Tender management against rising ocean freight rates

Outdoor freight container transshipment point

So what’s going on with ocean freight rates? It looks like they are marching upwards through 2017, which means shippers need to take early action now. This blog examines how manufacturers, suppliers, and retailers can take back control and cut cuts by improving tender management.

Checking the background info

In 2015, the ocean freight rate trend was distinctly downwards – the SCFI declined from around 1,000 to just 500 during the year. But through 2016 (notwithstanding a post-Christmas tumble at the start of the year), the overall trend was volatile and heading upwards. Asia-Europe trade had the highest spread – from lows of $180 per FEU on average to highs of $2,600, representing more than a 14x increase – and Trans-Pacific eastbound trade ocean freight rates increased x3 from lowest to highest.

Through 2017, most shippers anticipate rising freight rates (56%). Many shippers expect prices to remain stable (44%) but no-one thinks that rates will decline (Transporeon/Xeneta survey, 2016).

Ocean freight rates are expected to increase significantly in 2017

Asking why ocean freight rates will rise

Over the last couple of years, more ocean vessels have been built and mega-vessels with unprecedented capacities have been introduced. Yet there’s been growth stagnation in various economies and this has suppressed capacities – in less than 12 months, weekly services on Asia-Europe routes reduced from 21 loops to 17, and at least three loops were suspended on the Trans-Pacific route (Alphaliner, 2016, Issue 22). This trend is amplified by vessel scrapping: 1,000 ships with a combined capacity of 52 million metric tons of cargo will be sold for scrap metal during 2017 (not far off the record of 61 million scrapped and recycled in 2012).

Shipping industry consolidation is also causing ocean freight rates to rise. Carriers controlling a larger market share are able to dictate pricing and improve planning. Merger and acquisition in the shipping industry reached a historically high in 2016. Maersk acquired Hamburg Sud, CMA CGM acquired APL (NOL Group), China Shipping and Cosco merged, and Hapag-Lloyd is set to merge with United Arab Shipping Company (UASC). More M&A activity is certain in 2017.

Also, the number of shipping alliances has dropped from four to three: 2M – Maersk and MSC; Ocean Alliance – CMA CGM, China Cosco, Evergreen, OOCL; The Alliance – NYK, K Line, Hapag-Lloyd, MOL and Yang Ming. With fewer alliances to choose from, it may become harder to drive competition and balance cost with service. When your chosen carrier’s alliance partner omits your port of load, how do you ensure your backup provider is not a member of the same alliance? Likewise, as we saw with Hanjin, what happens when your chosen carrier has a vessel-sharing agreement with a financially unstable partner?

Deciding to improve your tender management

Tough market environments require a solid shipping procurement strategy. Shippers need to obtain ‘the three rights’: the right rates, the right schedules, and the right amounts of allocation.

Here are six ways that you can secure ‘the three rights’ – this is your most effective response to rising ocean freight rates in 2017:

  1. Streamline your tender managementprocesses:
    Don’t get bogged down by mundane tasks like copying and pasting Excel files as these introduce the risk of human error. Instead, use a technology platform to help you launch each bid, receive and consolidate offers, analyze allocation, and communicate effectively with your carriers.

  2. Add forecasting value to your supply chain procurement: 
    When you can forecast more accurately using granular data rather than a per-annum prediction, it is easier to negotiate with carriers.

  3. Review your carrier database: 
    If you procure from less than five carriers, you may need to re-evaluate your carrier database. Unless you cast your net wide enough, you can’t make the best buying decisions for your organization. I recommend you do a quick search on Transporeon’s Ticontract database of more than 35,000 unique carriers. This can help you to extend your closed carrier pool with additional suitably qualified providers.

  4. Evaluate your tendering strategy:
    It may be useful to change the timing of an RFQ launch. You are unlikely to get the best deal from carriers when their outlook for the year is optimistic. Waiting a while could bring contracted rates down. You should also consider using non-contract-based assignment or day-by-day allocation – many shippers achieve substantial freight rate reductions this way.

  5. Use a customized tendering structure: 
    An effective structure can help to set the tone of your request for quotes, convincing your carriers that you are in control of the process, obliging them to bid more competitively for your business.

  6. Keep an eye on benchmark rates: 
    The only way to really know you are paying above or below market price for your ocean freight is to access benchmark rates from shipping and procurement experts.

Since 2005, the Transporeon Group has been a trusted advisor to global shippers worldwide, supporting more than 8,500 managed transportation tendering events per year. With an experienced team of consultants from various geographies, industries and transport modes, we can advise you on current best-practice tendering in complex shipping environments.

You’ll find further useful information in our Ocean Freight Supply Chain Insight. And please get in touch to discuss the six ways of improving your tender management in the current ocean freight market.

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