Freight is a critical component of landed cost for both importers and exporters. It can become a serious expenditure, impacting margins and profitability.
The Pandemic impacted every aspect of the global freight market. This included all areas of the world, all products, all trade lanes and all modes of transit.
As an example, ocean freight costs in January 2020, on a 40’ container from Shanghai, China to Long Beach, CA ranged in cost from $1200-$2500 depending on volume factors.
The average cost for that same container in November of 2021 was $16,000-$22,000 and in some lanes premium service was in excess of $25,000.
Average air freight costs went from $1.80/kilo to as much as $12.00/kilo – unprecedented in global freight markets that had previously never seen these numbers.
The good news was that by the time we hit the spring of 2023 pricing was normalized. Consultants like me never anticipated the original price increases and would never have predicted such a rapid descent either.
With all these “elevator changes” seen over the past three years, supply chain managers are faced with dealing with a new reality of:
- An unstable international freight market
- An unstable economic certainty on a global scale
- Capacity and infrastructure exceeding demand
So, within all this chaos, the supply chain executive needs to think: resilience, sustainability and long-term.
With many senior managers seeking short-term results, there will have to be a balanced approach that meets both short-term and long-term strategies. That is not easy, but it is doable when we consider the following recommendations:
- Don’t look to the “cheapest.” Look where the best value for your spend can be achieved.
2. Look for service providers, 3PL’s and carriers, where strategic partnerships can be accomplished.
3. Bring technology advancements and “state-of-the -art” solutions which create efficiencies and business process enhancements.
4. Seek partners that have demonstrated stability of personnel at both the senior management and operational levels.
5. Seek where “bundling of services” can be achieved where pricing discounts would be gained.
6. Work intimately with your “demand planning” teams to allow for lower cost transportation solutions to be utilized, such as ocean freight as compared to the higher cost option of airfreight or expedited services.
7. At a detail level assess your “landed costs.” The five pillars of these costs can be dissected to determine where both risk and cost can be reduced. By making changes in your strategy and choices in any of these areas of cost, you could very favorably impact both risk and cost in freight.
As an example, a company distributing its imported products from a single warehouse and distribution facility in Baltimore Maryland. A demographic analysis determines that 45% of their customers are west of the Mississippi River.
By creating a secondary distribution facility in the West, they open the door to lower freight costs on companies nearer that facility and additionally, the overall overhead costs are lower than the Maryland location.
8. Create strategic relationships with all the internal stakeholders … sales, customer service, inventory management, manufacturing, demand planning, etc. and work in a collaborative methodology where much more can be achieved, compromises made, and the company benefits from the cooperation and unity thinking. This will create effective working relationships … “all rowing in the same direction”.
Your role demonstrates leadership, which will be valued up the management chain.
9. Look within your industry for “buying consortiums”; where “spend” can be combined and thereby “leveraged” for favorable terms and pricing.
We have been very successful at putting together buying consortiums within industry segments, benefitting both shippers and carriers.
10. Get yourself out there … at conferences, trade shows and industry events where:
- You can network, i.e. develop valuable resources and contacts
- Access competitor information flows
- See state-of-the -art options
- View new technology opportunities
- Keep the “learning process” contemporary and alive
Every supply chain executive’s primary responsibility is to find ways to reduce risk and cost in their global supply chain. This was a great challenge during the Pandemic but as we emerge from that difficult period, a door has opened for us to make betterments, adopt change, and have our supply chain evolve into a much more efficient, resilient and sustainable component of our company’s overall business model.
Typically, on an annual basis (often in March/April) negotiations take place between principal shippers and the carriers and service providers that move their freight. These negotiations can be intense and sometimes even a “slugfest” where freight rates are reduced and – depending upon your perspective – either not enough or way too much!
Shippers too often focus on freight cost negotiation as their primary tool in reducing overall landed costs. Over the past 30+ years I have come to believe this is the wrong focus; it is just not true that contract pricing is the primary cost driver in landed cost.
Furthermore, a singular focus on contract pricing actually creates angst between the shippers and carriers and leads to competitive pressures that destabilize the marketplace.
I firmly believe in free market negotiations, but what happens in international freight in the spring and throughout the year does not create mutual benefit for both sides, rather, it creates an imbalance that has longer-term negative impacts.
Shippers have other options and courses of action to reduce supply chain costs without taking a singular focus on freight rates. In our consulting practice, this is often the challenge we face in meeting customer expectations, that is, helping our clients expand their focus beyond freight contract negotiations. Here are a few of the most impactful options.
Demand Planning
Our first area of exploration with most companies is to assess to what extent a company’s demand planning systems are in synch with logistics. Too often they are not – and as a result supply chain risks and costs increase. There will be too many LCL orders and not a dominant mix of FCL shipments, which based on a cubic measurement is a less expensive option, maybe as much as 20-30%.
Demand planning also includes understanding inventory needs and placing replenishment orders on a timely and lean basis.
Many times, air freight, which can be as much as 18 times more expensive than ocean freight, must be utilized because product needs to be moved more expeditiously than ocean freight allows. Too often this is not a strategic planning event but rather a negative consequence of poor planning or lack of coordination between the various fiefdoms and verticals in any organization responsible for inventory, replenishment, purchasing, demand planning, supply chain and/or logistics.
Technology that allows an interface between all the internal stakeholders, service providers, carriers and suppliers is an integral component of any well-run global supply chain. For inbound logistics, these systems are often referred to as “PO Management Systems” and can become an invaluable tool in the arsenal to create very defined efficiencies in supply chain operations. For exports, similar systems are often referred to as “export order entry systems”.
Technology can become an extension of a corporation’s operating platforms or a “value-add” available from quality service providers, 3PL’s and carriers. The technology creates timely information transfer, transparency, lean practices and accountability between all the vested parties involved in the international transaction.
Managing these exposures proactively enables the global supply chain executive to create contingency plans in advance, defining the strategies and action steps that will mitigate these risks and costs.
Consolidate Service Providers
Another strategy in reducing logistics costs that has proven successful is by reducing the number of service providers and carriers. Some experts on international transportation caution companies against “putting all their eggs in any one basket.” I have found while that concern is real, it can be managed.
If you reduce the number of providers and carriers to better leverage spend and place more “eggs in the basket,” then you can more closely watch and manage that basket. Over the last 5-7 years (with the exception of our Covid years), as more companies have pressed hard to run leaner supply chain operations, we have moved them into a reduction of carrier and service providers. The benefits outweigh the potential downside consequences.
Sea-Air Combination
Another option available to shippers whose freight originates in Southern Asia is what is referred to as the Sea-Air Combination. Freight is shipped to various Middle Eastern Cities such as Dubai and then transferred to the airfreight mode which moves it to Europe, North and South America.
Cost savings on freight of as much as 45% is available with arrival time reduction moved from 28 days to as little as 14 days. This allows larger bulk moves to occur from Asia to the West with costs significantly less than air freight direct, but at transit times almost cut in half.
The Sea -Air option both reduces cost and risk to the global supply chain while creating a value add of efficiency and convenience well worth taking a look at by those who operate global supply chains.
Summary
At the end of the day, the most important factor in all of this discussion is to recognize that there are a variety of considerations, components and opportunities that exist to reduce risk and cost in the global supply chain and deliver more value for your spend with freight and logistics.
The key is to recognize that the “cheapest” negotiated contract price typically has negative consequences. Negotiating with a mindset of “obtaining value for your spend” is a more prudent option.
