By: Joseph M. Joseph, Esquire
Freight rates in the international shipping industry are, to say the least, volatile, especially for the small to medium size shipper who depend, in whole or in part, on spot market rates for their import and export pricing.
Several factors have, year over year, consistently affected freight rates, some causing increases while others contributing to declines. The most obvious include capacity and fuel prices. For example, in 2019, ocean carries were required to become compliant with a year-long foretold IMO fuel mandate which put a sulfur cap on a ships fuel beginning in January of 2020. The carriers’ response as most forecasted was to pass the cost of compliance on to the shipper via rate increases. Of course, capacity forces adjustments to market freight rates. However, couple these traditional factors with unforeseen and unknown issues shippers are continuing to face when attempting to manage a global supply chain, such as COVID – 19 and Tariff wars, left many finding themselves in unfortunate financial and operational circumstances when trying to meet customer demand. Both the COVID pandemic coupled with the increased tariffs, continue to drive down the demand for goods in the U.S. creating imbalances in the supply and demand of freight transportation services. While traditionally, the decline in demand would result in price declines due to overcapacity, ocean carriers for example, have manipulated pricing through unprecedented cancelation of sailings thus reducing capacity and driving up market rates over eighty percent compared to last year’s rates at the same time. Consequently, as transportation costs rise, companies are faced with shrinking margins and growing pressure to pass the increased costs onto their customers.
These shifting conjunction of factors and economic developments that lie beneath transportation costs have invariably impacted supply chains forcing companies to rethink their supply chain strategies. During the 1990’s and the first part of the 21st century, the high availability and low cost of transportation services relative to the cost of holding inventory encouraged a lot of organizations to emphasize fast, frequent delivery to customers through such means as just-in-time delivery. However, because of recent dramatic and abrupt changes to global transportation, many organizations are calling into question their long-standing strategies. Facing the realities of surging costs and continued uncertainty of future relief, companies are looking at making transportation driven shifts in their supply chains.
Several such shifts include, but are not limited to, moving from off shoring to near shoring, incorporating shipping considerations into product design and packaging and third, shifting from lean inventory strategies to a hybrid lean inventory/transportation strategy.
The shift from offshoring to nearshoring is driving change in sourcing strategies. Instead of procuring material and outsourcing manufacturing wherever it is cheapest, companies have focused more on performing these activities as close to the end markets as possible. The objective in this strategy is to shorten the length of the international component of the supply chain. Freight costs presumably decline, revenues would be improved as material is closer and more responsive to the market thus allowing businesses to make adjustments to customer demand with shorter lead times and, finally, current inventories would be reduced because of the shortened lead times and the uncertainties associated with possible delays from cancelled sailings or slower lengthy line hauls from distant countries.
Incorporating shipping considerations into product and package design allows for reduced weight and density, which in turn helps increase the amount of product to be shipped in a truck, ocean container or other conveyance. These changes are geared towards freight cost savings as well as packaging costs and enhanced space utilization.
Shifting from a lean inventory strategy to a lean inventory/transport hybrid strategy allows for companies to offset increased inventory carrying costs against lower transportation costs. Common transportation strategies that implement lean principles such as just in time delivery, customarily utilize fast and frequent shipments which are dependent on low cost transportation. However, as transportation costs rise, the importance of transportation economies of scale, achieved by making larger but less frequent shipments and carrying larger inventories, becomes more important. Transportation costs are now part of the formula when implementing safety-stock and cycle-stock inventory policies. More consolidated shipments are emerging as companies are paying closer attention to transportation costs. This strategy shift is indicative of a renewed focus on long established principles of transportation management that distance, density and shipment size are key drivers of transportation costs. Controlling shipment size should help reduce per-unit transportation costs.
As shippers face third quarter uncertainties with costs and their supply chain, some things are certain. Ocean vessel capacity is still under the control of just a few large global alliances whose decisions to artificially restrict capacity and limited low-cost air options will continue to cause higher than usual transportation costs. With less capacity ocean carriers will be able to hold current rate increases, but also, in affect gain the forth coming peak season surcharges, all in one. Couple that with a complete lack of clarity on the air cargo market demand, capacity levels and expected rates along with back to school merchandise which usually enters the country in May and June, still on hold, make forecasting less than accurate and putting added strain on supply chains.
One thing is for sure as shippers move into the third and fourth quarters of 2020, transportation must be treated as a strategic element of every organization’s business plan and the end-to-end supply chain in order to remain competitive.
Joseph M. Joseph, Esquire
is a licensed Attorney and United States Customs Broker. In addition to his Juris Doctorate degree, Joe possesses a Master’s Degree in Business Administration. Currently, Joe serves as in-house legal counsel for Dalko Resources, Inc., and is the company’s Executive Vice President of International Business and Customs. He has served in the international logistics field for over 2 decades. He is a well-known speaker and presenter in the areas of compliance, logistics solutions, customs brokerage and market development. His legal and customs background along with his international trade experience has benefited many who are expanding into a global market. Mr. Joseph has assisted companies in developing strategies to optimize global trade business practices. He is well versed on how to navigate the intricate maze of global trade challenges and regulations with a proven track record of helping organizations minimize costs and risks.
Joseph M. Joseph, Esquire, Senior Executive Vice President of Human Resources, General Counsel, International Trade and Customs, Dalko Resources, Inc., Sharpsville