Better Managing Ocean Freight Costs through Negotiations

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What is Freight?

Freight is the cost incurred by any person/business for the transport of goods by any mode of transportation, such as air, land, rail or sea transport. The freight cost of a business could be substantial and generally varies around 10% or more depending on the type of commodity/operation. Although a business directly puts every effort into controlling and reducing the costs within their operation, if asked, what is your annual freight cost? Countless times the usual answer is” Don’t know”.  Hence, simply, “if you’re not monitoring it, you’re not managing it”.

This article focuses on International Ocean Freight Negotiations and some useful tips for managing freight costs.

Carry out Freight Market Surveys

The first step is to carry out a freight market survey, to understand the current market rates. You need to know your total freight bill to better evaluate your position in the existing freight market while focusing on competitors’ shipping to the same countries/ports and target markets. Here, it is important to focus on the shipping volumes, and frequency of shipping, including shipments during peak seasons, and to identify the international shipping volume requirements/status during specific periods of the year. Many countries/regions have multiple ports. Hence, it is vital to identify ports that provide the opportunity to make cost savings, by switching cargo volumes between shipping lines. Remember, that this information is crucial when negotiating freight contracts.

Selection of Service Providers

Secondly, carry out a detailed analysis of service providers operating in the specific shipping lanes or routes. In this process, finding the availability of main shipping lines & freight forwarders in those specific lanes or routes is vital information. Consider the periods that those shipping lines/service providers float their tenders. It is generally the beginning of the calendar year. Therefore, it is the best time to negotiate large volume contracts with them. However, if you have smaller volumes in certain lanes, it is better to consolidate the total volume and negotiate with one shipping line or service provider. Most trade lanes have multiple shipping/service providers. More providers mean that there would be a greater opportunity of having competitive rates.

Get the Pricing Right

This involves several areas.

  • Evaluate end-to-end freight cost starting from origin to final destination delivery point. These costs cover charges such as origin inland transport, exporting country port terminal charges, Base freight charges, and Bunker surcharges, to name a few.
  • Analyze the origin or destination shipping agent’s or service provider’s total charges, including destination delivery order fees. Regardless of the INCO term used, the evaluation should be done.
  • In reality, when evaluating end-to-end cost, some cost elements may not be relevant to the applicable INCO term. For example, in the most common INCO terms like CIF or CFR, the seller bears the cost up to the port of destination. But for evaluation purposes, you need to know all cost elements up to the buyer’s final destination.
  • Try to keep track of fluctuating bunker prices. If possible, try to negotiate bunker prices separately based on actual quarterly prices rather than forecasted annual prices. This way there could be substantial cost savings.

Open Market Rates

This refers to the use of spot rates available in the market. This system may not provide guaranteed shipping space due to its offered low rates. However, if proper market intelligence is done, this is a good opportunity to keep your cost under control by using them when possible. But this may not be an option for critical time-sensitive shipments as service providers would prioritize “high freight rates” paid cargo throughout the transport

Benefitting from Different Transit Times

In most cases, faster transit means a higher freight rate. If you can manage your freight by using fast and longer transit times while analyzing the goods’ required dates at the destination country, you will likely reap benefits in the form of attractive rates. In addition, keep in mind, to minimize your container detention costs after the arrival of cargo at the port of destination. Shipping lines or service providers allow “a detention free time” for the use of the shipping container after arrival in port. For Example 7, 14 or 21 days or as agreed at the time of booking freight. Detention rates after allocated free time could not only be exorbitant but may apply retrospectively. It is vital that you understand container detention free time and the structure of charges when negotiating freight.

These are only a few tips to use when negotiating ocean freight. It is important to understand all end-to-end freight costs including hidden costs, as parties with a lack of knowledge will miss the opportunity to negotiate the best rates and minimize costs.

This article is a part of the Business Tips for Trading Across Borders series — A collaborative effort of 
The Ceylon Chamber of Commerce and United States Agency for International Development (UASID) Partnership for
Accelerating Results in Trade, National Expenditure and Revenue (PARTNER) Activity
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