances take turns sailing the same route; having both a primary and secondary carrier that are on the same alliance defeats the purpose of having sequential awarding rules since it means that your cargo will not be SOB (Shipped on Board) anytime soon.
Just like your business, carriers’ strategies also change over time. The recent China-US trade war has seen production diverted to non-China Asian countries in the region. Your major trade lanes may no longer be your major trade lanes and last year’s historical volume may not be accurate for this year’s forecast. Giving inaccurate forecasts to your carriers puts your business at risk—always negotiate with space protection in mind. Also, remember that your business is not the only one affected by the China-US trade war and a changing strategy.
Using technology to minimize time spend
Many shippers spend a lot of time on ocean freight procurement activities. Shippers with a spend of $30-100 million USD and approximately 1,000 -5,000 lanes spend an average of six months from preparation to award buying ocean freight contract that’s only valid for one year. For the sake of securing capacity and demonstrating compliance, some shippers will often accept an annual carrier contract and repeat it year after year rather than taking advantage of cost-saving movements in the market.
Using a freight procurement platform can help you reduce time spent on mundane tasks and focus on the face-to-face negotiations with your LSPs. These technology tools give you the hard, clean data and dashboards to negotiate confidently. Pairing this technology with benchmark data can also give you a basis with which to begin negotiations rather than starting with some random, arbitrary number.
Specialized freight procurement platforms allow you to identify outliers in bids, generate multiple stacked award parameters, provide immediate feedback to your LSPs with ranking and target rates, and save time decoding buffered rates by simply letting the platform do the work while you do the strategic decision-making based on this information.
Additionally, there are several electronic booking solutions and platforms that can streamline your booking process and ensure you are booked with the LSP you have awarded to make certain your budget remains inline with actual. Platforms like these can also help you track instances of LSP rejection of your booking. If you’ve signed an MQC (Minimum Quantity Commitment), it is important to know when there is a shortfall in MQC and where the gap lies. Shippers can get penalized for not meeting MQC the following year.
Find your ideal ocean freight procurement approach
Regardless of your organization’s overall freight procurement strategy, if your logistics team’s day-to-day strategies are not in line with the company’s, there is a huge risk of producing results that are counterproductive in the long run. At the end of the day, you cannot control the market trajectory, the M&A activities, the change in maritime regulations and political climate, but you can control how you run your RFQs to the best of your ability. By minimizing risks, making sure your LSP is a good fit, and leveraging technology and market data, you are on the way to finding your ideal approach to ocean freight procurement.
ABOUT THE AUTHOR
Regional Sales Manager
TICONTRACT, Transporeon Group
Vivien Cheong has close to 10 years of experience in the logistics and supply chain industry across various Asia Pacific geographical regions, working for various logistics service providers such as APL, Toll Group, Tiong Nam Logistics in the contract logistics and ocean freight space. She leverages her knowledge in all aspects of freight and logistics, including commercials, operational, business development, procurement strategy across multiple industry verticals married with technology to drive meaningful change in the companies that she works with. Her past roles have included key account sales, tender management and business analysis.
She is currently the Regional Sales Manager for TRANSPOREON Group, a cloud-based logistics and supply chain solutions. Using her experience to help businesses digitalize their logistics and supply chain processes, driving a more collaborative and efficient logistics ecosystem.
TRANSPOREON Group is the leading global cloud platform for intelligent transport logistics. It creates a digital connection between shippers and carriers, achieving smarter, transparent and more cost-effective movement of goods around the world. By digitalizing the entire logistics supply chain, it also enables real communication and collaboration across the worldwide shipper-carrier community. The company links today’s largest global network of more than 1,000 shippers, 55,500 carriers and more than 100,000 users in over 100 countries through a range of software-as-a-service solutions available in 25 language versions.