After two years of COVID-related supply-chain snarls, manufacturers now encounter labor rates and industrial real estate costs much higher than those experienced pre-pandemic. These cost increases are now baked into supply chains. In an unpredictable marketplace, how can a manufacturer enhance supply-chain resilience while keeping costs in line? It’s time to get tactical and benefit from some of the great savings opportunities in today’s supply chain.
Refocus on Domestic Trucking
Full-truckload (FTL) spot rates have declined more than 25% this year, according to Freightwaves. Contract truckload rates are down by about 7%. This softening market won’t last for forever, so focus first on right-sizing rates from your primary carriers, those with whom you have a long-term relationship. Given the competitive landscape, they may be willing to revise their pricing. It’s also a good time to re-engage on service commitments that perhaps were not prioritized during the shipping crunch. Review and refine your company’s volume split between asset-based providers and truck brokers. Selectively use spot buys to fill in service gaps and take advantage of the soft market.
It’s also a great time to review your company’s inbound freight plan. Are you controlling the service and pricing your company receives for raw materials transport—or allowing your supplier to decide for you? For many manufacturers, the transportation spend is greater on incoming raw materials than it is on outgoing finished goods. Yet the business focus is usually on outbound pricing and outbound transportation lanes. Refocusing on inbound means a greater opportunity for transportation savings.
Renegotiate Base Prices Before Increases Hit
After a quarter of weak demand, Federal Express announced a 6.9% increase in its small parcel rates, effective this coming January. UPS will doubtless follow suit with a similar general rate increase.
Small parcel spend may not be on your radar screen today, but should be assessed and renegotiated now, prior to the announced general rate increase (GRI). This way, the increase will be applied against a lower base rate.
If your company spends more than $250,000 per year on small-parcel shipping – easily done with spare parts or aftermarket shipments – a parcel spend advisory firm can assess your current pricing, identify specific savings opportunities and provide step-by-step help negotiating market competitive pricing. Parcel advisory services work on a gain share model, so there is no cost for the expertise and service. The average shipper typically reduces its small-parcel cost by 15-20%.
Respond to Overcapacity
Late last year, ocean rates from Asia to Los Angeles topped $15,000 per container or higher. Since then, the market has dropped precipitously. The current spot market rate into LA/LB is $1,275 per 40-foot container. These good times will not last forever – the ocean carriers are already pulling capacity out of the market to prop up ocean rates. But there are tactics you can employ today to capitalize on today’s savings opportunity while still preparing for 2023’s market.
If your primary provider is an international freight forwarder and your company has monthly or quarterly floating rates, make sure the rapid decline in carrier rates is reflected in what you are paying your forwarder. Typically, a freight forwarder comes out ahead in a declining market – they have the market know-how to “buy down” faster than they offer rate concessions to their clients. You want to make sure that all the carrier rate reductions benefit your company rather than your forwarder’s profit margin.
If your company signed ocean contracts directly with an ocean carrier, those contract rates are likely to be considerably higher than today’s spot market. Shippers concerned about locking in access to capacity this year signed early contracts at rates lower than last year’s spot rates, but much higher than historic contract rates. If, for example, your current contract has a rate of $6000 per container and the spot market is $1275, discuss an adjustment with your carrier to come to a happy middle ground. The carriers are very aware of the light shipping volume and the drop-in ocean rates. If your carrier declines to adjust your contract, you can divert freight to the spot market and pay a small dead-freight penalty. Dead freight is typically $500 or less per container – with the spread today, you’ll come out well ahead by not shipping under your company’s service contracts.
In such a volatile market, you may benefit from employing a consultant or rate analytics firm that will provide information necessary to ensure supply chain costs and service levels are market competitive.
Today’s tough business environment is unpredictable. To successfully maneuver around supply chain challenges, couple a long-term strategy of being a shipper of choice with tactics that capitalize on today’s opportunities for savings.
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