Volatility is rapid and sometimes unpredictable, up-and-down movements of the market. In global trade and shipping, these changes occur in the form of fluctuation of available shipping capacity and price.
The fluctuations in shipping volumes are due to the seasonality of products being shipped on a particular trade lane. Seasonality, however, does not only refer to or apply to shipments that are naturally seasonal such as fruits, vegetables, etc. This also applies to consumer goods that are heavily traded in holiday season.
Before and during these peak trading season, there is a huge demand for space on ships which in turn will increase ocean freight rates as shipping lines capitalize on this high demand. Similarly, during low demand (after the holiday season or when commodity prices are not favorable to the shippers) there is a surplus supply of space on shipping vessels which causes freight rates to drop. Such fluctuation in ocean freight rates affects everyone irrespective of whether they are a big retail chain or your local corner store as all products are linked through global and domestic trade.
Due to the volatility of ocean freight rates, the businesses of many BCOs and OTIs (Ocean Transport Intermediaries = NVOCC and Freight Forwarder) may be affected as their costing to their customers becomes unpredictable. While market volatility and the price fluctuations cannot be avoided, here are four tips on how these can be managed.
Understand your business
Understand your business, your products, its sales peaks and troughs in the various geographical areas you trade in.
Understand your competition, the products they deal in, the shipping services, modes of transportation they use and where possible and applicable, replicate those in your business model.
Understanding your business can help you a great deal in terms of which type of freight contracts and rate negotiations you must enter into with the shipping service provider.
Freight contracts and negotiations come in different types:
- tender based
- spot contracts
- Freight All Kinds (FAK)
Depending on your commodity, product or business you can choose the best option from above to ensure optimal returns on your freight rate negotiations. For example, if your commodity or product sells the most during a low demand period for the carrier, you could negotiate a short-term or spot contract for that period wherein you can maximise your revenue through cost reduction in ocean freight rates.
Or you could simply use the services and contracted rates of a NVOCC or a freight forwarder. Rather than lock yourself into a 12-month cycle based on commodity, this option could yield much better results for you. You can easily compare quotes, services, transit times which will help you find the best options especially around the peak season.
But if your commodity sells year around, then you could opt for security by entering into fixed-rate contracts for a year.
Contract ManagementBut entering into and managing
contracts is easier said than done. Successful contract management can be realized only when the full obligations of the contract are understood and also the context of the contract is clear.
A successful contract is possible when it is managed across the various phases of a contract – planning, creation, association, execution, administration till the closing or subsequent renewal of the contract.
Your relationship with the carriers plays a major part in what rates you are able to secure and maintain. It is important to understand how to manage your shipping partners. Carriers prefer loyal customers who support them through market changes and some shippers may be receptive to higher rates provided the carriers support them with space during high season.
If you are a BCO, you can use a combination of your own negotiated contract rates and use the services of an OTI. Depending on which OTI you use, you could benefit from better rates on certain sectors where you as a BCO may not be able to secure.
Automating your contract management process can help you in maintaining regulatory compliance and help you in setting up a structured contract management process. This will help you in managing the effects of the market volatility and the subsequent ocean freight fluctuations.
Market volatility and ocean freight fluctuations are here to stay. Therefore, it is in your best interest to work on options to achieve cost savings. This may be accomplished through a combination of understanding your business, choosing the best mode of transportation, identifying the best type of freight contracts to use, automating the various contract and freight negotiation processes, improving the supply chain visibility, analyzing the delivery patterns vs. costs and using an effective contract management process.