Cost saving opportunities in ocean freight rate procurement
In such turbulent times, it can be difficult for shippers to anticipate what might happen next in the global market. Challenges arise every day that impact supply chains, from new port closures in China, to the war in the Ukraine and increasing oil prices, it can be daunting trying to get a clear picture of the market as it stands. With these challenges comes higher cost pressure, longer lead times, clogged supply chains, delivery problems, supply problems, fear of recession, capacity restraints and more. While roadblocks are inevitable, there are some actionable steps you can take to mitigate them. By incorporating the right mix of expertise, technology, and market intelligence, global shippers can still realize true cost saving opportunities.
Control freight procurement operations
The first step is to get a firm grip on operations. To successfully do so, visibility into your daily processes and resultant roadblocks is essential. This is often executed using a digital platform, acting as a source of truth for all necessary data within you operation. Putting this into practice will allow for quicker reaction time, an ability to anticipate next steps, and identify upcoming opportunities to improve operations. To take the first step, use this blog as a practical guide towards rapid costs savings in your digitalization journey. While we’re focusing on container ocean freights here, this framework can be applied to all modes of transportation.
The challenges we discussed above are admittedly stressful, but they can also pose as opportunities. In a dynamically shifting market environment, shippers must know what to look for. Supply Chain Managers must be well informed and act fast if they want to gain from market conditions that offer opportunities for instance on rate negotiations. To stay informed there are essentially two sources of data: External (Benchmarking) and Internal (how your organization is performing and changing).
External: For example, the current container freight rate index shows a 5% decrease in freight rates on a trade that is part of your network
Internal: Ideally my digital control tower’s dashboards indicate that our suppliers performed much better on certain lanes, that a specific carrier increased actual transit times while charging us more.
Steps to take in securing opportunities
It is essential to understand your baseline. Current rates, cost drivers such as fuel, suppliers and their specific performance by lane, quantities per lane, operational KPIs during the contract year and more are vital to understanding where your opportunities lie. Once this is understood, it is time to perform your analysis. Ask the questions:
- Did your suppliers increase their rates as per benchmark market average, above, below?
- What impact has fuel had on your past rates, what impact did capacity / supply-demand have?
- Can you find alternative routes, e.g. avoiding overcrowded and backlogged port locations and trade lanes in favor of other port locations and options that may involve inland trucking or short shipping?
To be able to continuously analyze these variables, looking forward instead of being cornered into a constant cycle of reaction, incorporating a digital platform is the key.
Act fast and focused
Best practice in times of uncertainty is rather a very focused mini bid of only a few lanes, rather than bidding out the entire network. Mini bids are essentially done to address a specific set of internal and external volatilities. It is crucial that you prepare yourself to do these mini bids on a regular basis and choose the lanes that came out of the analysis as the most value driving ones for quick impact. Involve your suppliers and discuss your objectives and strategy; there will always be a supplier that is interested in your new concept if it provides an opportunity for the supplier as well, make it a win-win situation.
When data (lane data, historical data) is available, setting up a mini bid is easy. Don’t slow yourself down with analysis paralysis. By the time you have overanalyzed your bid, the market has already changed. Be agile and assess the entire picture. You’ll soon see that areas that might have been overlooked in the past pose as an area full of opportunities, and by implementing the right tools it becomes much easier to understand where they are.
Challenges will always arise, that is the nature of the market. It is constantly changing and shifting, never static, always dynamic, as shifts in supply and demand patterns are ever present. Inform yourself with external benchmarking data, without overanalyzing it. Know your internal performance by utilizing a digital platform that connects all readily available data in your organization to know where the areas for improvement are. Be agile in moving to the next improvement project and use the savings and success to invest into your next digital project. Embrace change and involve your suppliers, cross-functional colleagues, and all stakeholders in change initiatives. By implementing these practices, you’ll find that you emerge ahead of the game, ready for any challenge that might come your way.