Alleviating freight cost pressures in a post-pandemic world

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The last 2 years have seen many supply chain issues, which have challenged the existing management principles to the core. While a few of these may have been specifically due to the pandemic, many are also a result of years of underinvestment in people, infrastructure and processes across the supply chain.​

Swelling freight rates and container shortage have become a global challenge disrupting supply chains across industries. Over the last six to eight months, shipping freight rates across transportation channels have gone through the roof. ​Prices for several trade lanes have tripled compared to last year, and charter prices for container vessels have seen similar rises​.

There is little sign of relief in the short term, and rates are likely to continue to spike in run to Christmas. Retailers are looking for any possible innovative solutions, with John Lewis looking into the possibility to charter their own ship to get deliveries in time for the festive season, however there are many other smaller and effective solutions for retailers to manage these cost pressures.

 

Key drivers of increasing freight costs

  1. Pandemic and global trade imbalances

The shipping industry has been one of the worst-hit sectors by the Covid-19 pandemic. ​ Firstly, all the major oil-producing nations have cut down production drastically due to the pandemic, which has created a demand-supply imbalance resulting in pricing pressures. While crude oil prices were hovering around US$ 35 per barrel until recently, they are currently, more than US$ 55 per barrel.​

As a result of countries closing and reopening at different times, shipping companies have had to cut the capacity on major routes and shortages of empty containers. ​ The sudden closing of China’s Yantian container port – part of the world’s 4th largest container port Shenzhen – in early June was a key contributor. Even though operations have resumed, congestion and the continuing need for measures to stop the spread of Covid-19 mean delays continue to mount. ​

As the recovery has progressed, global demand has recovered strongly. Competition for ocean freight capacity has intensified as economies open up further and inventories are rebuilt across the several links of supply chains.​ Some countries are already exporting more goods than they did before the pandemic, while in others, including the US, exports continue to lag behind the overall recovery in output. ​With the competition for ocean freight capacity set to remain, the unbalanced recovery will continue to exacerbate some of the problems for world trade, including displaced empty containers. ​It all adds up to more pressure on freight rates in the near term.​

  1. No alternatives to ocean freight

With the pandemic-related restrictions disrupting the aviation industry, there was enormous pressure built up on ocean shipping for the delivery of goods. This in turn had a knock-on effect on the turnaround time of containers.​

A lack of alternatives to ocean freight means it’s hard to avoid surging transport costs. For higher value products, alternative modes of transportation would normally be an option, such as the shipment of electronic devices by air or via train, not least through the ‘Silk Road’. But capacity is currently limited, and tariffs have spiked. Shippers of lower value products such as household items, toys, promotional articles or t-shirts have seen freight costs increase from around 5% of their sourcing costs to more than 20%.​

  1. Shipping congestion

Congestion is also part of the problem. Shipping performance in 2021 has carried on where 2020 left off, in terms of lower rates of vessels keeping to schedule, and average delays for late vessels rising. Blank sailings (cancelled port calls) continued to cut 10% of scheduled capacity through the first quarter.

There are some signs that average performance will start to improve as the share of vessels reaching their destinations on time has improved since April. But overall performance remains the lowest it has been in ten years of records.​

  1. Brexit impact​

Besides the pandemic, Brexit has caused a fair bit of cross-border friction in the short term, owing to which the cost of shipping goods to and from the country has surged exorbitantly.​ With the transfer of goods to and from the UK now being treated as intercontinental shipments, coupled with the pandemic complicating the supply-chains the freight rates for goods to and from the UK have already quadrupled.​ Additionally, friction at the border has also prompted shipping firms to reject previously agreed contracts which again meant that companies trying to transport goods were forced to pay increased spot rates. Global freight rates have got further escalated owing to this development.​

Its not all doom and gloom!

While there are a few things that shippers can do to help the current freight rate situation, there is a need for retailers to work on a focussed programme with a series of immediate tactical measures and longer term strategic measures, in order to improve your supply chain resilience. ​

Short term solutions
  • Review your contract situation to develop closer relationships with shipping companies​
  • Agree longer term contracts with ability to review rates. ​
  • Review incoterms for risks and rewards​
  • Improve ability to plan and to share advance plans with suppliers and shipping companies​
  • Review opportunities to improve container fill through consolidation​
  • Transporting during ‘calmer’ days such as Mon/Fri, instead of Thurs that are generally earmarked as the busiest can reduce freight costs by 15–20% annually.​
Medium term
  • Identify opportunities to consolidate deliveries from multiple suppliers at port of departure​
  • Smaller companies can seek services of integrated transportation partners for shipments as outsourcing can help them focus on their core operations.​
  • Invest in advance planning systems to help reduce delays across the supply chain. ​
  • Review packaging (incl. use of corrugated boxes) to improve container fill and reduce weight.​
  • Review inventory levels in the supply chain with revised assumptions.​
Strategic measures
  • Invest in digitisation to improve transparency and visibility.​
  • Review processes, shared operations and collaborative technologies to maximize efficiency and reduce trading costs.​
  • Review the length of supply chain and identify ways to reduce. Some examples could be near shoring, 3-D printing, etc.​
  • Reduce reliance on single geography (not necessarily single country) to balance flows.​
  • Work with your smaller suppliers to help them consolidate shipments.​
  • Drive circular economy fundamentals, to reduce freight requirements​

 

Please get in touch with Gopal Iyer, Head of Supply Chain Practice at 4C Associates at gopal.iyer@4cassociates.com if you would like to understand more about how to alleviate freight cost pressures.

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