Expanding Your Ocean Freight Procurement Strategy

As you push forward in your ocean freight transport bid for 2019, we’d like to address some additional factors you should consider in order to get the most out of your sourcing event and help keep your budget and balance sheet in line with business objectives.

(In case you missed it, our previous blog detailed advanced ocean freight procurement strategies shippers should consider when entering their bidding event. We detailed the pros and cons of concepts such as contract length and port bundling while also highlighting some of the challenges associated with a successful procurement event.)

Cost vs. Speed

It should go without saying that the faster you want something transported, the more it’s going to cost. As you get into the weeds of your strategy, it’s important to spend time determining what your organization considers a cost trade-off in order to shave days off inventory cost and keep your balance sheet healthy. The best way to evaluate this is to develop a formula that closely analyzes the cost of goods versus cost of capital and incorporate it into your broader ocean bid expectations and desired outcomes.

Unfortunately, this can be tricky and time consuming since the cost of capital often varies significantly by destination due to interest rates, port times, etc. However, employing a proactive formula will help minimize problems later in the contract.

Non-rate factors

Rates are typically at the forefront of shippers’ minds when entering a bid, and rightfully so, but there are additional factors beyond rates that should be reviewed as well throughout the bid process, including:

  • Validate transit times: What carriers claim and what they deliver can be on different ends of the spectrum, but shippers should be diligent and validate lane transit times prior to committing to a particular carrier. This is especially important if you are considering a non-incumbent carrier for certain lanes.
  • Consider reliable incumbents on a lane: Carrier consolidation has certainly limited options, but if you are considering using a new player on a particular lane, trouble may present itself later. Sticking with carriers who have a proven track record on a particular lane may prove the best option, even if their rates are somewhat higher up front but allow you to avoid costly spot rates later.
  • Using predictive analytics for port congestion, early arrival, etc.: Having a good idea of what’s going on at the entry point of your inventory can allow you to make proactive decisions instead of reactive. Is there a consistent percentage of shipments that arrive early? If so, have a plan for that. Do particular ports experience more congestion than others? If so, have a plan for that. Incorporating the costs of these factors can give you the wiggle room you may need later and will help keep your overall budget in line with the initial expectation.

Fuel

While fuel surcharges remain important and are something all shippers should monitor, the biggest area to pay attention here involves the fuel regulation and the adoption of low carbon emission fuels and technology that carriers will be implementing in the coming years. As a result, rates will certainly be impacted by this, so careful evaluation of the pros and cons of multi-year contracts may be needed here. While this is more of a long-term initiative, the impacts of fuel regulation are already being discussed as to how they will affect markets in the coming years.

Supply chain professionals responsible for procurement understand the difficulties associated with the bid process and maintaining carrier compliance once contracts are in place. Unfortunately, many organizations lack the full set of resources needed to successfully conduct a sourcing event and simply “do the best they can” as it pertains to securing capacity and reasonable rates. If your organization is striving to get more out of your ocean freight contracts but don’t possess the tools to tackle all areas of the process, enlist the help of transportation experts and receive the peace of mind your organization deserves to meet business requirements.


John Westwood is a Sr. Manager in Chainalytics’ Transportation competency and has 17+ years experience in transportation sourcing and logistics management. John specializes in assisting global organizations in the development and implementation of transportation procurement strategies and international transportation spend management.

Chuck McDaniel is an international supply chain planning and logistics professional with 25+ years of experience, including such roles as Team Leader in Supply Chain Development, Leadership Training, Logistics Planning, Forecasting, Audit,Operations Management, Payables, and commercial solutions including supply chain crisis intervention.

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