As world economies begin to recover from the coronavirus pandemic, important lessons on freight cost management have been learned. Commercial shipping interests need to understand the market forces and challenges associated with freight costs as a risk management approach intended to supplement commercial marine insurance. There are several ways shippers can gain a better grip on freight costs, even as market conditions continue to evolve. In this guide, we will explore industry best practices for controlling the overhead costs associated with freight shipping.
2021 Freight Costs
As 2021 began, ocean freight rates began to climb, reaching levels 4.5% higher than 2020 figures. Shipping index analysis firm Xeneta reported that in January alone, the global long-term contracted freight rate reached a high of 6% over January 2020 numbers. These rate increases were influenced by numerous pandemic-related factors, including:
- Congestion in world ports.
- Difficulties in securing containers for freight.
- Imbalances in exports between U.S. and foreign manufacturers.
- Fluctuating consumer demands.
- Lack of personnel and equipment in freight-handling facilities like ports and terminals.
While increases in freight costs may sound like a positive development for the commercial shipping industry, the rates themselves can be a symptom of supply chain interruptions. In addition, rate increases are often accompanied by other cost increases, including handling, fuel, and port expenses. Managing these costs, then, is crucial. Commercial marine insurance protects against many operational and liability risks in the shipping industry, but controlling overhead expenses is a vital element of risk management.
Industry Best Practices for Freight Cost Management
Shippers need not rely solely on commercial marine insurance to protect against risks. Taking an active role in controlling expenses can protect business assets no matter what market forces are driving freight costs. Commercial shipping interests have several options to control costs, including:
- Negotiating shipping at off-peak times – scheduling freight for periods such as early in the week or in the evening/night. Rates are often lower at these times to help improve balance and consistency in operations.
- Renegotiating rates with freight partners – for shippers that work closely with high-volume carriers or established freight partners, improving the terms of contracts such as guaranteeing volumes or locking in rates can help control costs for both the shipper and the partner.
- Reducing dunnage in cargo loads – dunnage, or the packaging and supportive materials used in cargo handling, takes up space. Reducing this extra volume and weight can free up space for additional cargo, ultimately reducing freight expenses.
- Explore fixed-rate shipping – many shippers and carriers operate on variable freight rates, introducing some level of unpredictability to the operation. As a solution, fixed-rate shipping can improve consistency and ultimately manage expenses better.
- Reducing or eliminating less-than-load (LTL) shipments – on a cargo ship, empty space represents wasted freight expenses. One way to reduce or eliminate this wasted space is to work with load-consolidation partners or to forge contracts for full loads only. A full ship gets the most out of the costs associated with freight.
Shippers must also invest in freight logistics tools or third-party logistics service providers to help companies better understand the procedures and patterns in the operation. This improves supply chain management and ultimately controls costs. Logistics software developments have improved the ability of shippers to manage every aspect of freight handling, from initial loading of ships to final delivery in ports around the world. These logistics tools or services also help to influence decisions that will help the shipping company over the long term.
Commercial marine insurance is not the only risk protection available to shippers. With this insurance and by adopting best practices, shippers can control freight expenses, maximizing profits and setting the stage for success well into the future.
About Merrimac Marine Insurance
At Merrimac Marine, we are dedicated to providing insurance for the marine industry to protect your clients’ business and assets. For more information about our products and programs, contact our specialists today at (800) 681-1998.