The recent volatility in freight rates has led to a newfound urgency for businesses to become proactive in preparing for upcoming shifts in the industry. With changes in the global economy, geopolitical tensions, and ongoing pandemic impacts, there’s never been a more crucial time to understand and adapt to the dynamics of freight rates.
In 2021, container shipping costs peaked at around 8 times baseline costs due to port bottlenecks caused by the global pandemic, underscoring the volatility in this space. In this article, we will dive deeper into the strategies businesses can employ to mitigate the impact of these fluctuations.
Understanding Shipping Costs
Shipping costs can be broadly categorized into fixed, variable, and negotiable costs:
Fixed costs are those that remain constant regardless of the amount shipped,
such as rent for warehouse space or salaries for permanent staff.
Variable costs change with the volume of goods shipped, and can include fuel
costs, packing materials, and overtime wages.
Negotiable costs are those that can be influenced by business relationships,
quantity discounts, or negotiation skills, such as the prices charged by freight
carriers.
In an era of fluctuating freight rates, understanding and optimizing these costs becomes critical. One way businesses can manage shipping costs is by partnering with a third-party logistics (3PL) provider. But what is 3PL logistics exactly?
A 3PL can store your inventory, pick, pack, and ship your products, and provide a vital link between your manufacturing operations and your end customers. By leveraging the expertise of a 3PL, businesses can focus on marketing, growth, and customer satisfaction, while also potentially saving money and time.
Another strategy to manage shipping costs is to bring production closer to the target market — a concept known as onshoring or nearshoring.
Over the past few years, a combination of geopolitics, economics, and concerns about supply chains have started to push manufacturing closer to consumers, a trend that was only exacerbated by the global pandemic.
Reducing the distance between production and consumption potentially also reduces shipping costs, increases speed to market, and mitigates supply chain risks.
Alternative Shipping Routes and Partners
In an increasingly uncertain world, diversifying your supply chain can be a powerful risk mitigation strategy.
This can involve identifying alternative suppliers, switching to regional carriers, or even exploring different shipping routes. A reduced dependence on a single source or pathway creates a more resilient supply chain capable of withstanding shocks.
However, diversification also comes with costs. These can include higher prices from smaller or less efficient suppliers, increased complexity in managing multiple
relationships, and potential disruptions as new partnerships are established. It’s
therefore essential to weigh the benefits of diversification against these costs and to implement this strategy.
The Legal Framework of Freight Operations
Contracts
The fluctuating landscape of freight rates requires businesses to ensure that their contracts with partners adequately reflect the dynamics of the market. Long-term contracts can provide a semblance of stability and predictability in an otherwise uncertain environment. These agreements allow companies to lock in rates, secure capacity, and plan their logistics with more confidence.
However, while long-term contracts offer certain advantages, they should not be so rigid as to stifle adaptability. Given the fluctuations in freight rates, contracts need to be flexible enough to allow for adjustments.
This can involve including clauses for renegotiation based on specific triggers like significant rate changes or shifts in market conditions. This level of flexibility helps companies respond to changes in freight costs without being tied down to unfavorable rates.
Insurance Coverage
Insurance coverage is another fundamental aspect of risk management in freight operations. It provides a safety net for businesses by protecting them against various freight-related risks — and the benefits of insurance coverage go beyond the financial protection it offers.
It also provides peace of mind, knowing that potential losses will be covered, which allows businesses to focus on their core operations and growth.
Insurance can mitigate a range of risks, including:
Damage or loss of goods in transit: Insurance can cover the cost of goods that are damaged or lost while being transported.
Delays and disruptions: Some insurance policies cover the financial losses incurred due to unexpected delays or disruptions in the shipping process.
Natural disasters: If a natural disaster impacts the shipping process, insurance can help cover the associated costs and losses.
Theft: Insurance can provide coverage in the event that goods are stolen during transit.
Political risks: Some insurance policies provide coverage for losses resulting from political events, such as war, civil unrest, or changes in trade policies.
Liability claims: If a third party files a claim alleging that your business caused them harm or loss during the shipping process, insurance can cover the costs associated with these claims.
With the right insurance coverage, businesses can protect themselves against these and other potential risks, helping to ensure the continuity and stability of their operations in the face of uncertainty.
Order Timing and Restocking Levels
In the world of supply chain management, one thing is absolutely crucial — timing. It’s not just about when goods arrive, but also about how they arrive and in what volume. This involves a careful balancing act between keeping enough stock to meet demand and avoiding overstocking that can tie up capital and storage space.
Leveraging off-peak periods for inbound freight can yield significant cost savings and efficiency gains. Off-peak periods often correspond with lower demand for shipping services, which can translate into lower freight rates.
Additionally, deliveries during off-peak hours can reduce congestion at delivery points, speeding up the unloading and processing of goods.
However, it’s important to note that accurately predicting off-peak periods can be challenging, as they can be influenced by numerous factors, including seasonality, market trends, and geopolitical events.
The Impact of Technology on Freight Management
Technology has become an indispensable part of modern freight management. It offers a multitude of tools and platforms designed to provide comprehensive logistics intelligence, which is vital in optimizing operations and reducing costs.
These technological solutions often come in the form of Transport Management Systems (TMS), multi-modal platforms that automate and streamline the entire shipment lifecycle. They typically include features such as freight rate tracking and optimization, helping businesses navigate the complexities of managing freight costs and logistics.
Some of the most important capabilities of these platforms are:
Real-time visibility: enables businesses to track shipments at every stage, ensuring smooth operations and timely deliveries.
Predictive analytics: provide businesses with data-driven forecasts to help plan their logistics better, anticipate challenges, and seize opportunities.
Integrations: into existing logistical and operational infrastructures, enhancing their functionality without the need for extensive system overhauls.
These tech-based solutions provide valuable insights into freight operations. This visibility and understanding, in turn, enable businesses to make data-driven decisions that enhance efficiency, reduce costs, and ultimately, improve customer service.
Conclusion
The world of freight management is becoming increasingly complex, with shifting trends in onshoring and nearshoring, increasing reliance on 3PL providers, and the growing importance of technology.
Proactive risk management is more important than ever. This involves not just keeping a close eye on freight rates and market trends, but also being ready to adapt and innovate in the face of change.
Using cutting-edge technology, diversifying supply chains, and making strategic use of off-peak periods, enables businesses to position themselves to navigate the challenges and opportunities of the evolving freight landscape.
Tai TMS can equip you with the tools, integrations, and automations that will set your brokerage up for success. Book a FREE demo now to see how it can optimize your freight brokerage!
