Supply Chain Cost Concern of the Month: Ocean Freight

Spend Matters welcomes another guest post from NPI, a spend management consultancy focused on delivering savings in the areas of IT, telecom, transportation and energy.

If you use maritime shipping to move goods across the supply chain, you may have noticed costs are rising (and not just a little bit). The drastic rate increases we saw in 2010 are still packing a punch to shippers' budgets, further exacerbated by rising fuel costs. In the past, the way that ocean contracts were negotiated offered some protection against price volatility. Yearlong rates were traditionally negotiated in March/April. Today, pricing is done almost on a spot quote basis, making your ocean freight budget vulnerable to the cost variables du jour (e.g. rising fuel costs due to Mideast protests).

Misalignment of volume and equipment availability continues to plague the industry. According to a recent article in The Journal of Commerce, shipping volumes continue to increase with no corresponding growth in equipment availability. A volume increase of 7-8 percent in the eastbound Pacific is expected for 2011, while container manufacturers are producing half the numbers of containers they did in 2008.

Of course, the biggest impact on ocean freight costs is the rising cost of fuel. To conserve, many carriers are slowing speeds. This has an industry- and supply chain-wide domino effect. Arrival times are longer and there is less capacity in and out of ports. Many shippers have been (or soon will be) forced to expedite goods, which can drastically increase transportation spending.

These factors create a perfect storm for increased maritime shipping costs in 2011. The scales of supply and demand economics are heavily tipping toward demand, giving carriers good reason to increase rates and surcharges at whim. Understanding how to achieve fair pricing and terms amidst the changes and volatility in ocean freight is critical.

Want to learn more about best practices for reducing ocean freight costs? Click here.

-- John Haber, EVP of Transportation, NPI

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